BATTLE BEHIND THE BUDGET BATTLE

Is Red Ink a Tonic or a Poison?

Behind Washington's Battle of the Budget is a battle of economic theories. Its outcome may be more important than the outcome of Capitol Hill's political give-and-take over spending, for the theories of today are the policies of tomorrow--and the day after that. Central question before the debaters: Does the Administration's fight for a balanced budget--with its stand against chronic price up-creep--help or hinder economic growth?

THE most critical economic problem facing the U.S. is the failure to achieve the necessary economic growth," declares the A.F.L.-C.I.O. Economic Policy Committee, chaired by United Auto Workers President Walter Reuther. Necessary for what? For "improved living standards" and "defense and military requirements" and "the social needs of an ever enlarging population." The Administration's stress on price stability, charges the statement, is a "surefire prescription for stagnation."

The A.F.L.-C.I.O. argument, underwritten by some of the U.S.'s top economists, makes it appear that the issue is "growth" v. "stability." A report this week by the Congressional Joint Economic Committee, chaired by Illinois' Democratic Senator Paul Douglas, falls into the same pattern: "Some stress price stability at the expense of substantially full employment and adequate growth." Following ex-Economics Professor Douglas' bent, the Democratic majority holds that policies to promote "vigorous expansion of the economy should not be unduly deterred by the possibility of future inflation."

But growth and stability, says President Eisenhower, are "not two different problems . . . I believe that economic growth in the long run cannot be soundly brought about except with stability in your price structure." And the Joint Economic Committee's minority report, signed by the six Republicans on the committee, backs up the President. Fostering price stability, it says, "is not an alternative objective to a high rate of economic growth. On the contrary, it is a basic requirement for continuing growth."

So the argument is not whether economic growth is a good thing--both sides agree that it is--but how it can best be brought about.

Among advocates of more federal spending, the figure 5% has become a sort of magic number of yearly economic growth. "Our economy," says Walter Reuther, "should be expanding, at the very least, at a rate of 5% a year." Average yearly rate since the 1870s: 3%. In their swelling stack of pamphlets, proponents of 5%-a-year growth do not argue the realism of their goal in hard economic terms. As authority for it, they point out that last spring a Rockefeller Brothers Fund panel, sprinkled with big businessmen, urged a 5% growth rate.

The Rockefeller report settled on 5% as a rate that it would be very nice to have, but glided casually over the details of how it might be reached. The bigger-spending school offers a simple answer: it is the Federal Government's responsibility to bring about a 5% growth rate by spending more money and thereby upping demand for goods and services. Says the Congressional Joint Committee's minority report: "Political debate over whether any given growth rate is attained is absurd." Snorts pipe-puffing Arthur Burns, head of Manhattan's National Bureau of Economic Research and ex-chairman of President Eisenhower's Council of Economic Advisers: "Some people want a 5% rate of growth. I want 8%. My wife wants 10%. But the real question is whether more Government spending will help you get it."

The Administration is far from satisfied with the economy's recession-pinched average growth rate of 1.3% a year over the past six years, expects faster growth in the years just ahead. But Administration economic policymakers, also backed up by some of the nation's top economists, believe that an effort to force-draft the economy into an average 5% growth rate through deficit spending would bring feverish price upcreep, and would therefore hinder growth instead of fostering it.

Argues Chairman Raymond Saulnier of President Eisenhower's Council of Economic Advisers: "If we want to raise our growth from our historical 3% to the magic 5%, this will require a greater growth of capital than we have had for a long time. And where do you get that growth of capital? Out of savings. And that is my reason for believing that an essential condition for the growth of our economy is a confidence in the relative stability of our money."

Against the argument that price stability is needed for growth, the forced-draft school contends that actually, rapid growth is needed for price stability. Cigar-chewing Leon Keyserling, chief presidential economic adviser under Harry Truman and No. 1 proponent of the new theory that heavy federal spending will keep prices stable, rests his case on statistical evidence that during the 1950s prices 1) held steady when output rose, and 2) crept upward when output lagged. The explanation, says Keyserling, is quite simple: "When you have plants operating very far short of capacity, the costs of production per unit are greatly increased, and increased costs lead to higher prices." Therefore, he argues, the way to hold down prices is to pep up the economy with a big dose of federal spending.

But Keyserling's statistics can be turned around to prove the very hen-and-egg opposite of what he argues. Do prices creep up because output lags, as Keyserling says, or does output lag because prices creep up? And in arguing that a boom brought on by federal spending would shrink industry's production costs, Keyserling omits a heart-of-the-matter point: a main factor in pushing up production costs is the power of big unions to force wage increases not justified by increases in productivity. If unions can--as they did--push wages up during a recession, they can push wages up even faster in a time of forced-draft demand and full employment.

Some advocates of forced-draft growth dismiss the Administration's worries about price upcreep, argue that "mild" inflation does no harm. Harvard's Professor Emeritus Alvin Hansen, grand old man of the a-little-inflation-never-hurt-anybody school, points out that prices edged upward at an average rate of 2 1/3 a year over the past 60 years, while the U.S. was achieving history's most remarkable record of economic growth.

Against him, some U.S. economists argue that to equate past and present price upcreep is unsound, that creeping inflation is a graver menace than it used to be. Economist Burns points out that the past few decades have gradually brought two new inflationary factors into the U.S.'s economic structure: 1) Big Labor's power to force wages up even when demand is falling, and 2) Big Business' tendency to eliminate price competition, set profitable "administered prices," and restrict cornpetition to quality, styling, service, etc. The combined result, says Burns, is that instead of slipping downward when demand declines, prices tend to hold steady during economic downturns, or even go on creeping upward.

It is a momentous change. In the old days individual economic decisions had to take into account that price upcreep would be followed by a price shakeout. But today it is tempting to assume that there will be no more price shakeouts, that prices will go right on edging upward.

Because of the progressive damping of price downswings, the Federal Government's attitude toward price upcreep is much more important than before. Argues Economics Professor Neil Jacoby of the University of California at Los Angeles:

"When businessmen expect government to pursue inflationary policies, they are confident of their ability to pass on higher costs in higher prices, without loss of sales volume. They tend to become 'soft' bargainers and to make inflationary wage agreements."

To make it clear that the U.S. Government opposes inflation, President Eisenhower has asked Congress to amend the Employment Act of 1946 to include "reasonable price stability" among the nation's explicit economic goals. Commented Walter Reuther's Economic Policy Committee: "An empty gesture." As advocates of more federal spending see it, the Administration's balanced budget is also an empty gesture. They argue that a deficit of a few billion dollars in the next fiscal year can have only a slight impact in a $475 billion-a-year economy. But as a symbol of a commitment to fight inflation, the attempt at a balanced budget is a highly important gesture. "If we cannot live within our means as prosperity is growing and developing," President Eisenhower recently asked, "when are we going to do it?"

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