Problems of Abundance

Managing the nation's record prosperity may prove more troublesome for Washington than achieving it. The U.S. economy is thriving in a careful balance, with industry humming at close to capacity, shortages of skilled labor hampering (though not yet hobbling) key producers, price increases straining the bounds of stability. Last week, as fresh evidence showed that industry's plans to expand capacity have hardly been dented by the rising price of money, the signs also increased that the Administration may soon feel forced to use stronger medicine to fight the threat of inflation.

Temporary Overstrain. There was increasing speculation in Washington that the prospective sharp rise in defense spending (to perhaps $61 billion next year) will mean a federal tax boost (see THE NATION). Short of that, some of Lyndon Johnson's advisers are toying with the possibility of higher income-tax withholding, which would remove spendable cash from private hands at once. Their estimate of the size of the U.S. economy for 1966 has grown and grown--from a gross national product of $710 billion to $715 billion to the present $720 billion--and so has their concern that the combination of military outlays added to heavy plant-and-equipment spending will place a temporary overstrain on the nation's ability to produce.

The fact that business plans to step up spending for new plant and equipment by 14% for next year's first half (to an annual rate of $59 billion) was a major cause of the Federal Reserve Board's decision to boost its discount rate from 4% to 4 1/2% , and a major reason why Lyndon Johnson reacted so mildly despite his disapproval. Last week the National Industrial Conference Board told the Congressional Joint Economic Committee that costlier money will bring only a tiny cutback in those plans. Among the 1,000 largest manufacturing companies, testified N.I.C.B. Senior Vice President Martin Gainsbrugh, none of the 644 replying to his survey after the discount rate hike expected to reduce plant expansion next year by as much as 5%; more than 92% predicted no change at all.

Evidence supporting that bullish outlook was everywhere. Ford Motor Co. last week added $200 million to its already peak 1966 expansion schedule. United Air Lines placed a $56 million order for a huge computer system, adding strength to the airline industry's plans to boost its expansion outlays by 22% next year. Food-industry expenditures are expected to climb 15%, those of rubber manufacturers 29%, those of the aerospace industry 48% .

Scraping for Labor. Though all this building will eventually ease the pinch on the U.S.'s productive capacity--and prove beneficial so long as consumers retain their appetite for buying--the Administration's economy watchers have a more immediate worry: Will the declining growth of industry's output per man wash out the benefits of expansion? Hitherto unannounced Government statistics show that productivity grew only 2.5% this year v. 3.4% in 1964 partly because some industries are reaching the bottom of the labor pool, partly because older, inefficient plants have been brought back into use. Wages, however, climbed 4.2%. Unless industry's output per man regains at least a 3% growth next year, the fastexpanding economy will come under serious inflationary pressure. For the next few months, at least, the tightrope between supply and demand seems sure to stretch tauter.

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