Problems of Prosperity

"There is a growing feeling of unrest in the land," said William McChesney Martin, the chairman of the Federal Reserve Board. "The American people are being shackled with second cars, air-conditioned split levels and back yard swimming pools, leaving them dissatisfied and uneasy."

Martin's irony may have been heavyhanded, but his point was valid. In the midst of unprecedented national prosperity, a sense of nervousness pervades U.S. banks, board rooms and union halls. The economy has entered a delicate stage where difficult decisions have to be made about such matters as prices and money supply -- decisions that will strongly influence the degree of future prosperity. As President Johnson said in his annual economic report to the nation last week: "We are in a new economic environment."

Pride & Promise. The President's report reflected little of the nervousness, promised even better times ahead. In 1965, said Johnson, the U.S.'s gross national product grew by $47 billion, which was $9 billion more than his economists had anticipated. The tangible rewards of expansion were a 7.5% rise in personal income and a 20% jump in after-tax corporate profits (see following story). Profit-heavy corporations provided the fastest-rising single force in the expansion by increasing their capital investments $9.5 billion; the economy was also lifted by the "extraordinary strength of consumer demand" and the increase in defense spending--though the President stressed that production for Viet Nam accounts for less than 11% of the gross national product.

Johnson's Council of Economic Advisers, chaired by Gardner Ackley, predicts that the G.N.P. in 1966 will grow by almost the same amount as last year, rising from $675 billion to $722 billion, give or take $5 billion. Business capital investments will swell $7 billion, federal spending for goods and services will increase $7 billion and consumer spending will go up by $28 billion. All this will create 1,800,000 jobs and cut unemployment from 4.1% to 3.75% of the labor force, perhaps bringing it to as low as 3% at year's end.

Price Peril. Such gains will also cost something. As the U.S. enters what seems certain to be its sixth straight year of expansion, the economy is scraping up against the top limits of its current capacity. Growth has been so strong for so long that the U.S. has almost fully closed the gap between what it is actually producing and what it could theoretically produce at top steam. Just five years ago, economists calculated the gap at more than $50 billion; now the escalating demands of consumers, corporations and the Pentagon are straining the U.S.'s supply of men and machines. The nation is encountering what Johnson's report called "the problems of prosperity."

Chief among these problems is the danger of inflation. While Johnson argued that the U.S. is not yet caught in a real price spiral, his Labor Department reported last week that the cost of living in December rose faster than in any December in 15 years--up 0.4%, to 111% of the 1957-59 average. In all, consumer prices last year climbed 2% primarily because of higher tags on meat (up 13.5%), medical care (up 2.8%) and other services (up 3.8%).

Last week, as price increases were posted on a range of goods as diverse as cigars and scrap iron, the U.S. Commissioner of Labor Statistics, Arthur M. Ross, forecast that consumer prices "will advance somewhat more in 1966 than 1965."

Exuberant Demands. To keep the economy up and prices down, Johnson counts on a three-point strategy of tighter money, tougher guidelines and the threat of higher taxes.

Money is already tight, but it will become even tighter in the months ahead. Manhattan banks last week hiked the interest charges on most consumer installment loans from $4.75 to $5.25 per $100 of face value (or from 9 1/2% to 10 1/2% true interest). Rates are also going up for capital-seeking corporations and city governments. The increases were caused by the exuberant demands for credit and the Federal Reserve Board's recent boost of the discount rate, from 4% to 4 1/2%--with a further rate raise likely to follow.

Political instincts lead Johnson to believe that if anybody is blamed for deflating spending plans of consumers or companies, it ought to be the Federal Reserve's Bill Martin. The President, at the same time, depends on Martin to keep credit stiff enough so that the Administration need not raise taxes as an anti-inflationary measure.

Wielding the Weapon. Instead of raising tax rates, Johnson for the present asked Congress to reinstate some recently removed excise levies on cars and phone calls, and to speed up the collection of income tax payments. Congress is likely to approve those measures next month. One result: a man with three dependents and a gross income of $15,000, who now pays $144 in monthly withholding taxes plus an annual payment of $336, will have his monthly withholding boosted to $171, though his overall tax will remain the same.

Changing the Rules. As another instrument against inflation, the President in his economic message once more flourished his economic guidelines policy, under which both labor and management are supposed to exercise "voluntary" self-restraint against upping either wages or prices by more than 3.2% in any one year. The continuation of the 3.2% figure pleased nobody. Labor leaders were angered because the Administration refused to increase the wage guideline even though the five-year average of productivity gains--on which the guidelines were originally based--rose last year from 3.2% to 3.6%. Said A.F.L.-C.I.O. President George Meany: "Changing the rules for the formulation of the wage guideposts, in a deliberate effort to reduce them, undermines their very credibility."

Businessmen were looking at the productivity figures from another angle: the rate for last year rose by only 2.8%, a disappointing increase, caused mostly by the fast and heavy demands on their capacity that forced employers to use some less efficient machines and workers. Hence, many businessmen felt that the 3.2% wage guideline should actually have been cut.

Despite the grumbling and the unease, Johnson reiterated his belief that good times could continue indefinitely. "Recessions are not inevitable," he said. History's lesson, however, is that recession inevitably follows inflation; to head off inflation is the economy's prime and pressing problem. But it should also be said that the problems of prosperity are preferable to other kinds.

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