Time to Step on the Brakes?

While Lyndon Johnson keeps insisting that the U.S. can fight the Viet Nam war without sacrificing anything substantial on the home front, U.S. economists both in and out of Government continue to be agitated by fear of inflation.

Within the context of that fear, even good news can sound bad. Labor Secretary Willard Wirtz proudly announced some statistics: last month, for the first time in nine years, U.S. unemployment fell to 4% ; by year's end said Wirtz, the figure ought to reach 3.5%, and driving it even lower should be "a first-priority national objective." Although nobody favors unemployment, there were some fretful murmurs about the inflationary potential presented by nearly full employment. Scarcities of labor mean higher wages, and higher wages, with U.S. plants working close to capacity, conjure up the specter of too much money chasing too few goods.

The fear of inflation--along with uncertainty about the Viet Nam war--has certainly contributed to the recent eccentric behavior of the stock market. Dow-Jones industrials, for example, rose by more than four points one day last week, fell by more than four the next, partly as a result of false peace rumors about Viet Nam. At week's end the average was down nearly three points from the opener, and stood almost at the same level of a month ago.

Expansionist Policy. The Administration's reaction to the problem of inflation has been a slowdown best summarized by Treasury Secretary Henry Fowler: "If you take your foot off the gas pedal, you won't need to use the brake." In one more letup on the gas last week, the House Ways and Means Committee approved Administration proposals to restore 7% excise taxes on autos and 10% taxes on telephone bills; the committee also approved a faster schedule of corporate-tax collections and a stepped-up pace for personal income-tax withholding.

Outside the Administration, many thought it was time for the brake pedal. Appearing before the Joint Economic Committee, U.C.L.A. Business School Dean Neil H. Jacoby, a member of Dwight Eisenhower's Council of Economic Advisers, argued that proposed 1966 spending by Government, business and consumers was "far in excess of the real productive capacity of the economy. Preventive action is needed now, not after the inflationary process has become established." Arthur Burns, Ike's chief economic adviser, told a U.S. Chamber of Commerce symposium: "While the Government is lecturing the private community on the need for restraints in price and wage adjustment, it is continuing an expansionist monetary policy." Even M.I.T.'s Paul A. Samuelson, a leading "new economist," observed that "the time has come to reinforce wage-price guidelines with something much, much stronger."

Reprehensible Complacency. Perhaps the most trenchant comments on the situation came from former New York Federal Reserve Bank President Allan Sproul, 69, whose criticism was all the more significant because he has long been known as a middle-roader who used to chide Chairman William McC. Martin Jr. for being too conservative. Speaking before San Francisco's Commonwealth Club, Sproul warned that "the domestic economic situation changed in kind as well as degree during the past year. The Administration," he charged, "fostered the myth that we had mastered the business cycle, and that we could continue to suppress inflationary pressures by exhortation and threats."

Sproul was also critical of the Administration's guns-and-butter approach to Viet Nam: "In view of substantial increases in spending for military purpose, it has been clear that there would have to be a reduction in spending for civilian programs, or an increase in taxes, or both, if the federal budget is not to become an inflationary force." Most of all he was dubious about guidelines, which "are based on elusive estimates of complex aggregates and are applied in a hit-or-miss fashion-mostly, hit prices and miss wages; hit some industries such as steel and aluminum, and miss others-including all those which are outside the glare of national publicity."

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