What the President Could Do

If inflation is not here already, it is just around the corner, and President Johnson had better take tougher steps to stop it soon. That, after months of debate, was the clear consensus expressed last week by both liberal and conservative economists. The Life In surance Association of America warned that inflationary pressures are boiling up; so did the American Bankers Association and the National Association of Manufacturers. Most significant, former members of the President's Council of Economic Advisers--men who are Democrats and Republicans, experimenters and classicists, Keynesians and non-Keynesians--agreed impressively at a Washington symposium that the President should do more than he has so far to fight inflation.

Walter Heller, who worked for Lyndon Johnson as well as John Kennedy and now teaches economics at the University of Minnesota, said that recent price increases and inventory buying have become so "disquieting" that the Government should start figuring out right now just which taxes to raise if pressures increase. Raymond J. Saulnier, who served under Dwight Eisenhower, said that the time had come to "cool off the economy a bit"; he called for a cut in Government spending, followed, if necessary, by a tax increase. Arthur Burns, who also served Ike, proposed much the same remedies as Saulnier. Even Leon Keyserling, Harry Truman's far-out economist, wanted higher taxes--though not to reduce inflation but to guarantee that federal welfare spending would continue to rise despite the demands of Viet Nam.

Hurrying to Buy. Inflation is an international malaise (see WORLD BUSINESS) and symptoms of it are appearing all over the U.S. Last month wholesale prices climbed at an alarming annual rate of 6%. The Government's chief price expert, Commissioner Arthur Ross of the Bureau of Labor Statistics, expects prices to rise more markedly in 1966 than in 1965, when the wholesale index went up 3.4% and the consumer index 2.2%. The biggest increases will be in bills for medical care, recreation and repair services; the price of houses will rise more sharply than in recent years.

To beat further price hikes, businessmen are increasing their inventories at a pace unequaled since the Korean War: $10.1 billion a year. During January, bank credit expanded at 20% a year, double the already high rate of the past five years. Skilled labor has become so scarce that Inland Steel is trying to fill 600 job vacancies, is recruiting as far away as 400 miles from its East Chicago base. Detroit automakers are hiring unemployed Appalachia mountaineers to sweep floors --at $3 an hour. For its part, the Government has poured on more inflationary fuel: the national income accounts budget, which measures how much money the Government adds to or drains from the economy, has shifted from a $4 billion surplus to a $2 billion deficit since last summer.

Further Tightening. Lyndon Johnson continues to hold to his wait-and-see policy, is understandably hesitant to repeat the mistakes of 1957 and 1959, when the Government moved so vigorously against inflation that it helped produce recession. The President insisted last week that he would shift policies quickly, "if the need should arise." Assuming that inflation continues, what steps is he most likely to take?

First, he will probably rely on the Federal Reserve Board to further tighten the money supply. Last week Board Member Sherman Maisel, a Johnson appointee who had voted against last December's increase in the discount rate, surprisingly called on bankers to hold back loans for excessive inventory buying or plant expansion. Still another rise in the discount rate is by no means out of the question.

When Johnson failed to reappoint conservative C. Canby Balderston to the seven-man board, there was some thought that he might recast the Federal Reserve to swing it toward looser credit. Last week, however, the President appointed Assistant Commerce Secretary Andrew F. Brimmer, the board's first Negro member, who seems unlikely to change its apparent inclination toward restriction. Brimmer, 39, a Harvard Ph.D., is a onetime economist at the New York Federal Reserve Bank and is known as cautious and moderate in money matters.

If monetary policy alone does not do the anti-inflationary job, the Government will move on the tax front. Economist Heller proposes a temporary suspension of the 7% tax credit for new investment; that apparently would be a quick way of relieving the capital-spending boom without offending too many people. Treasury Secretary Fowler, however, would prefer a general increase in corporate and personal taxes if necessary. Said Senate Minority Leader Everett Dirksen last week: "The Ad ministration is talking in terms of another 5% income tax increase and an added 2% corporate tax later this year."

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