Time to Touch the Brakes

There could no longer be any doubt last week that the U.S. is suffering from inflation. The only question was how serious it could become. Buoyed by Viet Nam spending and the momentum of a historymaking, 60-month expansion, the economy was surging ahead far faster than the Government had anticipated in January. Unemployment was down to a twelve-year low of 3.7%, and there were already serious shortages of construction workers, machinists and technicians. With factories operating at more than 90% of capacity, industrialists were planning to plow $60.2 billion into new equipment, $2.4 billion above Washington's estimates, further straining overextended credit lines and labor pools.

Economics, derived from a Greek word that meant simply "household management," has never moved too far from the kitchen, and America's housewives were ahead of the professionals in spotting the trend. In stores from New York to Los Angeles and from Houston to Detroit over the past six months, the price of bread has risen 2-c- a loaf, hamburger 10-c- a pound, children's shoes 50-c- a pair. Men are being charged 25-c- more for a haircut than they were in September, and their wives are paying from 50-c- to $1 more for a shampoo and set.

Already, says Economist Beryl Sprinkel of Chicago's Harris Trust and Savings Bank, the inflationary situation is "about three times as bad as any we've had over the past 15 years." Even the most liberal of the "New Economists," whose free-spending policies have helped sustain the five-year boom, are openly troubled. "We've passed the point of creeping inflation," said M.I.T.'s Paul Samuelson, "and reached the point of crawling inflation."

Watch & Wait. In private, the Administration was worried that the crawl might become a walk, then a gallop. In public, on the other hand, the White House for months has soft-pedaled talk of inflation, which by November could hurt Democratic candidates more than any other issue. Thus Treasury Secretary Henry Fowler was still maintaining last week: "My view is that we do not have inflation now." Similarly, Chairman Gardner Ackley of the President's Council of Economic Advisers pooh-poohed talk of imminent tax increases, insisting: "We want to watch the figures more closely for a while."

Nonetheless, President Johnson's concern for the economy was evident in his repeated references to it last week. Sounding the theme that the U.S. could have its boom and beat inflation too, he warned: "We must be alert to assure that the pace of our advance does not become too rapid, endangering the healthy stability and sound balance of our expansion. Yet to conclude that we must proceed cautiously does not mean that we should slam on the brakes or throw the economy into reverse."

The men who manage U.S. monetary policy recognized the need for caution last December. Then, after the Federal Reserve Board boosted the discount rate, Chairman William McChesney Martin got only growls from the White House. Today, even the liberal minority on the board that opposed Martin concedes that he made the right move--though many businessmen are now worried that money has become too tight. Last week Manhattan's Morgan Guaranty Trust Co. led the way to a further tightening of credit by raising the "prime rate"--the interest charged on loans to the bank's biggest and most reliable customers--from 5% to 5 1/2%, highest level since the formula was introduced in the 1930s. Virtually every major bank in the U.S. followed suit, with Washington's tacit approval, further bruising the battered stock market (see U.S. BUSINESS).

Two-Way Street. The next, more difficult step is up to the Administration. In a classic inflationary spiral such as the present one, when demand outpaces supply, and when monetary measures have been exhausted, the balance can only be evened by cutting Government spending or raising taxes--fast. "The time for action is now," said John Langum, president of Chicago's Business Economics, Inc. "Instead, we have this happy talk that everything is fine." Samuelson, anxious to prove that "the new economics is an honest economics, a two-way street," urged that the existing 7% investment tax credit for business be dropped, corporate income taxes be raised from 48% to 50%, and individual income taxes be increased 5% across the board.

M.I.T.'s Robert Solow, one of the most expansion-minded of the New Economists, confessed: "Until now, I have been against any tax increases. I have come to change my mind in the last month." This week even Democrats on the Congressional Joint Economic Committee--headed by Easy-Money Advocate Wright Patman of Texas--plan to issue a report calling for stand-by tax increases.

To some extent, the Administration's reluctance to ask for higher taxes is a result of Capitol Hill's contrary mood. Last week, while considering a $6 billion tax measure to help finance the Viet Nam war, rebellious Senators festooned it with free-spending amendments that would have subtracted more than $1 billion from the total. The most costly proposals were finally killed in a Senate-House Conference (see The Congress), and the bill's major provisions survived, notably the restoration of excise taxes on phone calls and automobiles, and a speedup in the collection of corporate and personal income taxes.

High Society. Actually, there can be no solution without a measure of political risk. In a joint press conference last week, Senate Minority Leader Everett Dirksen and House Republican Leader Gerald Ford predicted that the economy would rank "right up at the top" as an election issue, went on to declare that "the Great Society has become the High Society," with "high taxes, high prices, high spending, high deficits." It was an all-purpose statement--putting Johnson on the spot, whether he raises taxes to dampen inflation or risks higher prices by failing to do so.

The President's least likely course is to do nothing. In conferences with Fowler and Ackley last week, he discussed several possible tax proposals, while Treasury officials prepared draft bills. A final decision may well be made in a couple of weeks when Johnson's financial "troika," Fowler, Ackley and Budget Director Charles Schultze, hold their next meeting--though Johnson is not expected to make his move until a number of revenue-raising and appropriations bills now before Congress have been cleared, probably around mid-April. The President, who seemed mainly concerned last week with winning an advance consensus, warned pointedly: "We must be prepared to act quickly in the field of taxation if such action appears necessary." Among economists, the consensus already exists: the necessity is obvious.

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