From Mist to Rain

From Capitol Hill committee rooms and economists' computers came the same insistent message. Inflation is no longer a threat but a reality. Politicians and Ph.D.'s wrangled earnestly over varying techniques to fight the fire, but few could disregard the smoke signals. After seven years of immobility, the wholesale price index has spurted 4.1% in the past year, last month alone rose seven-tenths of 1 %, the steepest February increase since the precipitate price escalation early in the Korean War. Industrial production was up 9% over the preceding February; personal incomes grew 8% to a record annual rate of $556 billion.

Moreover, with increased defense spending for Viet Nam, virtually full employment and unprecedented production levels, inflationary pressures seemed certain to become more, not less, severe. Economists of all stripes, from classical conservatives to New Economics liberals, urged the President to damp down the boom, whether by raising income taxes, suspending industry's 7% investment credit, or cutting Government expenditures.

Pious Caveat. Delivering the Godkin Lectures at Harvard, former Council of Economic Advisers Chairman Walter

W. Heller, who sold both John F. Kennedy and Lyndon B. Johnson on the idea of a $12 billion tax cut, declared: "The economic evidence for restrictive steps is weighty." At a seminar in Detroit, Columbia's Dr. Arthur F. Burns, who was Dwight Eisenhower's top economic adviser, complained that the Government is making "excessive use of monetary weapons and insufficient use of fiscal tools," called for a "modest" tax hike "to cool down the economy." Of eleven experts who testified before a subcommittee of the Senate-House Joint Economic Committee, three urged a cutback in Government spending and eight favored increased taxes, but all wanted some form of fiscal restraint to avert inflation. "Without an increase soon," said Yale's conservative Henry C. Wallich, "we will run into very serious problems."

The economists' concern was echoed by the 16 Congressmen who comprise the Joint Economic Committee. The Democratic majority called, as expected (TIME, March 18), for "standby" tax increases that could be put into effect whenever needed by a joint resolution of Congress, plus immediate suspension of the investment tax credit. In deference to the Great Society-and the November elections-the report contained a pious caveat that "the poor, the sick, the aged, the infirm and the discriminated against" should not, in any case, be asked to "carry the major burdens of preventing inflation." The six-man G.O.P. minority demanded "an immediate deferral of federal spending for nonessential and low-priority projects," though New York's Senator Jacob Javits cautioned that he would resist cur tailment of education, welfare and antipoverty programs.

Disturbing Paraphernalia. Despite such counsels, President Johnson and his economic advisers clung publicly to the slender hope that new counter-inflationary measures could be averted. Even if they should prove necessary, Treasury Secretary Henry Fowler assured Detroit's Economic Club, the Administration envisions nothing as drastic as "the disturbing paraphernalia of conversion to war that marked World War II and the Korean War." At most, he said, "there might be a need for further moderate tax increases."

In Washington, Budget Director Charles Schultze insisted, "You can't rush pell-mell into an action on the basis of a few indicators." Council of Economic Advisers Chairman Gardner Ackley, ranging as far afield as Brussels, acknowledged at an American Chamber of Commerce lunch that if Viet Nam spending and private demand both rise unexpectedly, taxes will have to be raised. However, he maintained, "our present view is that we have built sufficient restraint into our fiscal and monetary policies" to make such a move unnecessary.

"Go to Hell!" Those policies consist primarily of high interest rates and high-pressured attempts to impose 3.2% wage-price guidelines on management and labor. So far, though, the guidelines have more effectively restrained industry from raising prices (steel, aluminum) than labor from raising wages.

Last week, for example, when R. J. Reynolds Tobacco Co. announced a price rise that would have added 10 to the cost of a pack of cigarettes, the President stepped in, persuaded the company to rescind the raise. (At week's end, however, five other producers were standing fast on their price increases.) The guidelines proved totally ineffectual when a New Jersey local of the International Union of Operating Engineers, whose members were already earning a maximum $6.55 an hour, wrested a 10% wage increase from contractors-nearly triple the guideline figure. Only after intense pressure did the local's leader, portly Peter Weber, even consent to go down to Washington to talk it over with Johnson's economic advisers. When Weber finally got there, said a White House aide, "he told us to go to hell." Despite a veiled threat that Johnson might cut off nearly $200 million in federal highway funds for New Jersey unless Weber backed down, there was little likelihood that the Administration could, in fact, scale down the wage increase.

Another indication of the Government's inability to check wage boosts came from A.F.L.-C.I.O. President George Meany. After some cutting remarks by top-echelon union officials about the Administration's failure to win repeal of the Taft-Hartley Act's "right-to-work" Clause 14(b), Meany recently paid a private visit to the White House to assure Johnson that organized labor still likes him. After praising the President, he passed up the guidelines by exhorting eight unions involved in negotiating new contracts with General Electric and Westinghouse to go all out for raises substantially larger than 3.2%. Indeed, University of Virginia Professor James M. Buchanan testified before Joint Economic Committee members last week, "It is absurd to expect and dishonest to pretend to deal with inflation by exhortation, by reliance on so-called wage-price guidelines."

"Look Out!" All the same, having signed a $6 billion revenue-raising measure only last week, the President is understandably loath to request further tax increases for a while. The bill, raising excise taxes on autos and phone calls and speeding up corporate and individual income tax payments, was signed by Johnson at 8:12 one evening, a scant three hours after Congress had passed it, thus assuring the Government an extra $1,000,000 in revenue.-"That more than makes up for the lights we are using," he quipped.

As Johnson saw the bill, it was "the right measure at the right moment," blending "prudence and restraint" at a moment when the economy was bubbling along near capacity levels. Still, he cautioned, "if we allow our economy to run too far, too fast, we can expect demands for additional fiscal, price, wage, tax and expenditure restraints," adding: "I can make no prediction on the need for additional taxes later this year. No one can make that prediction."

Many did, nonetheless. Delaware's Republican Senator John J. Williams, for one, ventured: "This bill will see us through the 1966 elections. After that, look out." On the other hand, many Washington observers believe that the President will be forced to ask for more taxes in early Mayafter the pain of the April 15 income tax payment has partially subsided. In any event, most economists last week were in agreement with Walter Heller that "the fine mist of incipient inflation may be turning into light rain." It was time to break out the umbrella.

* Had the President waited until the following morning, the Government would have lost an average $25 in excise taxes on every auto sold during the day.

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