Where Restraint Begins

For most of the year President Johnson's advisers have worked full time muting the notion that drastic action might be necessary to head off serious national inflation. But last week, as if on cue from an unseen conductor, the Administration's tune changed. From White House aides, the Treasury and members of the Federal Reserve Board came warnings about the need for fiscal restraint in an economy that keeps on exuberantly expanding.

There was cause for concern. The Bureau of Labor Statistics reported the swiftest six-month cost-of-living increase since 1958. Capped by a gain of 0.3% for June, the consumer price index climbed 1.7% in the first half of the year to 112.9% of the 1957-59 average. For the twelve months ending in June, the rise was a hefty 21% . Industrial production and personal income also climbed to record levels in June.

Worry at the Top. Fretting because, in his words, "the economy is heating up," President Johnson called 50 congressional leaders to the White House and lectured them about economizing. Unless they do, he insisted, the alternatives are price and wage controls (which nobody wants), a huge budget deficit (inflationary), or new taxes (in an election year). Congress has already appropriated about $1 billion over the Administration's requested $113 billion budget for the new fiscal year. Pending proposals, if adopted, might add another $5 billion or so, chiefly for health, education and agriculture. On top of that, the Viet Nam war will probably force the President to ask for at least $5 billion in supplemental funds before next June.

If there was general agreement on the need to calm the economy, there was also plenty of argument about how to go at it. Last week Andrew Brimmer, Johnson's newest appointee to the Federal Reserve Board, urged a suspension of the 1962 law that lets companies deduct from their income tax up to 7% of what they invest in new factories and equipment. Brimmer insisted that capital spending has now reached "unsustainable levels," posing a threat of sharp cutbacks and a drop in the whole economy later.

Shortage in the Market. The idea of tinkering with the tax credit worries many businessmen, if only because plant expansion often requires decisions on spending two or three years ahead of the actual outlays. "Tax and depreciation incentives created the boom in the first place," said Chairman Willard F. Rockwell of Pittsburgh's Rockwell-Standard Corp. "If they cut down the investment credit they'll be in a slump much faster than they expect."

Echoing a common sentiment, President Archie K. Davis of the American Bankers Association demanded that the President send to Congress "as soon as possible" a detailed plan for cutting domestic spending and raising taxes "to eliminate dangerously mounting inflationary pressures." He blamed "the failure of Government economic policies" for today's shortage of mortgage money and the interest-rate war between commercial banks and savings and loan associations. Banking, he said, "is being castigated for affairs over which it has very little control."

One of those "affairs" is interest rates, which have been forced, partly by Federal Reserve Board action, to the highest level in 35 years. In at least one industry--housing--this has had a far more serious deflationary effect than anyone could have intended. Housing starts in June fell to the lowest point since 1961, an annual rate of 1,288,000. But other areas have been far less affected by the Federal Reserve's tight-money policy, which has been by no means so restrictive as many people think. During the first six months of this year, bank loans to business actually increased by $5.8 billion--11% over the same period in 1965.

The fact is that the most inflationary factor in the U.S. economy is, and almost always has been, Government spending. And though he is not the least bashful about urging spending restraint upon others, President Johnson remains unwilling to impose such restraint on his Great Society programs.

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