Action at Last

For Lyndon Johnson, the time had finally come to do something positive about inflation and tight money. Though faced by rising wages and prices, mounting shortages of workers and materials, and a steadily increasing scarcity of money, the President had for months refrained from taking any major action in the hope that inflation would somehow stay within bounds--at least until the November elections. But inflation would not be held back, and a rising clamor for presidential initiative from both parties convinced Johnson that White House action could no longer be held back either. Last week, acknowledging that the U.S. was in the grip of an "accelerated boom that could be cooled off," he requested emergency action from Congress to do just that.

Some of Johnson's critics charged that he should have acted much sooner; many did not like the action that he finally took. But almost everyone felt a sense of relief that the President, who of late has tended to let decisions pile up a bit, had at least acted. Johnson moved after Chairman Wilbur Mills of the House Ways and Means Committee changed his mind about opposing any new tax measures this year and agreed to give vigorous support to the Administration bill. That bill cagily calls for inflation-dampening measures whose burden would fall primarily on business rather than consumers.

Request & Plea. Johnson requested a temporary suspension of tax incentives and accelerated depreciation allowances for business investment in new equipment and construction--in particular, the lifting of inducements that enable businessmen to deduct from their tax bills up to 7% of the cost of new machinery and equipment. This tax break was enacted by Congress in 1962 in order to stimulate economic growth, and it has worked only too well: a new Government survey shows that business and plant expansion this year will be 17% greater than last year and 76% greater than in 1961 (see U.S. BUSINESS). Canceling the tax credit, the President hopes, will curb the inflationary upsurge in business expenditures as well as reduce demand for borrowed money.

In another step to ease borrowing pressures, Johnson promised--and Treasury Secretary Henry Fowler promptly acted--to limit sales of certain kinds of federal securities, in order to "eliminate from the market as much federal demand for funds as possible." The President also asked the Federal Reserve Board and commercial banks to "seize the earliest opportunity" to reduce interest rates paid by borrowers--currently 6% for prime customers of major U.S. banks. As for interest rates paid to depositors, an Administration-backed bill giving the Federal Reserve Board and other regulatory agencies discretionary power to impose interest ceilings sailed through the House last week by a vote of 271 to 68. The measure is designed to cut down competition for funds between commercial banks and savings and loan institutions.

Skimp & Slash. In his message to Capitol Hill, the President also took note of congressional rumblings about governmental economy, vowed to reduce federal spending by $3 billion. To demonstrate his frugality--and once again shift onto Congress some of the onus for spending--the President only hours before had vowed, while signing a $7 billion agricultural appropriations bill, that he would refrain from spending part of it because Congress had added $312.5 million to his original request. Understandably, Johnson is more inclined to cut congressional add-ons than slash his hallowed Great Society legislation--especially at a time when he is accused of skimping on domestic needs in order to finance the war. Congress, said L.B.J., should "not make the poor carry the burden of fighting inflation." Nonetheless, new moves to hold back on Great Society programs are expected on Capitol Hill.

Speedy and favorable congressional action is expected on the Administration's requests for suspension of business tax incentives. Despite the misgivings of virtually all Republicans and many Democrats about the package--"Belated fire fighting," sniffed House Minority Leader Gerald Ford--a majority will probably go along on the grounds that the President's action was better than none at all. This feeling was shared by American Stock Exchange Chairman David S. Jackson, who conceded: "The thing that Wall Street hates most is indecision."

The reaction of most other business and economic leaders was less than ardent. Because many corporations are too deeply committed to expansion plans to call a halt, some observers fear that suspension of tax incentives might not have a favorable impact on the economy for months, and in fact could conceivably boomerang by forcing business to borrow more than ever in order to compensate for loss of the tax break.

Aspirin. Even as Congress prepared to consider his proposals, the President strove in vain to hold price and wage increases within reasonable distance of his now-demolished guidelines. Only two days after he told a Labor Day audience in Detroit that "the other face of freedom is self-restraint," 23,000 electrical workers won a robust wage increase of roughly 5% from Western Electric, setting a pattern for some 400,000 Bell System employees. Meanwhile, two copper producers imposed the same 2-c--a-pound price increase that L.BJ. had beaten down last November by dumping Government-held copper on the open market. This time around, the Administration's copper stockpiles are about as depleted as its powers of persuasion.

The economy plainly is not likely to be out of trouble for some time, and the President has not completely abandoned his waiting game. Whatever action Congress takes on his prescription, there remains a good deal of feeling that it is little better than a dose of aspirin, administered somewhat later than the eleventh hour. Indeed the President himself does not rule out the possibility of a tax increase. Noting that eight appropriations bills are still pending in Congress and that the Defense Department will request a Viet Nam supplemental appropriation at year's end, L.BJ. told a press conference: "We have no idea of how much it will take to operate the Government next year." The cost may be high enough and inflation still sufficiently rampant, he admitted, so that "further, longer-range actions may prove necessary." The almost certain prospect is for a general tax increase early next year.

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