Reaction: Favorable

Chances are better that inflation will slow down, that money will loosen, and taxes will not go up. The American people want to curb Government non-defense spending, and federal and local legislators will have to oblige them. While the recently passed Great Society programs will not be jettisoned, new programs will be viewed with a cooler eye. All that, in the opinion of U.S. businessmen, is the meaning of last week's election.

In terms of future economic legislation, business won and labor lost. A.F.L.-C.I.O. leaders lament that in the next session of Congress they will have no hopes of expanding minimum-wage laws or repealing the Taft-Hartley Act's Section 14B, which permits states to ban the union shop. Labor will be put in the defensive position--unique in recent years--of fighting off legislation to bar strikes and buttress the battered wage-price guidelines.

Less Palatable. To the relief of bankers and retailers, the so-called truth-in-lending and truth-in-packaging bills lost their champion in the defeat of Illinois' Senator Paul Douglas. The defeat of ten of the 24 Democrats on the House Agriculture Committee prompted American Farm Bureau President Charles Shuman to predict: "This should speed the day when the futile effort of the Government to manage and subsidize agriculture is ended."

Administration officials concede that a tax increase will be less palatable for the new Congress than it would have been for the old one. The election brought out a heavy vote against, tax hikes; voters rejected almost half of the $2.1 billion of proposed bond issues. Republican leaders have put President Johnson on notice that they will agree to raise taxes and the federal debt ceiling only if he reduces inflationary demand by paring non-defense spending to "austerity" levels.

Easier to Remove. The tax issue will thus hinge more than ever on the size of Viet Nam spending, and President Johnson has not told even his highest policymakers how much that may be. Left in the dark, his aides are chagrined that their decisions must involve so much guesswork. Says Federal Reserve Chairman William McChesney Martin: "If the defense supplemental is going to be, as many think, between $7 billion and $15 billion, we should take the calculated risk of a one-year tax increase rather than risk another step on the accelerator. It's easier to remove the tax increase than to untangle the impact of an inflationary situation."

Either a slowdown in non-defense spending or an increase in taxes or both would enable the Federal Reserve to loosen the money supply and reduce interest rates. The Fed is openly fed up with Johnson's policy of forcing it to carry on the anti-inflationary crusade alone. Yet it has already been so successful in cooling the overly exuberant economy that the worst of the money shortage appears to be over. The board for three weeks has been rationing out more money to its member banks, and some interest rates have retreated from their 40-year highs.

Republican Rally. The Commerce Department reported last week that, from the second quarter of 1966 to the third quarter, the annual growth rate in the gross national product increased slightly but the rate of corporate profits slipped from $48.7 billion after taxes to $48.3 billion. Consumer spending and business spending for inventories are leveling, and McGraw-Hill forecasts that capital spending, up by an inflationary 17% this year, will increase only 5% next year.

While a disquieting number of business leaders warn of a recession in 1967, the majority still agree with Bill Martin that the economy is "very strong." Most believe that the recent flattening is a welcome indicator that the economy's speed is moderating from dangerously high to sustainably brisk. Though still far from its peak of 995 last February, the stock market has become decidedly more optimistic. Last week the Dow-Jones industrial average rose 14 points, closed at 819. Some of the rise was energized by the bears, who hustled to cover their record-high amount of short sales by buying stock in expectation of a further advance. Most of the lift, however, came from bullish small investors and big institutional buyers. Heartened by the new moderation in the economy and politics, they started what Wall Streeters called "the Republican Rally."

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