Decision & Delay

When newsmen first gathered around Lyndon Johnson's bedside at Bethesda last week, they found him intently studying a memorandum on the question of a tax increase. The President shoved the document toward the reporters for a quick glance. One sentence stood out. "We feel there is a high premium," it said, "on an announcement within the first ten days of December."

Treasury Secretary Henry Fowler, Budget Director Charles Schultze and Council of Economic Advisers Chair man Gardner Ackley, who prepared the memo, are by no means the only offi cials to believe that the President should make up his mind on the tax issue as soon as possible.

The decision is not an easy one. Some economists believe that if Johnson refuses to raise individual and corporate income taxes to cool the war-heated economy, severe inflation will result.

Others argue that a tax boost, coming at a time when tight money has slowed down several key industries, would set the stage for a far-reaching recession.

The news that auto sales were off 5.5% for the first ten days of November, that General Motors is paring production by 8.1% in the next two months, and that housing starts were at a 20-year low in October seemed to confirm their view.

Three Questions. Economics aside, the President's decision--right or wrong --could seriously impair his chances of re-election in 1968. That is nobody's fault but his own. Johnson could have --and, most economists agree, should have--requested a tax increase early this year, when it was already obvious that defense and Great Society spending had fed a burst of inflation. Fearful that a tax boost would cost him seats in Congress, the President dillydallied--and the economy kept expanding. One ironic result was that rising prices proved the overriding complaint against the Administration in this month's elections; they probably cost Lyndon Johnson more congressional seats than he would have lost through a tax increase.

Before he underwent surgery, the President discussed the tax question with newsmen at the L.B.J. Ranch. "We won't fire in the dark or jump in the dark," he said then. The day after his operations, members of Johnson's economic consortium--Treasury's Fowler, Budget's Schultze, Federal Reserve Board Chairman William McChesney Martin and C.E.A. Member Arthur Okun--spent a lunchtime hour at his bedside, and it was clear that nobody had jumped in the interim.

Nor are they likely to, until the Administration has answers to three pivotal questions:

> How much red ink would the current budget soak up? To find out, Fowler said that the Budget Bureau was undertaking a "complete restatement" of expected revenues and expenditures for the fiscal year ending June 30.

> How much would industry spend in 1967 on plant and equipment? This year, such outlays increased by 17%. Now that Johnson has suspended the 7% investment credit, which acted as a stimulus to expansion, the figure may well be halved--but the Administration will not know until next month.

> How big will the Defense budget be? Last year there was speculation that Viet Nam would add a few billion dollars to fiscal-year 1967 defense expenditures; $10 billion would have been a good deal closer to the mark. This time around, the President has requested a solid estimate of defense outlays before he moves.

Though Johnson hopes to have at least tentative answers to those questions within the next few weeks, another big question mark complicates his decision: Will business and labor adhere to the Administration's voluntary restraints on wages and prices? The anti-inflationary 3.2% guidelines were badly bent when the airlines' unions won a 5% settlement in August. With a new round of contract negotiations coming up in such major industries as autos and rubber, they are virtually certain to be battered again.

With that in mind, Labor Secretary W. Willard Wirtz admitted last week that the old guidelines may be unrealistic, should be reset around 5% .

The most opaque pronouncement of all was delivered last week by Secretary Fowler. "The most fruitful approach," he said in Manhattan, "would seem to be to shift the mix of policy." After the fruitful shifting, Fowler intimated, the Administration may hike taxes, or cut spending, or do both, or neither. Fowler plainly was still sifting the shifts.

Gratitude Vote. Congress may help him make up his mind. In the 89th Congress, 211 Representatives favored a tax increase. However, a Congressional Quarterly survey shows that only 189 members of the new House, well shy of a majority, support higher taxes. On the other hand, the number of Representatives who would prefer to cool the economy by reducing Government spending has risen from 289 to 309, a comfortable majority.

One move that the President has in mind is to ask Congressional leaders to recommend spending cuts before he submits his budget message in January. That, of course, would allow him to blame Congress--in particular, its G.O.P. members--for any cutbacks in Great Society programs. Should that ploy fail, a tax increase may prove necessary. Tight money has had its effect, but now the supply seems to be easing up--and with it, the threat of recession.

Over the longer term, the main threat is inflation, largely because defense spending is all but certain to continue its present amplification. Until Lyndon Johnson knows just how big that increase will be, he intends to bide his time. Earlier this year, politics dictated procrastination. Now, prudence may well suggest delay.

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