Qualified Optimism

The U.S. economy, like any other mammoth organism, can continue to flourish only as long as its intelligence can direct its vast bulk and react to an ever-changing environment. The guidance system faltered in election year 1966, causing that rare paradox, inflation at a time of some business slow- down. Some of the problems have changed, but they remain serious enough in 1967 to pose the question: Can the nation sustain a seventh consecutive year of expanding prosperity? In his Economic Report and Budget Message to Congress last week, President Johnson answered with a qualified yes. He said the U.S. could curb inflation, avoid recession, ease the painful money pinch, and still expand economically. This could be done, moreover, while the U.S. continued to prosecute the war in Viet Nam and expand social security and welfare programs at home. But, said he, "neither the threat of inflation nor of recession is ever distant in a high-level economy."

Beyond Capacity? The Economic Report, bulwarked by the findings of the President's Council of Economic Advisers, assumes that while inflation remains a hazard, its main cause has shifted from excessive consumer demand to cost pressure on producers. Consumer prices now are expected to rise at a still troublesome but some-what slower rate than they did last year (2.5% v. 3.3%).

The CEA report forecasts a slowdown in the growth of the gross national product to about $47 billion, or 4% in stable dollars, compared with the too-swift expansion of $58 billion (51%) last year. Anything more than 4%, the council says, would surpass the nation's capacity in both plant and manpower. The trick, of course, is to keep the slowdown from going too far and prices from rising too fast. Last week banks began lowering the prime rate of interest, giving important evidence that the Administration's prediction of easier credit had foundation (see U.S. BUSINESS). Housing, the industry most seriously depressed by tight money, will thus be assisted in making the 1967 revival that the White House expects. Activity in other sectors can be expected to accelerate as high inventories diminish.

There is less reason for optimism about prices. High wage demands are certain, a tax increase a possibility. Corporate profits are expected to grow, but at the slowest rate since 1961. Johnson appealed to both labor and management to avoid a "disastrous" chain reaction of wage-price rises, while the CEA put most of the onus on business: "The public interest requires that producers absorb cost increases to the maximum extent feasible." At least 700 union contracts are up for negotiation this year; the outcome can only be guessed at.

In the absence of legal controls, the main federal influence on the economy is the budget. But which one? The traditional administrative budget measures the amount the Administration will ask of Congress in the form of appropriations. For fiscal 1968, beginning next July 1, it amounts to $135 billion and contains an $8.1 billion deficit. This seems a further invitation to inflation. But last week, for the first time, the President emphasized the more comprehensive national income accounts (NIA) budget, which includes trust funds, such as social-security money. Although larger than the administrative budget $169.2 billion for '68--the NIA deficit is smaller by $6 billion because the trust funds have a surplus.

Fine Tuning. The NIA budget is a more accurate measure of total federal impact on the economy, and Johnson claims the Administration can manipulate NIA delicately to produce a stabilizing force. For the rest of fiscal '67, the NIA deficit is computed at $5 billion.' This is to decrease starting July 1, so that by the second half of fiscal ''68, when no federal stimulus is wanted, the NIA should be finely tuned to a balance.

Of course, Congress will help decide whether that pleasant dream comes true. The administrative budget, despite its size, actually gives economizers a small target because so much of it involves defense needs and other unavoidable expenses. Although the long knives flashed in anticipation last week, large-scale cuts seemed unlikely. The Presi- dent himself had pulled back on many Great Society programs, asked $3 billion less overall than previous congressional authorization schedules had envisioned. But his proposal for a 6% surcharge on personal and corporate income taxes, amounting to $4 billion plus, faces serious challenge. If it fails, the real deficit will grow. Also in doubt is his plan to sell another $5 billion in "participation certificates"--shares in Government-held mortgages and other obligations. To many members of Congress, this is a gimmick to hold down the budget size. And there is no assurance that the private market can absorb this amount without contributing to a new credit shortage.

Congress must pass as well on the President's grandiose program to ex- pand social security. With rapid expansion of the new Great Society programs stymied, this increase of benefits--the largest since social security began-- could emerge as the most significant domestic proposal of this year. Benefits would be raised an average of 20% but at the low end of the scale payments would go up 59%. Already somewhat weighted in favor of low-wage earners, the social-security system would shift farther from the actuarial principle toward a welfare-oriented concept. The system would, in effect become a Poverty War weapon. The President also proposed that welfare payments be increased in some states, and that regulations on earnings by recipients be liberalized. In addition, he proposed that Medicare be extended to disabled persons receiving social security, regardless of age.

Jostling. The social-security increase, to begin July 1 and pump out $4.1 billion in the first year, would be financed for the first six months by the existing trust-fund surplus. Before higher payroll taxes go into effect next January, the expansionary effect on the economy would be offset by the income tax surcharge--if that is enacted. Both Republican and Democratic leaders in Congress favor some increase in social security, but the size of the President's proposal--translated into higher costs

for both employees and employers

will probably force a compromise.

Johnson meanwhile must worry about his delicate balancing act being jostled to calamity by a variety of other forces The Federal Reserve Board may not ease credit to the extent the Administration wishes. The war in Viet Nam seems unlikely to expand again by major pro- portions, but no one can be sure. The international balance of payments remains a constant problem. In the eco-nomic bestiary, Johnson is trying to be owlish rather than bullish or bearish. "There will," he predicts, "be surprises along the way."

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