Losing His Cool

Only six months ago, the U.S. economy was heating rapidly and Lyndon Johnson decided to cool it. His damper was a dose of New Economics: he asked Congress for a temporary suspension of the 7% investment-tax credit on plant and equipment spending. The move helped chill the economy so much that last week the President requested Congress to reinstate the credit nine months ahead of schedule.

Sharp Difference. One reason for Johnson's decision was the sharp difference between capital spending and anticipated first-half trends. In 1966, capital investment had reached $60.6 billion, a 16.7% increase over the year before. As the Administration saw it, this was too much, and the credit was suspended. Early estimates for 1967 said that even so, investment would rise an other 6%. But last month, with the tax credit removed, a Commerce Department-SEC survey showed that business men had cut their spending plans for 1967 by $2.3 billion. And a similar survey released last week disclosed that the year's increase in capital spending would probably be 3.9% rather than 6% -- or enough to knock half a billion dollars off the first-quarter G.N.P. John son was understandably worried. With such economic aides as CEA Chairman Gardner Ackley, Treasury Secretary Henry Fowler and Budget Director Charles Schultze, he had been mulling over for some weeks a restoration of the 7% credit. In two days of meetings that eventually included Defense Secretary McNamara and House Ways & Means Chairman Wilbur Mills, he decided that the time was now.

What nagged Johnson and his advisers was that other indicators are off as well: sales of autos and other durable goods are down sharply, housing has slowed, inventories are up and industrial production down, new orders have declined and retail sales were off 2% in February.

Antagonist into Ally. Even before last week's decision, the White House was already working to reverse the trend. Federal highway funds have been hastily released to stimulate construction, money has been funneled into the mortgage market to stimulate home building. The Administration also got valuable aid from an occasional antagonist over interest rates. The Federal Reserve Board, spurred into activism by the appointment of new young economists, has worked through the winter to make money looser. Mandatory reserves at banks have been lowered by $850 million in order to free cash for loans. After a meeting of the Federal Reserve's Open Market Committee last week, $1.3 billion in Government securities were bought up to free still more money for lending. At his press conference last week, Johnson proudly announced that interest rates"have come down as much as 1 1/2% from their September peak." The President was being rather selective: Treasury-bill rates have dropped that much, but interest on business loans is down not much more than 1/4%.

The speed of Johnson's move was a happy contrast to his procrastination last year, when he could not decide whether or not to raise income taxes. One immediate effect: the stock market responded with its biggest one-day volume since 1929 (see following story). Still to be learned is whether New Economist Johnson can warm up the economy as fast as it cooled last fall.

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