Portents of Trouble

Even when business is good, business men scan the economic horizon for portents of approaching trouble. And these days, as the dreary deadlock persists between Lyndon Johnson and Congress over taxing and spending, businessmen view the portents as troublesome. Seldom in recent years have they felt more uncomfortably aware that the whole U.S. economy can be crucially affected by a political impasse.

Whether they blame the Congress or the President, corporate executives are increasingly vexed by uncertainties and inaction in Washington. "It's difficult to calculate the inflationary pressures on labor rates and costs of ingredients," complains President William Howlett of Consolidated Foods. "I lay 99% of the responsibility at the doorstep of the Administration," says President Robinson F. Barker of PPG Industries. "Sure, you can keep surtaxing and surtaxing until we're surtaxed to death," says President A. Clark Daugherty of Rockwell Manufacturing Co., "but it won't help unless federal spending is cut." The difficulty about wielding an ax on the budget, noted Chairman Roger Blough of U.S. Steel Corp. last week, is that "nobody has come forward with a list of priorities that would command a consensus." Blough's somewhat idealistic recommendation: political support for "elected officials who vote to cut government spending even if this affects our own pet projects and communities."

The Common Cold. Without question, the stalemate has already cost the President some of his cherished support among business leaders. Last month, when the presidents or chairmen of 100 major companies gathered in Hot Springs, Va., for the semiannual meeting of the prestigious Business Council, the corridors hummed with complaints. Most of the council faulted the President for "lack of leader ship" and "playing politics" with congressional demands for spending cuts as a prerequisite to the 10% income tax surcharge he proposed in August.

Despite their misgivings, most businessmen predict rising sales next year. "We are backing up our forecast by increasing production," says Chairman William Blackie of Caterpillar Tractor Co. "Most businessmen I meet feel we're going to succeed--in spite of Government." Optimism, however, is often tempered with worry over strikes, rising labor costs, and, inevitably, squeezed profit margins.

Such troubles lie beyond the therapeutic reach of a tax increase, which is not, as Chairman Gardner Ackley of the White House Council of Economic Advisers quipped last week, "the complete remedy for every ill including the common cold." But Ackley, from rostrums in Los Angeles and Manhattan, spelled out the Administration's case in somber detail. Without higher taxes, he warned, the nation faces "potentially serious trouble" with "price increases and soaring interest rates." On top of that, Ackley forecast "a deteriorating trade balance and new weakness in housing alongside a possibly unhealthy boom in investment, inventories or even consumer spending on durable goods." A tax surcharge, Ackley insisted, would make the difference between an economy that is "healthy, balanced and noninflationary" and one that is "overexuberant, unbalanced and that generates a monetary and financial crunch."

Voracious Demand. With the President's tax bill stalled in Congress, Wall Street is betting on a credit crisis. Already, the mere prospect has helped to depress the stock market (see following story), lift some interest rates to 46-year peaks and cause bond prices to plummet. On top of voracious corporate demand for funds, the federal deficit has forced the Treasury to borrow $16 billion since midyear (apart from replacement of maturing issues). The Government had to pay 5 1/4% interest for some of that money last month, its highest rate since June, 1921. Last week a 3%, $1,000 Treasury bond that was first issued in 1955 traded at $750 (although the Treasury, to be sure, will pay off the full $1,000 when the bond matures in 1995).

Without a surtax, Washington maintains that it will be forced to borrow as much as $22 billion in the bond market next year to finance the federal deficit. And economists in and out of the Government agree that there will be too little money to meet the demands of private borrowers as well. While the Federal Government and the country's bigger corporations will snare what they need, bond experts figure that housing, auto finance, small businesses and state and local governments will be starved for funds. This year, the Federal Reserve Board's policy of monetary ease has pushed enough money into the economy to forestall a pinch, but many argue that rising inflation may soon impel the board to switch policy. "We might see the kind of pressures on interest rates and credit markets," says Investment Banker Sidney J. Weinberg of Manhattan's Goldman, Sachs & Co., "that could require direct controls of credit and capital markets, and possibly of wages and prices."

The Straitjacket. Though Treasury and Federal Reserve officials deny that any such straitjacket is seriously being considered, private economists back from Washington briefings nevertheless insist that it is. Treasury Secretary Henry Fowler, they say, has been threatening that the Administration will seek authority for all types of controls if Congress spurns a tax increase.

The crisis may well reach a decisive point early next year. For the longer the deadlock continues, the closer come the 1968 elections and the harder it will be for the President to slash spending or for Congress to raise taxes. The shape of next year's economy is not the only issue at stake. The big question is whether the "new economics"--the Keynesian formula for minimizing business ups and downs through Government tinkering--can survive old-fashioned politics.

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