The Consumer's Free Spending

THE ECONOMY

To explain why he expects the Administration's policies to cool the U.S. economy soon, Economist Walter W. Heller last week recalled an old poker-room joke that, he said, he had heard from President Johnson. It has to do with a professional dealer who is getting an unexpected show of strength from one of the local yokels. "Reuben," says the shark, "you better play fair, because I know exactly what I dealt you."

In this analogy, Reuben is the free-spending U.S. consumer, who is apparently playing all too fast and loose. Despite a deliberate anti-inflation deal from Uncle Sam, who enacted the 10% tax surcharge in July, the consumer is buying even more than he did before. During the third quarter of the year, savings declined while consumer spending actually rose to 10% over the level of the same quarter last year.

How to Cure. Largely because spending remains robust, the nation's gross national product is surpassing expectations. In the third quarter, the total output of goods and services reached an annual rate of $870.8 billion, a $17.9 billion increase just slightly less than the $21 billion average rise of the first two quarters. Unfortunately, almost half the increase is not "real"; it represents only further inflation of the dollar.

Continuing inflation has intensified the debate about a cure and how long the task will take. At a Hot Springs, Va., meeting of the Business Council, a group of corporate executives who generally support the Johnson Administration's policies, there were plenty of questions about what the next president might have to do. The consensus of 20 council economists was that an economic slowdown next year, however temporary, would tempt a new Administration to ease off on the brakes prematurely. The result might be more inflation, followed by a "major recession" in late 1970 and early 1971.

According to Council Vice Chairman Ralph Lazarus, president of Federated Department Stores, the economists believe that to tame inflation from its cur rent 4 1/2% annual rate to a manageable 2%, a new Administration may have to "extend and intensify" its braking pressure. For how long? Possibly for one or two years, during which profits would suffer and unemployment would rise from its current 15-year low of 3 1/2% to 4 1/2% or even 5 1/2%. That price, said Lazarus, might be "neither politically wise nor socially acceptable."

Bitter Exception. Any such solution is certainly anathema to the present Administration, would probably be distasteful to the next. Humphrey has said he is "determined" to keep joblessness at a minimum; Nixon vows to fight inflation "without increasing unemployment." In Washington, Chief White House Economic Adviser Arthur Okun took exception to the view that braking measures would have to be continued for very long. Inflation, he warned, might be less of a hazard than a prolonged slowdown, which could bring on "a stall and perhaps a tailspin."

Economists in and out of the Government generally agree that the pace of business will slow through mid-1969 as the effects of the surcharge--if it has not already been rescinded by a new Administration--begin to tell. Amid indications of continuing economic growth (see following story), there are signs of a softening. Last week the Federal Reserve Board reported that during the past three months U.S. plants were running at just 83.4% of capacity, lowest since early 1963. Still, no one foresees a large-scale loosening of the tight labor market and an easing of the upward pressure on wages and prices. Which means the rhubarb over Reuben remains far from academic.

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