Strategies for Slowdown

"The immediate task in 1969 is to make a decisive step toward price stability. This will be only the beginning of the journey. We cannot hope to reach in a single year the goal that has eluded every industrial country for generations--that of combining high employment with stable prices."

With a mixture of prophecy and prescription, Lyndon Johnson last week summed up the chief economic challenge that he bequeaths to Richard Nixon. In his final economic report to Congress, he called for a strategy aimed at slowly reducing both inflation and the excessive boom in business. The principal ingredients are a small--and perhaps precarious--budget surplus (see THE NATION) and a Federal Reserve Board policy of permitting the supply of money and credit to expand less than it has over the past three years. What the nation must avoid, warned Johnson, is "an overdose of restraint" that could easily lead to recession.

No Jolt. In most essentials, the Nixon Administration and the independent Federal Reserve Board seem to agree. To halt inflation, said Secretary of the Treasury-designate David Kennedy last week, "we must maintain a tight budget and a restrictive monetary policy." The Federal Reserve has gone to considerable lengths lately to proclaim its intent to curb credit gradually.

How much restraint can the economy stand? One indication came in a Los Angeles speech by Andrew Brimmer, a member of the seven-man Federal Reserve Board. Citing a study by the board's staff, Brimmer said that even if the nation's real economic growth slowed to practically nothing for one or two quarters, the result would be only a 0.2% rise in the jobless rate, now at a 15-year low of 3.3%. The findings reinforce the belief that the Nixon Administration will have a bit of leeway in which to move against wage-price rises without causing a significant increase in unemployment. But Brimmer and the other Federal Reserve governors believe that "some increase" in the jobless rolls will be unavoidable in a successful fight against inflation.

Fortunately, no jolting slowdown is expected. In its annual report, the President's Council of Economic Advisers foresaw a 6% gain (to $941 billion) in Gross National Product this year. Inflation should account for "a little more than 3%" of that growth and real output "less than 3% ." Real growth last year was 5%.

The council foresees continued weakening in housing and consumer spending, a moderate $10 billion rise in federal spending, and strong gains in business outlays for new factories. The 10% surtax, along with federal spending restraints, will bring a "significant slowdown" in business during the first half of this year, said the council. The latest figures support that outlook. From November to December, retail sales slipped by 2% and housing starts by 15%.

A Miserable Surplus. President Nixon also inherits some global economic problems. In international trade, the nation last year suffered a setback. As Under Secretary of the Treasury Frederick Deming reported, the trade surplus shrank to a "miserable $500 million, down $3 billion from 1967's respectable but relatively poor showing and down more than $6 billion from the 1964 level." Inflation, the Viet Nam war, and higher imports (see following story) share the blame. Only because many foreign investors poured funds into the U.S. was the nation able to achieve a $150 million surplus in its balance of payments. It was the first such surplus in eleven years.

Though the nation faces serious difficulties in foreign trade, President Johnson last week again deplored protectionist sentiment in the U.S. "The only real solutions are ones that improve our economy--not ones that erect new barriers that could provoke retaliation," he told Congress. To help strengthen the U.S. dollar, he also asked for continued controls on private investment abroad. Nixon is likely to keep those controls in force.

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