NIXON'S FIGHT AGAINST ECONOMIC PROBLEM NO. 1

A5 a prelude to President Nixon's forthcoming trip, a team of top U.S. moneymen traveled to Europe last week for the new Administration's first formal contacts with European economic officials. At the week-long meetings in Paris of the 22-nation Organization for European Cooperation and Development, the delegation earned high marks and persuaded even the skeptics that the U.S. economy is in good hands. The Europeans wanted some indication of U.S. determination to handle its No. 1 economic problem: inflation. The Americans did not disappoint them. "If we have one objective, it is to try to cool the overheated economic situation," said Paul McCracken, chairman of the President's Council of Economic Advisers. The main priority, observed Paul A. Volcker, the Treasury's new Under Secretary for Monetary Affairs, "is to regain control over inflation." Under Secretary of State Elliot Richardson added that "we intend to intensify our efforts to restore price stability and go about it promptly."

Fresh Pinch. As much as they pleased the Europeans, such reassurances were even more welcome to Americans, who have seen inflation ravenously and relentlessly eat into their real income. Inflation is reflected in price rises that reached an annual rate of 4.7% in December. It is particularly burdensome for the poor, who are least able to adjust to the ever higher cost of goods and services. By making U.S. products costlier and less competitive on world markets, it has also hurt the nation's bal ance of payments. Inflation's grip is so tenacious that it will undoubtedly take all of the Government's weapons and will to curtail it for any sustained period.

Washington is certainly, if belatedly, making the effort--and that effort is beginning to pinch the public. The 10% tax surcharge shows signs of reducing some consumer demands; retail sales have rolled along on a plateau since last fall. The federal budget is expected to shift from last year's deficit of $25 billion to a small surplus in fiscal 1969, resulting in far less Government-generated economic demand. Meanwhile, the Federal Reserve Board has moved to tighten the money supply. After growing at an annual rate of more than 7% in late 1968, the supply rose at a 3.7% rate in January, and is expected to show even slower growth in February.

With money harder to get, interest rates have rocketed. The prime rate for the banks' major corporate customers has climbed to a historic high of 7%, and could go higher. Federal Housing Administration mortgage rates have risen from 61% to about 71% over the past year. A man who got a 25-year, $20,000 FHA mortage a year ago would have to make monthly payments of $135; if he signed a similar mortgage now, he would commonly have to pay $144. Last week a subsidiary of American Telephone & Telegraph issued a Triple-A bond with a 7% interest rate, but found few takers even at that rich yield. New York City has chosen to postpone some bond offerings altogether rather than pay so much for money. The nation's banks are expected to increase their loans by only $25 billion this year (to $418 billion), compared with last year's record expansion of $39 billion.

All of this is much in line with what the Nixon Administration and the preceding Johnson Administration have intended. As McCracken said in Paris last week: "In general, we are now on the right course in economic policy. The budget is back under control. Money and credit policy is tracking about right. But we have had three years of excessive demand, and it naturally takes time to regain your balance."

Breaking the Psychology. In trying to curtail inflation, the Nixon Administration hopes to decelerate the economy gradually, avoiding the kind of overzealous monetary restraint that helped bring on the last real recession in 1959-60 and contributed to Nixon's defeat by John F. Kennedy. The more immediate danger, however, is that any sign of an economic downturn may tempt the Government to let up too soon on the anti-inflation campaign.

In view of the continued buoyancy of the economy, Nixon will have to extend the 10% surcharge well beyond its scheduled June 30 expiration date and resist various pressures for costly new Government spending programs, even when the Viet Nam war finally ends. For its part, the Federal Reserve will have to avoid the stop-and-go policies that in the past have produced sharp, erratic swings in the money supply and have brought criticism from some economists. The need is to show, as George W. Mitchell, one of the Federal Reserve's seven governors, puts it, that "we mean business in breaking the inflationary psychology."

Changing that psychology is Washington's most difficult economic task ahead. Some consumers and businessmen continue to pay sky-high prices for goods in the self-fulfilling expectation that prices are destined to rise higher still. Investors switch their money out of fixed-yield bonds and into stocks, which are a better hedge against inflation partly because buyers think that they are. Inflation has contributed to both the stock market overspeculation and Wall Street's glut of back-office paperwork. * Because of rampant inflation, unions increasingly demand unlimited cost-of-living wage increases instead of limited boosts. Complains Paul Carmichael, a Pittsburgh electrical workers' official: "The ink is hardly dry on labor contracts these days before price increases make them obsolete."

The feeling that inflation is inevitable may finally be giving way to a touch of welcome uncertainty. In Paris last week, Federal Reserve Board Governor Andrew F. Brimmer predicted that the economy's real growth, which reached 5% last year, would slow to a rate of 3% or less by the end of this year. But many other economists and corporate policymakers predict an appreciably higher--or lower--rate of growth. When opinions divide and uncertainty becomes widespread, decision makers begin to act with caution, holding back buying plans. That tends to retard economic growth and inflation.

Other Policies. The price of any slowdown, if it comes, would be some job layoffs, with ghetto dwellers among the first to suffer. Though that prospect is filled with obvious political and social perils, the current jobless rate--a 15-year low of 3.3% in December and January--gives the Nixon Administration some room for maneuver. So does the fact that a number of companies are "stockpiling" workers because of the shortage of skills, and may be inclined to hang onto them as long as possible, even if that means some short-term loss of profits. The White House nonetheless hopes to devise what Paul Mc-Cracken calls "other kinds of public policies" to keep unemployment from rising too rapidly under the influence of anti-inflationary restraints.

What other policies? Beyond the classic tools of high taxes, tight money, steep interest rates and restraint on Government spending, the most direct way to fight inflation without increasing unemployment would be outright federal controls on wages and prices. Paul A. Samuelson of M.I.T., a liberal economist, says that controls should be "saved for emergencies"; most officials shudder at their use under any. circumstances. In a letter to the Washington Post last week, Harvard's John Kenneth Galbraith argued for revival of the Johnson Administration's voluntary wage-price guideposts, "or something similar." Yet, as Johnson learned, such guideposts can be flouted so often that they become meaningless.

On the theory that low-wage jobs are better than none at all, Neil Jacoby, a U.C.L.A. economist and former Eisenhower adviser, urges an easing of minimum wage laws to encourage employment of marginal workers. Ultimately, the best way of reconciling price stability with high employment is to increase labor productivity by means of expanded job training among the semiskilled and the unskilled. Thus Nixon's proposal for giving private enterprise tax incentives for ghetto job training could combat inflation at the same time that it helps serve other social needs.

Any successful drive against inflation would cause some dislocations in the job market. It would also temporarily result in generally lower increases in corporate profits, returns on investment and wages. "If we do manage to restore relative price stability, it won't be painless," says Norman Robertson, economist for Pittsburgh's Mellon National Bank. Inflation is so pervasive--and the task of stopping it so wrenching--that the pain is likely to be shared in some degree by almost every American.

* In their efforts to dig out from under the paper blizzard, the New York and American Stock Exchanges last week contracted with California's Rand Corp. to study ways of making securities transactions more efficient.

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