Nixon's New Worries About Recession

One trouble with the economic strategy practiced by Richard Nixon is that it makes awkward politics for his party. To the President and his advisers, it has seemed sensible to fight rising prices by deliberately stalling the economy, painful as that might be. To the Republican Congressmen and Senators who must stand for re-election in eight months--a necessity that does not confront the President--the political pain threatens to become excruciating. Unemployment is rising and has begun to hurt members of the Republicans' Silent Majority; corporations' profits have been crimped; and the jobless rate among construction workers, at 7.9%, is higher than among Negroes.

Meanwhile, consumer prices continue to rise fast; they went up at an annual rate of 6% in February, a decrease from the seasonally adjusted January rate of 7.2% but one so small as to make little difference to the shopper. The Administration is trying to make up its collective mind about which is the greater peril: inflation or recession. Last week, reports Lawrence Malkin, TIME'S Washington economic correspondent, the President began an effort to defuse the political dangers by giving the appearance of combatting recession without significantly changing economic policy. In a press conference, Nixon denied that the U.S. was in a recession and boasted that his Administration had "taken the fire out of inflation."

Help! Early in the week Republican congressional leaders had trooped to the White House to ask for political help --something that would persuade voters that recession was not right around the corner. The President was ready with a shiny token. He would unfreeze $1.5 billion of federal, state and local construction money that he had effectively held up last fall as an anti-inflation move. Congressmen greeted the announcement as political manna. "The problems of inflation have been defeated," said House Republican Leader Gerald Ford. "The danger of recession is nil." His comment was deflated the next day by Arthur Burns, chairman of the Federal Reserve Board, who stated soberly that "of course there is danger" of both recession and inflation.

Burns estimates that actual additional federal-construction spending this year will come to only $175 million. One reason: the supposedly unfrozen funds will be slow to trickle down to the states and municipalities. That might be just as well for the nation. Most of the extra money would go to build highways --hardly the country's most pressing social need--and a spurt in highway construction would divert resources from the genuine need of private housing.Said one Administration staff economist: "I can't understand all the excitement about the construction bit. It's all really sort of a shell game."

In trying to fight recession, the President has got himself into something of a box. He cannot ask Congress to cut taxes further or to raise federal spending without repudiating his own warnings that such action would be inflationary. He has repeatedly forsworn "jawboning" intervention in specific wage and price decisions. Unless he gives up the anti-inflationary fight, about all he can do is to make some gestures like last week's unfreezing and try to persuade the nation that slowdown will not turn into recession.

Nixon can also try to persuade Arthur Burns' independent but Republican-leaning Federal Reserve to put more money into circulation, making credit cheaper and easier for everybody. Chairman Burns, in uncharacteristically defensive testimony at midweek to the Senate Banking and Currency Committee, sought to get across that the Fed was doing its part. He came as close as he could, without actually using the words, to saying that the board has already begun expanding the nation's money supply for the first time since last summer. He called attention to weekly monetary figures, which so far show only traces of easing. Further, Burns predicted that later this year banks will bring down prime interest rates and that other interest rates, including those on mortgage loans, will also drop slightly. He expects mortgage interest rates to be "appreciably lower" by 1972.

Burns indicated that the Fed's easing will be small and gradual. The board, he pledged, will not "stand idly by and watch the current adjustment degenerate into a recession." But he added, in a typical Burns hedge: "Neither do we intend to let excess demand for goods and services burst out anew."

Businessmen, shareholders and homeowners will believe that money is becoming more plentiful when they see it. Burns' words, coming after so many soothing pronouncements by Administration leaders in recent weeks, had curiously little effect. The stock market, which earlier had rallied explosively on far less explicit hints of easier money, actually went down last week. The key question is no longer whether the Federal Reserve will again expand the money supply, but how quickly and by how much.

Professors v. Politicians. Many economists think that the nation wilf need a quicker and greater increase in money than Burns apparently has in mind if the Administration is to head off a recession. Milton Friedman's followers argue that it takes six to nine months for any switch in monetary policy to make its impact felt on the economy. Beryl Sprinkel, vice president of Chicago's Harris Trust & Savings Bank and a member of TIME'S Board of Economists, calculates that industrial production is likely to drop an additional 4% even if the Federal Reserve begins now to expand money supply at a 5% annual rate, and that the decline will be sharper if the money expansion is less.

Within the Nixon Administration there may well be a split developing between the professors and the politicians. The professors--Chief Economist Paul McCracken, Budget Director Robert Mayo and Burns, who still attends economic policy meetings--want to stick to the Administration's "game plan." The plan calls for 1) continuing the tax, budget and monetary restraints until it is certain that inflationary pressures are under control, and then 2) easing only enough to permit a slow and gradual resumption of business growth late this year.

The politicians, including several cabinet members, are more worried by the threat of recession. Treasury Secretary Kennedy, HUD's Secretary Romney and Postmaster General Blount have all flirted with the idea of price and wage controls as a possible way to stop inflation without paying too high a price in unemployment. Nixon has slapped them down hard, but he seems to be getting nervous about sticking with the professors. The professors may well be correct in thinking that their course will stop runaway inflation without plunging the U.S. into a deep recession. If they are wrong, however, the political damage to the Republican Party and the economic damage to the nation could be extreme.

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