The Great Debate Begins

Now that the President has said that the wage-price freeze will not be extended beyond Nov. 14, the stage is set for the most important debate on economic policy in many years. It promises to be a rare opportunity for the nation to find means of achieving full employment and price stability. Richard Nixon is genuinely open-minded on the issues, and he is actively seeking out ideas for Phase 2. Already he has begun meeting with leaders from labor, business, agriculture. The first group to call on him last week was a union delegation led by A.F.L.-C.l.O. President George Meany. Meany made it clear that if labor's wishes are not reflected in the Nixon strategy, then "we won't play." Chief among those wishes, Meany emphasized, was a tax on "excess" corporate profits.

Slow Collections. The mission of Phase 2 will be not only to hold down prices but also to revive the sluggish U.S. economy. That will take some doing. Industry continues to idle along at 73% of capacity. Unemployment has hovered close to 6% for nine months straight. Even if Congress quickly passes the tax cuts and other measures submitted by the White House, Government economists concede that they will be lucky to wrestle the jobless rate down to 5% by next summer.

The weakness of the economy became even more apparent when the Administration's top economic aides testified before Wilbur Mills' House Ways and Means Committee last week. The Congressmen were shocked to learn that the nation faces hair-curling budget deficits--all caused by unexpectedly weak tax receipts. Last January, Nixon had forecast a deficit of $11.6 billion for the current fiscal year. But Treasury Secretary John Connally revealed that the shortfall is now expected to reach $27 billion or $28 billion--a post-World War II record.

Budget Director George Shultz told the Mills committee that there would be a large deficit even in the so-called full-employment budget. That budget calculates the revenues that the Government would collect if the economy were at full employment. Originally, the Administration had vowed to keep it in balance. The extent of the Government's failure was evident in the size of the deficit that Shultz forecast: $8 billion or $9 billion.

Capstone Proposal. The Administration's strategy for recovery encompasses a range of measures, among them some tax breaks for individuals and sales-stimulating efforts like abolition of the 7% auto excise tax. Paul McCracken, Nixon's chief economist, reckons that the program will generate 500,000 new jobs. But what Connally so emphatically describes as "the capstone" of the Administration program is a large effort to aid business. The key proposal is for an investment tax credit of 10% in the year beginning Aug. 15 and 5% in subsequent years. In theory, the credits will produce a torrent of capital investment, which will trickle through the economy, generating new orders for goods and services and new jobs.

It is this plan that will be the focus of the great economic debate in the coming months. Wilbur Mills strongly favors an investment tax credit, but doubts that business should be granted a credit as large as 10%. He is looking for ways to give a bigger tax break to people in the lower income brackets, thus putting a Democratic stamp on the Nixon program. To do this, Mills is considering eliminating $3.5 billion in depreciation benefits that took effect in January, and reducing the investment credit from 10% to 7%.

Does this formula sound familiar? In the early 1960s, the Kennedy Administration introduced a 7% investment tax credit and cut corporate and personal taxes. Business investment jumped nearly 37% in the next three years--and the U.S. economy was off and running on the longest period of sustained expansion in its history.

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