Nixon's Second-Term Plans

RICHARD NIXON and George McGovern are in total agreement on at least one thing: they offer the most fundamental choice between presidential candidates in this century. Yet in the vital realm of economics, where both men consider their differences especially great, voters have a tough time defining the choice with any precision. After months of confusion, contradiction and revision, McGovern has now produced an explicit, detailed tax and spending program. Nixon, while assailing that program as threatening a radical lurch to the left, has made only the most general promises about what he might do in those areas during a second term.

Politically, that silence makes sense. As President, Nixon has a program in being--one that has made notable progress during the past year toward repairing the damage that his economic performance once did to his standing with the voters. On Aug. 15, 1971, Nixon abruptly reversed the policies that he followed in his first 2 1/2 years in the White House; as a result, he has slowed inflation and produced a remarkable spurt in national output. Gross national product in 1973 seems likely to show a rise topping even this year's biggest-ever gain (see box on next page). Democrats argue that this record looks impressive only by comparison with the inflationary recession of 1970. Perhaps, but it has been good enough to help Nixon move to a lengthening lead in the polls. And it has left the President free to concentrate on attacking McGovern's program rather than risk alienating anyone by spelling out possible changes in his own.

On the gut issue of taxation, for example, the Republican platform pledges "further tax reform," but the President has not dropped the slightest hint of whose taxes might be raised how much. Nor has he ever confirmed or denied the persistent speculation that he might propose a value-added tax (VAT), a kind of national sales tax. Treasury Secretary George Shultz, who has once again become Nixon's closest economic adviser after being eclipsed last year by John Connally, told Congress last week that "the probability that the President would want to do it is declining." Shultz offered no guidance on how, in that case, Nixon proposes to raise the $16 billion a year that he has promised eventually to make available to local school districts, so that they can reduce property taxes.*

On the crucial subject of wage-price controls, Nixon seems sure to keep some version of his present program beyond its scheduled expiration date next April 30. Main reason: more than 4,000,000 workers are covered by major union contracts that expire next year. If controls are lifted, their unions may well press for and win raises large enough to aggravate inflation badly.

Thus Nixon appears more hawkish on controls than McGovern. The Senator would abolish most statutory controls and substitute voluntary wage-price guidelines. He would, however, give the White House direct authority to order rollbacks of increases that flagrantly exceeded those standards. What changes Nixon might make in present controls is not at all clear. Administration officials hope that as inflation calms down they can progressively loosen the reins and make more exemptions. They expect the program ultimately to fade away--but how soon, no one will even guess.

For all the uncertainties of Nixon's second-term economic policy, his general direction could hardly be more at variance with McGovern's. The President has been impressed by the passion of voter resentment against taxes, and he has been frightened by the parade of gigantic budget deficits that his policies have done so much to produce, even though those deficits have helped to set off the current surge in the economy. So he will give top priority to a tough hold-down in Government spending in order to trim the deficits and avoid any net increase in federal taxes. Ronald Ziegler declared that "the President would not propose tax increases during his second term." That does not necessarily rule out some changes: tax reform could consist of a balanced package of increases and cuts, and White House Aide John Ehrlichman has put forth at least a semantic justification for VAT. If it led to local property-tax relief, said Ehrlichman, VAT would not be a tax increase but a "tax substitution."

On the spending front, the Administration is asking Congress to set a $250 billion ceiling on expenditures this fiscal year. That would require a slash of at least $10 billion in the spending that otherwise would be likely, and would reduce the deficit by a like amount from the $35 billion now foreseen. If the President gets what he wants from Congress, he would have what Deputy Treasury Secretary Charls Walker calls a "retroactive item veto" over money bills that have already been passed. Aides are not saying what would be cut. Shultz pledges only that the Administration would not touch Social Security or revenue sharing with the states, and that it would squeeze merely "a nickel or two" out of the Pentagon's budget. Most of the money would have to come out of welfare as well as Lyndon Johnson's Great Society programs, which run the gamut from Headstart to VISTA. Direct federal grants-in-aid to states and cities for such purposes as hospital construction and rapid-transit improvement would also be in jeopardy. Some likely candidates for deep reductions: manpower training, urban renewal and the Model Cities program.

For fiscal 1974, which starts next July 1, Budget Director Caspar ("Cap The Knife") Weinberger is roughing out a plan to hold spending to $262.5 billion, though he is likely to wind up at $265 billion. That would further pare the deficit to around $15 billion. More than that, it would bring expenditures into approximate balance with the revenues that the tax system would generate if the economy were operating at full employment. Although federal spending would climb about $15 billion from this fiscal year, the increase would be entirely accounted for by rises, already dictated by law, in Social Security benefits, federal pay, interest on the national debt and other built-in expenditures. There would not be a penny for any new federal programs--presumably including Nixon's own plans for welfare reforms that would guarantee an annual income of $2,400 to a family of four, and for the start of "special revenue sharing" with states and cities. (Under the latter plan, states and cities would get federal money earmarked for very general purposes, such as health or transportation, and could spend the money on any programs they pleased within that limitation. By contrast, under "general revenue sharing," which has just gone into effect, there are no restrictions at all on how the money can be used.) Payment of the promised $16 billion a year for schools and property-tax relief would almost certainly be long delayed or would have to be financed by VAT.

Economically, Nixon's budget policy is sound enough. Deficits of the size that the U.S. is running can be tolerated while there is still slack in the economy, as is the case now. As the nation moves toward fuller use of its resources, however, such large deficits could well be highly inflationary. The price for reducing the deficit to hold back inflation would be high: freezing or cutting social programs that may not always have been effective but are nonetheless directed at genuine and often pressing needs. At minimum, Washington would be shifting a heavy fiscal burden onto already hard-up states and cities. That burden would be only partly offset by general revenue sharing. Even worse, Nixon's budget plans imply that he is willing to settle for an unemployment rate leveling off at about 5%, meaning that 910,000 more Americans would be out of work than if the U.S. pushed on to the traditional "full employment" target of 4%. Economists generally believe that getting down to a 4% jobless rate would require a continuation for several more years of the huge deficits that Nixon is absolutely determined to shrink.

Are President Nixon's budget goals achievable at all? Pressures to raise rather than reduce federal spending mount inexorably on every side. Just last week the Senate Finance Committee voted a $6 billion annual increase in Social Security payments to widows, the aged and the disabled, on top of a hefty rise already legislated earlier this year. Even some loyal Republican Congressmen doubt that the President can restrict spending as much as he wishes.

If he cannot, Nixon eventually will have to propose a fat tax increase. Congressman John Byrnes of Wisconsin, ranking Republican on the Ways and Means Committee, said last week that "there is no question" that taxes will have to be boosted some time in the next four years. Nixon will be hardly likely to agree during the campaign, but he may be forced to later. One thing he has made perfectly clear about his economic views is that, when necessary, he can reverse them abruptly.

*This is one of the few subjects on which Nixon is outpromising McGovern. The Senator proposes $15 billion a year in new federal aid to education, specifically for the purpose of enabling communities to reduce property taxes.

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