Oldtime Religion v. Inflation

In still another clear bid for conservative support, President Nixon last week took to nationwide television to defend his Administration's economic policies. The message was that the White House has no intention of taking any important new action despite rampant inflation and declining production. Nixon told a warmly sympathetic gathering of four California businessmen's groups in Los Angeles that the Administration would continue on its present course of "steadiness" and "would respect the basic laws of the marketplace." He again rejected any return to wage-price guide lines or controls and said that the battle against inflation would best be served by restraining demand for the short term while increasing supplies for the future.

To help accomplish this goal, the President rightly stressed the need for more effective use of workers and machines to improve the nation's sagging productivity, but he offered no suggestions on how to do it.

Scrap Plans. Nixon said that he will seek to hold federal spending for this fiscal year to about $300 billion, or about $5 billion less than present esti mates. But beyond promising to eliminate 40,000 of the Government's 2.8 million jobs he gave no hint of where the cuts would be made. Nixon announced that he has ordered a "sweeping review" of all federal regulatory agencies in order to scrap old rules that hamper production. He said that the nation must "reevaluate" environmental and safety laws, which many businessmen have criticized as being too costly. In private talks, Nixon has been outspoken about his determination to weaken clean air and water controls.

For all its generalities, the tone and thrust of the President's talk proved that despite his politically successful fling with the easy-money, deficit-spending ways of Keynesian economics, he has returned with some relief to that "oldtime religion," with its emphasis on gradualism, balanced budgets and monetary restraint. Yet the message is not likely to dispel the public's thickening gloom about the economy.

No Gain. The nation's real output of goods and services has already suffered two consecutive quarterly declines, and last week New York's First National City Bank reported that the economy is gripped by not just a temporary slowdown but by "a pervasive recession." The bank predicted that real gross national product will probably show a drop for all of 1974, instead of the small gain forecast by the Administration.

Prospects for any appreciable slowdown in inflation soon are dim. For all the public agonizing over cutting the present budget, there is little likelihood that federal spending will be reduced sharply enough to have a substantial impact on prices. Consumer prices in the first six months of this year shot up 12.6%, and they are likely to continue leaping at or close to a double-digit pace for the rest of the year. Farm prices are marching up again, and increases in wage settlements jumped from 7.6% in the first quarter to 10% in the second.

The Administration has been relying on the Federal Reserve Board to curb demand by keeping a firm rein on money supply. The rate of money expansion has shrunk from about 12% in February and March to less than 7% in the second quarter. That policy has made it too costly for many companies to raise money in the long-term bond markets and virtually dried up capital in the stock market. It has also hammered the housing industry into its worst condition since the end of World War II.

Housing starts are limping along at an annual rate of 1.6 million, v. 2.5 million a year and a half ago. Many economists expect a further decline, to a rate of some 1.3 million in the third quarter. Home-loan capital has all but evaporated because of a run on deposits in savings and loan associations, which cannot compete with the rich-yielding rates being offered for Treasury bills, bank certificates of deposit and commercial paper. Mortgage rates round the country average about 9.2%, and many home buyers have to make down payments of 30% or even 40%.

In addition, inflating labor and material costs have jacked up the price of an average new house from about $30,000 to almost $36,000 in the past year. The industry's deepening slump is of critical significance because there has rarely been an economic recovery that was not paced by a surge in housing starts. Yet Michael Sumichrast, the National Association of Home Builders' chief economist, sees no relief in sight until inflation's back is broken.

The Administration seems bent on moving only slowly to revive the economy, hoping that sluggish growth and rising unemployment will eventually cause the fires of inflation to burn out. Yet if, as generally expected, unemployment edges up from its present 5.2% to near 6% later this year, the Democratic Congress may impatiently ram through a series of expansionary measures that could well bring on even worse inflation. The Administration cannot expect any outpouring of public support. A Harris Poll released last week before the President spoke showed that 83% of those questioned no longer believe that his Administration can effectively manage the economy.

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