Business: Nixon’s Dilemma: A Boxed-ln Economy

PRESIDENT NIXON’S political aides are considering a new campaign theme for 1972: “Prosperity Without War.” They are ahead of events on both counts, but the gap between slogan and situation is clearly narrowing more slowly on the economic front than the military front. The recovery from “Nixon’s Recession,” as it is bound to be called in the election campaign, is faltering. Worse, the economy seems boxed in by conflicting pressures—slow growth, high unemployment, big deficits and continuing inflation. There appears to be little that the President can now do to help it without taking great risks for himself and for the country.

$22 Billion Deficit. A preliminary Government figure circulating in Washington last week indicated that during the second quarter of 1971 the annual rate of G.N.P. was only $20.4 billion higher than in the first quarter. That gain was only two-thirds of what the President had hoped for. One result, as Chief Presidential Economist Paul McCracken recently admitted, is that “the expansion is not yet moving fast enough to eat into unemployment.” The jobless rate is a discouraging 6.2% of the work force and is likely to go higher as more Viet Nam veterans hit the streets.

Largely because the slow recovery has caused tax revenues to lag, the Federal Government this week will close its book on fiscal year 1971 with a deficit of about $22 billion. Expert estimates of the red ink in next year’s budget range up to the same figure—if the economy does not substantially improve. Aside from its economic effects, the deficit gives Nixon a negative political credit rating, particularly among the many Republicans who disapprove of unbalanced budgets. If the fat deficits continue, says one presidential counselor, they “could make Lyndon Johnson look like a fiscal conservative.”

Hard Choices. One way the President could try to speed up the recovery would be to ask Congress to reduce corporate and personal income taxes, thereby pumping up private spending power. This course has been urged by some of

Nixon’s advisers and by Senator Edmund Muskie, who may submit his own tax-cut measure, including a big 14% investment tax credit. A tax easing, however, could widen the budget deficit. And unless a cut is coupled with wage and price guidelines, which the President has been determined to avoid, it could aggravate another major economic problem: inflation.

The consumer price index seemingly had been brought under some control in the early months of 1971, but it shot up in May by .6%—the biggest monthly jump in more than a year and twice that of April. Because inflation is still so strong, some longtime proponents of a tax cut have backed off from the idea. One of them is Arthur Burns, chairman of the Federal Reserve Board, who despairs of the effectiveness of conventional economic policy tools in dealing with the nation’s deep-rooted inflationary psychology. To friends, Burns has explained the dilemma: “We are not living in the same world any more. The old remedies are not working.” The quandary has left many of Nixon’s other top economic advisers equally frustrated and perplexed.

May Snowball. Inflation may worsen in the closing months of this year and early in 1972 because of monetary pressures built into the economy by the Federal Reserve Board. With the Administration cheering it on, the board early this year began sharply increasing the money supply, a process that Nixon’s economists hoped would rev up business. But for a complex of reasons that the board’s governors themselves cannot fully explain, the growth got out of control and moved too fast.

The money supply spurted at an annual rate of 11% for the year’s first five months, accelerating alarmingly until it hit 16.9% in May. The board now aims to trim back the growth to 6% or 8%—but only by small snips, lest a severe cut send interest rates spiraling upward again. Changes in money supply take months to affect the economy. Some economists fear that when the huge “May snowball” hits with full force in several months, it could sock the U.S. with still more inflation.

Budget Director George Shultz, the Administration’s strongman on economic policy, believes that no further action is necessary now to stimulate the recovery. He is confident that the measures taken, especially the increase in money supply, will prove sufficient in the long run. The next great test of that judgment will come in mid-July, when statistics on the economy’s performance in the second quarter come out. Then the President will have to decide whether to move boldly for lower taxes and higher spending at the risk of widening the deficit and worsening inflation—or to continue present policy as is, at the risk of heading into an election year with the economy still sluggish.