The Nixon Boom

...Should "voluntary" restraints falter, the President has asked for the power to reimpose controls, but few expect him to exercise that option...

...By midyear, President Nixon will be forced to choose among three unattractive alternatives: 1. Assuming that Congress extends the Economic Stabilization Act, he could reimpose mandatory controls, an action sure to enrage organized labor and unlikely to be effective against concerted union opposition and covert corporate sabotage...

...Notoriously, the jobless rate for blacks is double, and for all teenagers it is treble, the figure for the general population...

...I hate to throw cold water on such a cheerful prospect of a real economic boom...

...on the wage front, this is the year of major labor negotiations in trucking, autos, electric appliances, construction, rubber, and transportation, affecting some 5 million union members...

...These events, though not demonstrably caused by Phase I and II, at least coincided with the Administration's interventions into "free" markets...

...angry at Federal Reserve Board Chairman Arthur Burns for not clamping down on the supply of credit, conveyed his emotions directly to the President...

...The risks of predicting what the President will do on any given public issue are now apparent...

...Word has leaked out that House Ways and Means Committee Chairman Wilbur Mills (D.-Ark...

...All parties will weep a flood of crocodile tears as the familiar price-wage-price spiral resumes...

...Business Week warns that "economic activity is heating up too fast for comfort...

...Since at best the Phase II controls had only a very slight impact on inflation and unemployment, Phase Ill's deference to large corporations, major unions and agri businesses combined with savage budgetary restraints upon Federal education, housing, environmental, job training, and antipoverty programs is clearly less likely to generate acceptable price, wage and employment performance...

...As for international trade and the balance of payments, the importance of foreign trade to the American economy is often exaggerated, and the way to avoid worry is simply to float the dollar...

...Yet judging from his known opinions and recent policies, the first and third approaches are the least likely of the three...

...No wonder prudent, responsible types have begun to worry that the boom is getting out of hand...

...At some point, Burns' own innate conservatism and abhorrence of inflation will overcome his only slightly less intense aversion to unemployment, and the Fed will move once again to nip a boom in the bud...

...What we have now is a failure, so any change is better...

...3. The President could accept continued inflation as the price of emergent boom...

...The general, if not quite universal, euphoria was stimulated by President Nixon's elimination of mandatory controls over everything except medical services, food and construction...

...The cost of building a house or an office building ascends at monthly rates of 1 per cent or more, despite controls antedating Phase I. To put it mildly, preserving controls in these areas does not seem to promise a great deal of solace to hard-pressed consumers...

...The would-be victims can be protected by writing escalator clauses into private pension plans, raising savings bank interest ceilings, and revising other contracts...

...My guess, made with trepidation, is that as inflation further accelerates and contract negotiations produce outsized pay and benefit packages, Nixon will redouble his appeals to Burns...

...Since last year's GNP totaled $1,152 billion, these experts are soberly speaking of growth rates in real goods and services of 5-7 per cent, accompanied even more reassuringly by price inflation of 2.5-4.0 per cent...

...Yale's James To-bin, an exception in his trade, has argued that in an economy where the power is permanently concentrated in corporations, unions and governmental price-fixing institutions, the only route to high employment and steady growth is inflationary...

...The politics of decontrol explain why Nixon chose the middle of January to revoke a program that most observers, unlike Professor Houth-akker, had considered mildly successful...

...But if big business, big labor and big agriculture were to reap maximum benefit, even the gentle restraints of Phase II were too much...

...Nor were either group's prospects improved by the Administration's impoundment of appropriations for job training and development programs in urban environments...

...Nixon and such key advisers as George Schultz, Caspar Weinberger and Herbert Stein are resolute anti-inflationists, far more concerned about price instability than unemployment...

...The wholesale price index, an excellent predictor of retail trends a month or two later, climbed at an annual rate of 4.9 per cent in the first half of 1972, spurted to 6.7 per cent in the third quarter, and accelerated to a sickening 9.6 per cent in the last three months of the year...

...If Burns, a notably prickly character, agrees and the Fed reenacts its 1966 money squeezes, no one need doubt that interest rates will soar, business investment contract, and new housing practically vanish...

...Should this come to pass, as I devoutly hope it will not, 1973's real growth will be much below 5-7 per cent, and the year's average unemployment level will be closer to 6 than to 5 per cent...

...Last December, when wholesale food prices went up 5.8 per centAn annual rate of some 70 per cent secretary of Agriculture Earl L. Butz admitted that he was expecting similar food price rises for the next six months...

...Furthermore, this green light could not have been flashed at a more propitious time: In an increasing number of industries, corporations were beginning to bump against even the gentle profit-margin controls of Phase II...

...Some boom...

...Nevertheless, I can not help thinking that my profession has got the situation wrong...

...President George Meany of the AFL-CIO, who reportedly insisted upon the dismantling of most controls as the price of his cooperation and reappearance on a new labor-management advisory board, commended Nixon's action as "a step in the right direction toward eliminating inequities in the present control system...

...Unemployment would begin to rise again, too, giving the new Nixon Administration its new Nixon recession...

...The economy did recover from the 1969-70 recession, unemployment did begin to edge downward, and prices, if the right period and the right index were selected, could be shown to be moderating...

...These men would be most reluctant to return to mandatory controls, for the political cost is high and the chance of success low...

...2. The President could slash the civilian budget even more ferociously and lean much more heavily on Arthur Burns to clamp down on credit...

...And even that, I would venture, is optimistic...

...The most pessimistic seer prophesied a $1,250 billion Gross National Product (GNP) and the most optimistic a $1,270 billion figure...

...Last December, it stood at 5.2 per cent, a number that more or less plausibly permits the Nixon economists to claim they hit their final 1972 unemployment target, the "neighborhood" of 5 per cent...

...The politics of Phase III seem impeccable...

...As Business Week summarized professional opinion, 25 human prognosticators and eight computerized econometric models tell a remarkably similar tale of great things to come...

...Thus we can envision the following scenario: Laissez faire for the corporations, plus the spectacular misbehavior of food and health costs, will boost the consumer price index still higher, resulting almost certainly in contract settlements far exceeding present or potential productivity improvements...

...Medical costs, controls or no controls, have increased two-three times as fast as prices in general...

...The momentary entente between the President's traditional big business clientele and his new labor pals is appropriately rewarded with the promise of prosperous times and new licenses to lap up the available gravy from higher prices, larger profits, and more generous collective bargaining settlements...

...To begin with, inflation has not really been checked...

...Business will pass the increased labor cost on to the customers, along with the usual profit margins...

...All the portents point to far brisker inflation than the experts currently anticipate...

...In time, prices do respond to such heroic remedies, but of course this policy entails much lower rates of real economic growth than the 5-7 per cent the experts confidently project...

...In the ranks of the powerful, a quite different assessment of Phase III immediately surfaced...

...The economists' consensus forecast for 1973 is continual joblessness of about 5 per cent...

...With the tacit support of many economists the Administration has junked the old Kennedy-Johnson 4 per cent criterion of full employment, itself too high, and settled on 5 per cent in its place...

...Firing the pay board and the price commission returns the situation roughly to the jawboning of the Kennedy-Johnson era, a circumstance that no doubt explains the favorable comments of Walter Heller, Gardner Ackley and Arthur Okun, the three Democratic economists most closely associated with the formulation of the wage-price guideposts that guided past efforts at Presidential jawboning...

...Of this demarche, possibly the sharpest judgment was made by a former member of Nixon's Council of Economic Advisers, Hendrik Houthakker, who was quoted from his Harvard sanctuary by the Wall Street Journal in these acerbic terms: "I think it will probably work as well as what we have now, which isn't working...

...My second drastic reservation concerns unemployment...

...Chairman Richard C. Gerstenberg of General Motors called the President's action "timely" and looked forward to "a return to the discipline of the competitive market," a comment not without comic overtones when its source is considered...