Putting the Brakes on Inflation

...As usual, too, when credit is scarce municipalities and states, chronic borrowers, find themselves compelled either to postpone needed public improvements or finance them out of mostly regressive taxes...

...To workers and their unions higher taxes are felt as increases in the cost of living, occasions for larger contract demands, and determination to recoup the taxes paid...

...As levels of factory utilization rose, unemployment continued to shrink, and occasional labor shortages began to appear, it seemed plain that price increases would accelerate and equally evident that the appropriate Congressional reaction was fiscal restraint...

...These very profits have generated some of the funds which have financed the investment boom...

...The potential rewards of inaction were considerable...

...The first is a suspension of the investment tax credit, proposed as long ago as last January by Walter Heller, reiterated recently by James Tobin, once a colleague of Heller's on the Kennedy Council of Economic Advisers, and now apparently being considered by the President...

...In September, still less in January 1967, the sum seems too small...

...Of course it is true that as interest rates rise, bonds yield higher and higher returns and attract increasing diversions of funds from equities...

...The investment boom is the most important single source of inflationary pressure...

...As favoring circumstances the Administration could count on the small number of labor contracts coming up for renewal in 1966, the large amount of new factory capacity coming into operation as a consequence of past investment, and even the occasional success of the Administration in persuading corporations to withhold or withdraw price increases...

...Suppose that the bulk of the tax increase comes from high imposts upon the earners of large personal incomes...

...They have increased the inequity of American income distribution and they have undoubtedly enlarged the size of union demands for pay and benefit improvements...

...Small loan and installment credit are scarcer and more expensive...

...It became increasingly evident as the year wore on that President Johnson would be back to Congress for a substantial supplementary Vietnam War appropriation early in 1967...

...Particularly if war costs fall on the high side, one can only hope that Johnson will summon a special session of Congress and present it with the remainder of a coherent fiscal policy...

...Economists might endlessly preach the beautiful symmetry of modern fiscal policy...

...Higher interest rates imply another shift of income in the direction of the haves and away from the have-nots...

...Moreover, a President who refrained from raising taxes avoided further damage to a consensus already dented by Vietnam...

...Profits have steadily mounted as a share of national income and wages have risen very slowly indeed, certainly no more rapidly than realized gains in per capita productivity...

...It is possible to come up with a tax mixture which is economically if not politically advisable...

...One should not be too certain in these matters...

...As usual the explanations are less than completely satisfactory...

...One should waste little sympathy on the plight of stock market investors...

...Perhaps worst of all, so far monetary policy has had little or no effect upon business investment...

...The only man who can resolve the uncertainty, and the only man who can be reasonably sure what a sound fiscal program should be, is the President-and it seems evident that he will postpone a complete program until after the November elections...

...During the past five years of expansion a growing number of enterprises have been presented with a choice between large profit increases and a combination of price reductions and more moderate rises in earnings...

...All the same if fear of inflation is general, it is hard to know why some investors at least are not more eager to purchase common stocks, the traditional hedge against inflation...

...In 1967 when a number of important contracts come up for renegotiation, there is little question but that unions will seek 5 or 6 per cent settlements...

...Ordinary voters were familiar only with the tax decrease side of the policy and might require a good deal of persuasion before they embraced the whole of Keynesian doctrine...

...Tight money falls very unequally upon borrowers...

...Otherwise, as that unexpected contributor to the economic debate Harry Truman has said, there is genuine danger that the boom will collapse of its own excesses...

...Even prior to this year's acceleration of price inflation, the long economic expansion was an inequitable affair...

...The desirability of raising corporate income taxes is very considerable...

...Once the tragicomedy of the spring peace offensive was concluded, the hope of diminished war expenditure vanished and the steady buildup of military strength in Vietnam accelerated...

...It is unfair to ask those who have gained least from the boom to contribute most to its control...

...One element would be an increase in personal income tax rates bearing moderately on average income recipients and somewhat more heavily upon the wealthy...

...A further bonus of full employment might be the alleviation of some of the Negro discontent which has generated apparently annual summer riots in the major cities...

...To ask aircraft mechanics or communication workers to settle for 3.4 per cent was to ask them to accept an actual decline in real wages and to invite disruptive episodes like the lengthy airline strike...

...At the start of the current year many analysts, including some of the economists prominent in the formulation of past Kennedy-Johnson economic policies, diagnosed incipient inflation as the year's looming disturbance of American prosperity...

...Indeed if equity is the only consideration, they deserve no less...

...The boom has treated other groups much worse...

...That the situation is no worse is to the credit of an unexpected hero, William McChesney Martin, who has administered a highly restrictive monetary policy...

...In an atmosphere of comparatively stable prices, unions could count their gains as steadier employment, more plentiful overtime, and lower average rates of unemployment...

...Until this year the situation for labor was just barely tolerable...

...Up to 1966, the guideposts were on occasion used to turn back some of the more outrageous price grabs by large corporations...

...People who aren't saving can pay higher taxes only by reducing their spending-a consummation much to be desired from the standpoint of inflation control...

...Is the market predicting the imminent end of the boom (as Fortune for one anticipates) and a corresponding sharp decline in profits...

...And although consumer spending sagged in the second quarter of the year after an impressive first quarter performance, much of the explanation seems related to the scarcity of consumer and housing credit rather than a genuine disposition on the part of the customers to increase their savings...

...In the face of labor surpluses which have only very recently vanished, unions have been in a poor position to press for very large gains...

...But what the policy has achieved in restraining still more rapid price inflation has been at some cost in economic fairness...

...Unemployment might at last decline to the 3 per cent level, long wistfully yearned for...

...Hence it is decidedly odd to maintain in effect a premium upon additional investment which was designed for an economy operating at much lower levels of activity...

...President Johnson rejected this analysis...

...Indeed, it is a close question whether meteorology or economic forecasting is the more uncertain science...

...Moreover, it is going to be quite difficult to tailor the sort of tax program which is both equitable and effective...

...Although the guidepost theory urged the second course of action upon such conspicuous beneficiaries of prosperity as the auto companies, they preferred very large profits to corporate restraint...

...Insofar as they do so, the tax increase fails of its anti-inflationary effect...

...Is this really a rational outlook at a time when more or less informed speculation contemplates a doubling of force levels in Vietnam to 600,000...

...The economic uncertainties are the more substantial because the cost of Vietnam is still shrouded in mystery...

...If fiscal policy presents all these difficulties, should we all simply resort to public prayer as the only solace in a situation where no economic policy is really very attractive...

...But even in 1964's and 1965's somewhat less buoyant economic climate, the guideposts failed disastrously to enforce the price reductions in exceptionally productive industries which the doctrine of overall price stability required...

...In this fretful autumn of complaint about interest rates being higher than they have been since the Harding Administration, increases in consumer prices at an annual rate of over 3.5 per cent and in food prices at over 5 per cent each year, and actual erosion of the purchasing power of the average factory employe's wages, it is evident that the Administration's critics have had much the better of the argument...

...He and his advisers gambled that the rate of increase in aggregate demand-public spending, consumer expenditure, and business investment-would not be so rapid as seriously to impair the price stability which had marked the earlier years of the boom...

...Possibly, just possibly, beaten and bloody as they were, the wage-price guideposts might endure yet another year...

...If monetary policy has reached the end of a road, if the guideposts are in ruins, is there anything left except fiscal policy...

...On every conceivable count, then, sensible tax policy will go after corporate profits more vigorously than any other variety of income...

...However, it now appears possible that he will recommend more rapidly a suspension or reduction of the investment tax credit...

...Insofar as the guideposts have had a substantial influence, they have served to reinforce employer ability to keep wage gains moderate...

...And, it scarcely needs the saying that low-income voters are much more numerous than their wealthier brethren...

...This seems fair enough: Those who will pay are those who have enjoyed an inordinate share of the boom's benefits...

...But surely this approach has still less to recommend it...

...Corporate tax policy falls into two parts...

...On the assumption that inflationary pressure will continue for some time, the suspension of the credit is desirable, but it is unlikely to produce an immediate curtailment of investment plans...

...It is easy to illustrate the complexity of the issue...

...Unfortunately, the wealthy are likely to pay higher taxes out of savings instead of reduced spending...

...It should be supplemented by an increase in taxes on corporate income, possibly to the rates in force before the 1964 tax cut...

...Since Congress has a poor record of rapid action even on tax decreases, the earlier the Congressional argument gets started the more likely it is that action will be completed in time to do some practical good...

...Probably a larger amount should be raised from larger imposts upon corporations...

...This is no winning recipe for economic policy...

...They based their apprehension upon an investment boom which showed signs of accelerating instead of moderating, a high level of consumer demand, and Federal spending enlarged both by Great Society programs and the Vietnam buildup of men and materials...

...The prospect is plain that if the present rate of price inflation is not slowed, 1967 will be a year of considerable labor turmoil...

...As much as any other cause, this may be the occasion of the uncertainty now upsetting the securities markets...

...Even if it weren't unfair, the effects upon stabilization policy are still quite dubious...

...Informed" guesses about the size of the January 1967 supplemental appropriation run from $5 to $15 billion-a range quite substantial enough to make nonsense of overconfident projections of price movements, government deficits, and desirable fiscal programs...

...Although corporate profits are still extraordinarily high, the stock market has nevertheless been declining...

...Not at all...

...No one is very happy...

...A tax increase of $4-5 billion last January might have been enough to calm the economy...

...Thus home-building has declined from a rate in the spring of some 1.5 million units annually to about 1 million units per year in August, and it appears likely to suffer still further contraction...

...As an alternative the bulk of the tax increase might be imposed upon the low savers and the high spenders...

...Once prices began to rise more rapidly and labor markets tightened, labor militancy became inevitable...

...Although the details of their proposals inevitably differed, the partisans of tax increases concurred in the desirability of rapid Presidential recommendation and Congressional action...

...The short answer is No, but even here the outlook is far from joyful...

...In spite of a 6 per cent prime rate of interest, the investment boom has not flagged...