End of the 'Boom Without End'

...The wild gyrations of the stock market at the end of May mirrored the financial community's new doubts about the soundness of Administration policy and the temperament of the President...

...For my part, I find more relevant a somewhat different scenario...

...An exit from this gloomy prospect is available through a speedy termination of the Vietnam war...

...The new plant may turn out to be a white elephant, thrusting additional capacity onto markets incapable of digesting what existing equipment can produce...

...Their effects were fundamentally political and psychological, but politics and psychology rapidly translate into economic behavior...

...If, as unhappily seems more likely, the President continues to waver and equivocate in Southeast Asia and his economic policy continues as clumsily as it has begun, there is every reason to anticipate, not another 1929, but a more sour and dangerous reprise of the worst years of the 1950s...

...But after his May 1 turnabout, the President will need to act firmly and quickly if he is to convince very many of his constituents that he really means to get out...

...At the end of April there was little in the real state of the economy to give businessmen cheer, yet cheerful for the most part they remained...

...But too much really has changed (here I accept the conventional wisdom), including the expectations of the business community, for a contemporary President to allow the economy to deteriorate indefinitely...

...A recent National Industrial Conference Board survey of capital appropriations noted the first decline in several years in the amounts major corporations budgeted for investment purposes...

...But under current conditions peace is bullish...

...Another product of the Depression, the Securities and Exchange Commission, polices the grosser practices of the investment community...

...And this year's President, after all, is the same Richard Nixon who in print attributed his 1960 defeat to the very mild recession which began in the summer of that election year...

...Subsequently, at a private dinner for business leaders at the White House, Burns assured one and all that the Federal Reserve would pump credit into the economy, even if it meant accepting the risk of promoting further inflation...

...It is a sign of the times that Arthur F. Burns, about as conservative as intelligent humans come, was impelled in public speech to set aloft the trial balloon of incomes policy...

...In April, the cost of living had risen at a faster rate than Americans had experienced since the early days of the Korean War...

...End of the 'Boom Without End' BY ROBERT LEKACHMAN Ask practically any economist and he will tell you in boring detail that the institutional changes stimulated by the Great Crash have rendered impossible a repetition of the calamities of the 1930s...

...Our present economic posture is midway between the 1929 apocalypse and the experience of the 1960s...

...Still, until May the retreat was orderly and the expectation general that better business in the second half of 1970 would restore the bloom of health to the brokers and their customers...

...The trouble was that the wrong half of the proposition worked too well, and the other not at all...

...Such respected and moderate organs of corporate opinion as Fortune and Business Week have reluctantly, but plainly, urged the President to contemplate some scheme of wage and price intervention for the grim reason that current policies are failing...

...Business reaction to Administration economic policies has suddenly turned quite chilly...

...Then came the calamities of May: the intervention in Cambodia, the shootings at Kent State and Jackson State...

...As for the stock market, despite occasional rallies, its overall tone is likely to be sour for a good while to come...

...It is rather late in the game to be talking about voluntary policy or even the mild guideposts of the Kennedy era...

...Income shrinks, unemployment rises, but the intrepid corporate planner, looking across a troubled but narrow valley, glimpses in the distance a vista of booming consumer markets and revived profits...

...What is now required is nothing less than mandatory controls and recognition of the facts of economic power—the capacity of the Fortune 500 to raise prices even when output falls, and the ability of corporate managers and the leaders of major unions to negotiate inflationary wage bargains even if the consequence is fewer jobs for their own members...

...To a degree such confidence serves to ward off the events businessmen disbelieve...

...The counterpart to their attitude is union refusal to moderate wage demands...

...even in this Administration, render probable somewhat more generous financing of social welfare and environmental programs...

...If real investment shrinks, stock prices will of course be bearishly affected...

...Social security, supplementary unemployment compensation payments and ordinary unemployment insurance cushion blue- and white-collar workers against the financial debilitations of all but protracted layoffs...

...Once opinion in Wall Street and elsewhere swings back to belief in the inevitability of recessions, and the business cycle (quiescent rather than extinct) returns to plague the economy, then no obstacle will remain to the full realization that what the economy is currently experiencing—and probably has been since last August—is a recession, and one that is not necessarily mild in amplitude or short in duration...

...They fear that the June 30 expiration of the surtax and the infusion later in the year of larger Social Security benefits and fatter Federal salary checks will superimpose a dangerously inflationary upswing upon the remnants of current inflation...

...Although Administration economists bravely descried signs of improvement and imminent stabilization, men and women of duller vision or less exigent political necessities saw no cause for celebration...

...as a result of the public confidence it inspires, runs no longer occur and banks rarely fail...

...It is a sign of things to come, of further slackness in consumer markets and sad times in the industries serving real investment...

...The Federal Deposit Insurance Corporation, created in 1933, insures savings deposits up to $20,000...

...although it would be naive to imagine that financial chicanery has been eradicated, registration and reporting requirements do make it rather harder than it once was to float and market utterly worthless securities...

...All the same, even its own supporters judge that the Administration has mismanaged the economy...

...But price relief, the object of the exercise, refused to manifest itself...

...Worse still, protracted contraction in capital spending contradicts the central assumption of "boom without end" based on the record of the 1960s...

...After Cambodia, it was difficult to be equally certain of the Nixon course in Asia...

...whatever the costs to our proteges in Vietnam and Cambodia...

...Refusing to retreat from their investment plans, unpersuaded by lagging sales that price reductions are sound procedure, they shrug off high interest rates, restrictive fiscal policies and tight credit markets...

...I have already mentioned the key role confidence in a rapid revival plays in the maintenance of high investment, even when sales lag and profits fall...

...Declines in real investment have well-known multiplier effects...

...As for conventional predictions about the remainder of this year, there are economic forecasters who are right now less concerned about recession and unemployment than they are about too rapid a revival in output, income, and employment...

...For—and this is truly the modern temper—there are worse things in the world than inflation, among them excessive credit stringency, extensive bankruptcy, and high unemployment...

...A man so sensitive to financial undercurrents is unlikely to risk Republican congressional prospects in 1970 and his own chances for reelection in 1972...

...Perhaps most important of all, recessions and depressions are no longer accepted by politicians as acts of God or natural disasters against which human wit is forever powerless...

...It is perhaps premature to announce that the great capital expenditure boom of the 1960s has finally come to an end, dashed on the rocks of poor economic management and disappointed expectations...

...Business' new suspicion of Republican economic wisdom impinges critically upon general corporate expectations...

...The President and his advisers may be driven to price and wage controls by events, but their old-fashioned views have already caused expensive delays, and they may yet prove obstinate...

...The Federal government's contributions to the Gross National Product (gnp), trivial in 1929, in 1970 amount to one quarter of the nation's output, and are a much more stable, and stabilizing, component of the economy than private sector activity...

...The crucial effect of this event would be upon the generational tension now poisoning the national atmosphere...

...By the middle of May unemployment was 1.1 million higher than on the day Richard Nixon assumed the office once occupied by Herbert Hoover and Dwight Eisenhower—who presided, respectively, over one economic disaster and three annoying recessions...

...Labor is no more convinced than management that the bogeyman of massive unemployment is a serious menace...

...At the moment, several depressing circumstances are reinforcing each other: the possible end of the investment boom, the sad condition of most consumer markets, the disasters of the housing industry, and the general loss of confidence in the Presidential grasp of policy, both domestic and foreign...

...The current bear market has fed on falling profits and sales, and been further sustained by the bursting of the conglomerate bubble...

...Unemployment may ascend to the 7-8 per cent levels touched in the 1950s...

...Management officials may have begun to think soberly about retail markets that stay depressed for one, two, or three years...

...Credit policy may proceed by fits and starts, increasingly responsive to external pressures rather than the product of consistent initiative by the Federal Reserve Board...

...Other things have also changed for the better...

...Only the Wall Street Journal, the Attorney General, and the Nixon economists (except Arthur F. Burns) remain loyal to the antique faith in free markets and the "abhorrence" of direct Federal intervention into essentially private decisions—as if there were much private about the pricing decisions of major corporations and the wage demands of large unions...

...An early end to this moral abomination would have a happy impact upon investment expectations, release a good many resources and...

...That plan featured a trade of a little more unemployment for moderate but steady improvements in the pace of wage-price escalation...

...What I have thus far summarized is the conventional wisdom, model 1970...

...A $10 billion drop in plant and equipment spending readily becomes a $30 billion contraction in gnp...

...Jawboning may stop short of effective pressure upon union and corporate wage-price pacesetters...

...Indeed, it is precisely because businessmen are convinced that no administration dares risk serious recession that, up to now, private investment has remained stubbornly buoyant in the face of all sorts of discouraging news...

...Prior to Cambodia, businessmen thought they understood Nixon's Vietnam strategy: Under a sheltering cloud of militant rhetoric, the President was coldly liquidating the war, win or lose...

...In the future we may well see a series of confused and half-hearted interventions by the Nixon Administration...

...The recent drop in capital expenditure is genuine, basic, long-run bad news...

...Confidence shaken upon one topic is weakened on others...

...The construction industry may be losing hope in the awaited flow of new mortgage money, and wondering who could afford to meet the monthly payments even if mortgages were plentiful...

...Only this time around the natives arc restless, and too many of them are armed...

...The business community has become so sophisticated about the production of goods that the wild inventory cycles of the past are for contemporary managers nothing but bad memories, exorcised by computers and modern techniques of financial control...

...Idle capacity is expensive capacity—overhead and financing burdens continue relentlessly despite the absence of customers...

...As the cards appear to have been dealt, it is quite likely that the economy will drearily sag for a year or two longer...

...One should start with the economy's unresponsiveness to the Nixon "game plan" prior to his May 1 decision to enter Cambodia...

...When such calculations begin to be made, capital expenditure assumes a less benign aspect...

...Yet there are signs of such a climacteric...

...In sum, institutional protections to individuals and groups are reinforced by a dramatic shift since the 1930s in the nation's expectations of prompt remedial action by the President and Congress whenever recession looms...

...For a long time Vietnam has been an awkward war, too small to benefit the business economy in general, quite large enough to distort labor and capital markets and set in motion the current cost-push inflation...