Wrestling with Slumpflation

Beset on all sides by worsening economic news--a deep dive in labor productivity, a continued spiral in interest rates, a lag in business spending for plant and equipment--the Nixon Administration clings fast to an optimistic scenario. It insists that the slumping economy will turn up and the nation's frightening inflation rate will go down, helped by the Federal Reserve Board's continuing efforts to hold down growth of the money supply. Last week, Federal Reserve Chairman Arthur Burns pledged in unusually strong terms to pursue that policy--even at the price of further hurting the sliding housing industry. Now, in opposition to the Administration line, a two-pronged Democratic counter-strategy is taking shape. Democratic legislators are moving to 1) continue (or revive) limited wage-price controls to check inflation, 2) cut taxes in the hope of heading off a recession.

Under present law, wage-price controls will die this week; and until recently congressional Democrats, under pressure from big labor, appeared willing to let them expire without a fight. But last week Adlai Stevenson III of Illinois called in the Senate Democratic Caucus for a limited extension; to his own surprise, his motion was adopted unanimously. A bill embodying his ideas has a good chance to pass the full Senate, though its fate in the House is uncertain. The bill would permit the Cost of Living Council to reimpose controls on companies that violate commitments they had made earlier to hold down price increases and on industries that show marked inflationary tendencies.

The move to cut taxes is steadily picking up powerful Democratic support; Senate Majority Leader Mike Mansfield, among others, favors the idea. The leading plan has been advanced by Senators Edward Kennedy of Massachusetts and Walter Mondale of Minnesota. They would increase personal income tax exemptions from the present $750 to $825; alternatively, a taxpayer could forgo using the personal exemption and simply subtract $190 from his tax bill. Estimated total reduction: $5.9 billion a year. The legislation could be introduced in the Senate as early as this week, and is expected to get quick approval; no Senator likes to vote against a tax cut in an election year. In the House, the bill's fate probably will be determined by Ways and Means Committee Chairman Wilbur Mills. Last week he seemed cautiously receptive. The President has let it be known that he would veto any tax-cut bill.

Big Deficit. Whatever happens to the controls and tax bills, they are setting the stage for a first-class political fight that will likely continue through the fall elections. Most Administration officials want to get rid of controls once and for all, arguing that they only breed shortages of goods by holding prices down artificially. In opposing a tax reduction, the President and his aides argue that putting more spending money in consumers' hands and intensifying demand would only fan inflation. Moreover, the White House estimates that the federal deficit in fiscal 1975, even without a tax cut, will hit $10 billion, about twice what it was the year before.

The Administration has good reason to fear inflation. The most comprehensive index of U.S. prices, the G.N.P. deflator, bounded up at an annual rate of 10.8% in the first quarter, the fastest three-month spurt in 23 years. John Dunlop, head of the Cost of Living Council, predicted last week that the rate in the current quarter will be almost as bad. One reason for gloom: in the first quarter, productivity (or output for each man-hour worked by the nation's labor force) fell a shocking 5.5%, the worst fall in the 27 years that the Government has compiled productivity figures. As a result, the cost of the labor going into each unit of output rose an enormous 11.3%. Sooner or later, much of that added cost will show up in the prices of goods and services.

Liberal economists like Walter Heller and Arthur Okun of TIME's Board of Economists assert that a tax cut of the size proposed by Kennedy and Mondale would contribute little to the current high inflation. They contend that it is necessary to relieve the burden of higher prices on low-and moderate-income families and to stimulate a sluggish economy. Consumers could indeed use some relief; real disposable personal income of the average worker shrank at an annual rate of 7.3% in the first quarter because prices rose faster than wages. As for the economy, the national output of goods and services in the first quarter fell at an annual rate of 5.8%, the steepest drop in 16 years.

President Nixon last week predicted a leveling off of the decline in the current quarter, followed by a rebound in the third and fourth periods. But there are few signs of a pickup yet. Consumer spending is flat. The Administration has been counting heavily on businessmen to take up the slack by fulfilling their plans to spend 13% more this year for new plant and equipment. Actual business spending in the first quarter rose at an annual rate of less than 8%, however, possibly because shortages of materials and equipment are preventing companies from increasing investments as rapidly as they would like.

New Doubt. A rebound in the housing industry from last year's slump has also been expected but Arthur Burns threw new doubt on that prospect last week. Correctly noting that there has been a "veritable explosion of business loans," he insisted that the Federal Reserve would not pump out enough money to accommodate the demand. Burns acknowledged that his policy might hurt the housing industry, but contended in effect that that was just too bad. "Other ways" could be found to help housing, he said. White House aides are now working on recommendations for action to bolster housing, which they expect to present to the President this week.

Interest rates are zooming in response to the Federal Reserve policy. Last week New York's Franklin National Bank raised its prime rate on business loans to 11%, and some bankers estimated that the rate could go to an unheard-of 12%. The high interest rates attract deposits away from savings banks and savings and loans and thus dry up mortgage money. Otto Eckstein, a member of TIME's Board of Economists, worries that "with the present consumer gloom, the stock market malaise and the Watergate crisis, another housing slump would be sufficient to abort any recovery" in the economy.

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