How Real a Spending Cut?

In its long and losing struggle to manage an unruly economy, the Nixon Administration has at one time or another applied the diverse economic theories of Milton Friedman (concentration on money supply), John Maynard Keynes (liberal spending) and John Kenneth Galbraith (price control). Last week, still seeking an effective anti-inflation strategy, it went back to Adam Smith. In a bow to the oldtime, laissez-faire religion of reduced Government spending, the White House announced that it would try to trim more than $5 billion out of the budget for fiscal 1975, which starts this week. If the cuts are actually made, spending would still rise to a record $300 billion, but the deficit would drop from a projected $11 billion to $6 billion. The White House further announced that it would attempt to balance the budget for fiscal 1976, a feat that has not been accomplished since 1969. Where this year's cuts would be made is unknown. Presidential Economic Adviser Kenneth Rush said that the $85 billion defense budget was a possible area for savings, such as "the reduction of personnel that is not needed."

Raging Debate. In an effort to determine specifics, President Nixon is scheduled to meet next week with economic policymakers again to get suggestions. But already a debate is raging among Administration budgetmakers as to how much trimming is really feasible. Office of Management and Budget Director Roy L. Ash said after the White House announcement last week that only about $2 billion could be cut by "tightening the screws." The remaining $3 billion, he said, would have to come through sale of federal assets, such as oil leases. In the convoluted semantics of budgetry, money from such sales gets counted not as federal income but as "negative expenditures" and thus serves to reduce officially reported spending.

The idea of making such illusory "cuts" does not please Herbert Stein, chairman of the Council of Economic Advisers, or Treasury Secretary William E. Simon. Both want more real spending reductions than Ash says are possible. Simon was reported to be so irked by Ash's stand that at one point he exploded to Ash in language reminiscent of the White House transcripts: "You would think this [expletive deleted] budget was your own."

Small Impact. Whatever genuine cuts the Administration can make will be both proper and timely. Last week, First National Bank of Chicago raised its prime lending rate to an alltime high 11.8%, and many other major banks went back up to 11 3/4%, an increase of one-fourth of a point. In theory at least, lower federal spending should reduce the pressure for still higher rates by lessening the need for the Government to borrow in competition with private borrowers for scarce funds. A thinner deficit should also ease inflationary pressures, which continue frighteningly strong. U.S. Steel and Bethlehem Steel raised prices 5% to 15% for many products (U.S. Steel for the third time in seven weeks), and Chrysler boosted auto prices $60 a car, its fourth increase on the 1974 models.

Even a $5 billion budget cut, however, would probably have only a marginal impact on the rate of inflation; Rush conceded that the initial effect would be mostly psychological. That effect is already observable in Congress, which is in a parsimonious mood for an election year. A majority in the Senate has signed a resolution calling for a balanced budget in fiscal 1975, and the Senate last week trounced by 65 to 33 an amendment to a debt-ceiling bill that would have cut personal income taxes by $6.5 billion.

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