Ford's Plan: (Mostly) Modest Proposals

Coming down from the heady abstractions of the summit, President Ford last week rolled up his sleeves to confront the gritty economic and political realities of devastating inflation, lengthening recession and a looming international crisis over oil prices. With congressional elections less than a month away and pressure building for action, the Administration has been working feverishly to meet its self-imposed deadline to produce an effective and politically acceptable program by this week. The President planned to address Congress on nationwide television on Tuesday afternoon to announce his program and appeal for bipartisan support.

Though he and his advisers were tinkering with the package right up to the last minute, these were among the key proposals that the President was thought ready to make:

> A 5% income tax surcharge on individuals with higher earnings and on corporations.

> Bigger investment tax credits for business to encourage production.

> Tax relief for the nation's low-income families.

> An expanded public-service employment program.

> Federal financial aid for the mortgage market.

> A voluntary fuel conservation program.

> A proposal to cut the budget by about $5 billion.

In preparing that blueprint, all week long the White House's economic team, headed by Treasury Secretary William Simon and Presidential Adviser L. William Seidman, sifted piles of option papers streaming in from a dozen departments and agencies. They also studied loose-leaf notebooks fat with suggestions that came out of the recent round of minisummits. All the way through, the President himself was deeply involved.

The often frenetic process revealed some open disagreements between the President's political and economic advisers. Most notably, a number of economic aides sensibly favored an additional tax of 100 to 300 on each gallon of gasoline on the grounds that it would not only offset revenue losses caused by granting some tax relief to the poor, but above all, would also depress demand and lessen the nation's dependence upon overpriced, inflation-fueling foreign oil. But in the end, the President was swayed by the arguments of his political advisers. They warned that such a proposal would be poison at the ballot box and have practically no chance of being enacted by the Democratic Congress.

The overriding mood of the White House was one of urgency--with good reason. So far, the Administration has relied heavily on the tight-fisted money policy of the Federal Reserve Board to temper prices. That policy has lifted interest rates to towering levels and thus attracted massive amounts of money out of the mortgage market, put an enormous strain on banks and credit, and generally slowed production--without even denting inflation. Growing doubt among investors about the Administration's ability to control the economy has sent the stock market into a frightening slump. The Dow Jones industrial average has plunged almost 200 points in the eight weeks since Ford took office, closing last week at a twelve-year low of 585. The Labor Department announced that the unemployment rate for September jumped from 5.4% to 5.8%.

More than 5 million Americans are out of work, and that is certain to set off alarms in Congress.

Against that background, the President spent the weekend putting the final touches on his program. At that point the package contained:

1) A request that Congress approve a 5% income tax surcharge on personal earnings above a certain amount--possibly $15,000 for families and $7,500 for single people--to help pay for federal emergency relief measures for the poor. The surcharge would raise about $2.5 billion in revenues.

2) A 5% tax surcharge levied on corporate profits. But to encourage businessmen to expand capacity, increase production, and sharpen efficiency, Congress would also be asked to raise the investment tax credit on equipment bought by most firms from its present 7% to 10%, and for cash-strapped power utilities the rate would go from 4% to 10%. The corporate surcharge should yield about $2.4 billion in revenue, though almost all of that would go into the increased investment allowance. One argument for such surcharges is that unlike a gasoline tax, they would not raise retail prices. Even so, asking for any kind of tax boost so close to an election is a calculated risk.

3) A proposal that Congress pass some kind of tax relief for low-income workers, possibly by raising the so-called low income allowance. That measure, which took effect in 1972, is aimed at eliminating taxes altogether for people below the poverty line. Now, a family of four can earn $4,300 and still pay no taxes. Under the proposed plan, the same family could earn $5,000 without being taxed. This would cost the Government about $1.5 billion.

4) A recommendation that Congress give more money to states and cities for hiring the unemployed for such public-service jobs as police officers, sanitation workers, zookeepers, librarians and teachers' aides. The program would be triggered when unemployment hit a certain point--probably 6%--and stayed at or above that level for three months.

Wages for such jobs would range around $6,000 annually. The cost and scope of the program would depend upon how high unemployment goes.

5) A presidential directive aimed at channeling more money into the cash-parched mortgage market. The plan would probably enable lenders to grant mortgages to home buyers at below-market rates, then sell the loan to the Federal Home Loan Mortgage Corp. and collect a fee for their services. In a similar plan last spring, the FHLMC got $3 billion to buy up mortgages carrying an interest rate of 8 3/4%.

6) A rather mild fuel conservation program that will rely on voluntary frugality.

7) Proposals for reducing the current budget of $305 billion by between $5 billion and $6 billion, largely by paring some defense and public-works spending. Inflation will make this difficult. Last week the Pentagon reported that the original cost estimates on 42 major weapons systems under development, notably the B-l bomber and the Trident submarine-missile system, have increased by a walloping $37 billion, and by $16 billion in the past three months alone. To fight inflation, budget cutting and tight money will probably remain the two keys of Administration policy.

There is not the slightest indication that the President will heed the demands of some Democratic critics and call for wage-price controls.

In all, the package is not very remarkable, though Administration officials insist that they plan to remain flexible and swiftly make changes when they are needed. During the months ahead Ford and his advisers may well find that despite their ideological objections they will have to move to selective wage-price controls. As the program stands, it is not likely to do much to immediately deter inflation.

The tax surcharge does have virtues. If it stands, a conservative Republican President will be asking Congress to increase the progressiveness of the income tax system for the express purpose of aiding the poor. Because lower-income people tend to spend a larger proportion of their income than higher earners do, the tax changes should encourage consumer spending. Thus the surcharge should not hasten or deepen a recession.

Promising Measure. The tax changes, while helpful, are so relatively modest that they can hardly be expected to substantially help low-income people. The public-service jobs program is not likely to solve the problems of a large proportion of unemployed workers. Some state, city and town administrations will probably try to use the money to subsidize the wages of people whom they would have hired anyhow. As for the calls for voluntary fuel conservation, they are likely to draw big yawns in the absence of any mandatory moves.

A most promising measure is the increase in the investment tax credit for new equipment. Capital investment in the U.S. has been slipping behind the rest of the industrialized world for several years. Dwindling production capacity has been a major contributor to the nation's inflationary shortages of semifinished industrial goods, including steel, copper and paper.

Not surprisingly, the program reflects more of the thinking of the President's political operatives than of his economic aides, who are deeply concerned about inflation. White House political advisers are primarily worried about the danger of recession, and they pressed for stimulative measures to head it off and help the people who would be most hurt. Arguing for this were Donald Rumsfeld, new staff coordinator, and Robert Hartmann, Presidential Counsellor. They were joined by Economist Paul McCracken, who as Nixon's first chairman of the CEA, helped formulate the original "game plan" strategy of combatting inflation with budget and monetary restraints; that policy slowed the economy but did not do enough to brake prices.

Within the Administration, the major policy dispute focused on whether to call for a new gasoline tax, instead of an income tax surcharge, to make up revenue lost in the relief moves. The gas tax has been promoted by Simon and Federal Energy Administration Chief John Sawhill. An added tax of 100 per gal. could have raised about $10 billion a year, and much of this money would have been returned to low-income people through income tax rebates, which they would have collected after submitting their tax forms next year.

Some of Washington's most powerful lobbies--representing farm groups, truckers, oil companies, automakers and auto dealers--strongly opposed a gasoline tax. So did such Democratic Senators as Washington's Henry Jackson, Maine's Edmund Muskie and Minnesota's Walter Mondale. They insisted that with rebates it would take a long time to get the money back to the poor, who in the meantime would be the chief victims of a gas tax boost. Also, they noted that a higher levy on gasoline would immediately add to the consumer price index, though in the long run the increase in Government revenues would serve to dampen inflation.

Prospects for Passage. Congress's reaction to the total Administration package remains uncertain. Tax relief for the poor and an expanded public-jobs program may well zip through both Houses, but it is unlikely that the lawmakers will take up the distasteful business of a tax surcharge until next year. Critics in and out of Congress will continue to push for some kind of Government intervention to hold down wages and prices and for an expansion of the money supply beyond the 5% to 6% annual rate now targeted by the Federal Reserve.

Some businessmen, economists and politicians worry that unless the Administration moves more swiftly and forcefully, the economy will slip into a deep recession. Economist Walter Heller, CEA chairman under President Kennedy, asserts that if the present tight-money policy is continued, the jobless rate will scoot up toward 7% by mid-1975. Says Heller: "Never in the five previous postwar recessions have we waited so long to stimulate the economy. The slump is already in the cards, and what is needed now is action so that it doesn't feed on itself."

The success or failure of the program will hinge largely on how effectively and harmoniously it is administered by Ford's new 13-man Economic Policy Board. The half-dozen key members are all self-professed economic conservatives, who strongly favor balanced budgets and distrust Government intervention or controls. Problems may lie ahead because several of the members have had little experience in public life or with broad, complex economic theory.

Simon, for example, is a former Wall Street bond trader and a tireless, tough administrator, but he is neither a politician nor an economist. Alan Greenspan, chairman of the Council of Economic Advisers, is a superb economic technician, but has had no deep experience in public life, and his bluntly stated conservative views have made him a favorite target of liberals. Budget Director Roy Ash, who left his job as president of Litton Industries to join the Nixon Administration, is expected to return to private life in a few months. Arthur Burns, chairman of the independent Federal Reserve, is wise in the ways of Washington and will of course have an important say in policy.

Sagging Forecasts. Already there is mild jockeying for power between Board Chairman Simon and Executive Director Seidman. For the moment, Seidman, Ford's old friend and adviser from Grand Rapids, is closest to the President's ear, and there is not much that Simon can do about it. Seidman is a novice in high-powered Washington politics and has limited experience in economics. He is an urbane millionaire lawyer and accountant (Seidman & Seidman) and is regarded as a first-rate executive. He seems well suited for his job of coordinating the board's policies and managing its day-to-day activities. Says one Administration admirer: "Seidman is moving on a very fast learning curve."

Meanwhile, the exquisitely complex challenges confronting Washington's new economic team grow more ominous. Month by month recently, the economy has sagged more than the Government or private forecasters have expected. Some economists are openly mulling over possibilities that even a short while ago were unthinkable. For example, just before Greenspan took office last month, his consulting firm, Townsend-Greenspan, warned clients that "although we do not expect a breakdown in the financial system near term, it cannot be ruled out as a possibility at some point in the future."

The most potent inflationary forces are outside the direct control of Government. The soaring costs of fuel and food account for about half of the present inflation. But oil prices are dictated by the OPEC cartel, and food prices have been sent skyward by capricious weather. A combination of heavy spring rain, summer drought and early fall frost has already reduced crops of corn, wheat and soybeans, boosting the cost of everything from bread to salad oil, and feed for cattle and hogs. In August alone, the wholesale price of farm and food products rocketed 7.6%, and some Government economists believe that retail food prices could go on rising at close to 15% throughout much of 1975.

The White House is trying to avoid a massive flow of American farm goods out of the country. It will require that grain exporters get Government approval for all big sales to foreigners. Last week Ford intervened to halt the sale of $500 million of grain to the Soviet Union, even though the dealers--Manhattan's Continental Grain Co. and Memphis' Cook Industries--had already signed the contracts.

Living costs are now lunging ahead at a compound annual rate of 16.8%, and even the most optimistic forecasters do not expect them to come down much below 8% until mid-1975. The price surge has cut factory workers' real in come by 4.1 % below a year ago and has flattened consumer spending.

Prices are certain to go even higher. The wholesale index in August soared 3.9%, to a harrowing annual rate of 46.8%. Says Economist Otto Eckstein of Harvard: "If the wholesale index does not do dramatically better by, say November or December, then the outlook is pretty grim." One hopeful sign: after several years of going straight up, prices are dropping on many raw industrial commodities, including cowhide, copper, rubber, wastepaper, cotton, lumber and steel scrap. They are declining largely because of reduced demand.

Capital spending remains relatively strong in such industries as oil, chemicals and public utilities, but much of the money is going to pay for increased costs of machinery rather than expanded capacity. Indeed, inflation has flared so high so rapidly that some machinery producers are demanding more for their equipment than they had contracted to sell it for, even though they are risking lawsuits. Many contracts do not count for much any more.

First Step. All the grim news has sent the stock market into a precipitous decline. Stocks of some big corporations are selling for two or three times earnings per share, v. ratios of 15 to 1 or 20 to 1 several years ago. So far this year, the paper value of the roughly 1,500 stocks listed on the New York Stock Exchange has dropped $250 billion. Lately, there has been a dangerous flurry of margin calls. Investors must put up more cash or brokers will sell some of their securities, usually at distress prices, to bring the account up to prescribed credit limits. Because margin calls force the dumping of so many stocks, prices go down even farther, and the bear market indeed feeds on itself.

Wall Street, like the U.S. itself, is suffering most from uncertainty about the future, a fearful sense of drift that, for all its efforts, the new Administration has so far failed to arrest. Now that could, well change, though slowly. The President's new program represents a first step on what will be a long and punishing journey back to prosperity. The key question is whether President Ford can rally the nation to make the many sacrifices, large and small, that are absolutely necessary for winning the critical war against inflation.

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