Small Weapons for the Two-Front War

After a dozen highly publicized "summit" meetings, innumerable agitated sessions with his official advisers and countless private talks with old friends, President Ford said that he was ready at last to "bite the bullet" on the economy. But the program that he presented last week to a nationally televised joint session of Congress was more balm than bite, and not a great deal of either.

The basic policy was essentially unchanged from that which Ford inherited from Richard Nixon last August--a federal budget with spending held at or below $300 billion and a fairly tight monetary policy.

To his credit, the President did not try to deal with the economy's incredibly complex problems in a demagogic fashion by promising simple solutions where none exist. As expected (TIME, Oct. 14), he called on Congress to pass a modest 5% tax surcharge on some individuals and all corporations, and he asked for additional tax credits to stimulate investment and industrial expansion. But there was much less tax relief for the poor than had been expected.

Following his conservative instincts, he turned aside insistent advice for direct Government intervention and appealed instead for voluntary action to cut demand--and prices--for food and fuel.

Recruiting Effort. "Grow more and waste less," he urged. "Drive less, heat less." Wearing a red-and-white lapel button reading "WIN"--for Whip Inflation Now--he called "upon every American to join in this massive mobilization and stick with it until we do win as a nation and as a people." At White House request, newspapers the next day printed an enlistment form for "inflation fighters"; the first 100,000 people to fill out the form and mail it to the White House will get a free WIN button.

At every turn, Ford found himself fighting a two-front war. Clamping down hard to restrain the inflation threatening the financial fabric of the nation could tip the economy into a deep recession.

Doing battle with the recession that now grips the nation could doom the fight against inflation. A gasoline tax could limit driving and cut demand for costly imported oil, but raising the tax would boost retail prices and make inflation even worse.

Curtailing oil imports directly by imposing quotas would help pressure the oil-exporting nations to lower their prices, but that move could also send economic activity downward.

Congress, which had welcomed the President warmly to the House chamber he knows so well, greeted his proposals with a cool skepticism. Legislators wondered if the suggestions, in the eyes of the American people, would constitute much of the "leadership" and "action" that the President rightly said they yearn for. Even within the Administration, some officials found it hard to muster more than faint praise for the end product of so much public and private soul searching. Federal Reserve Chairman Arthur Burns, who favored more wage-price jawboning and a bigger public service employment program than Ford proposed, said, "It is a well-balanced program. Whether it goes far enough as a whole or in individual directions is a complicated question that members of Congress may well answer differently. But I think it is a useful beginning toward the rebuilding of confidence."

The fact that the policy is not new does not make it wrong, but it is a poor standard round which to rally a people to change the habits of a lifetime. The one specific, mandatory sacrifice that Ford requested, a one-year 5% surcharge on the corporate income tax and on higher income individuals, has little support in Congress and apparently less among the public. The approximately $3 billion that the surcharge would raise in 1975 would be used to offset the cost of an expanded public service job program for the long-term unemployed and a large increase in the 7% investment tax credit to spur new business outlays.

The Democrats pinned such labels as "outrageous," "rip-off," "extremely unfair" on the surcharge proposal. A number of Republican legislators who face a tough re-election fight, including Robert Dole of Kansas and Marlow Cook of Kentucky, announced their opposition to it. Representative Herman Schneebeli, the ranking Republican on the tax-writing Ways and Means Committee, said that the Administration has a major selling job.

Awesome Precedent. Other members of Congress and many economists were critical of the President for not taking a more forceful line in asking for, or demanding, moderation in wage and price changes, especially in major industries. Just about everyone is reconciled to an enormous settlement between the United Mine Workers and major coal companies. The companies have become flush with profits as coal prices have followed oil prices off the charts. The 120,000 unionized miners are expected to stage an economy-stalling strike when contracts expire Nov.

12, but strike or no, they are likely to at least duplicate the huge, 39% three-year settlement the Steelworkers won earlier this year. Even economists who urge some return to mandatory controls would accept a delay until after the miners settle.

Ford's program calls for about $500 million in tax relief for the poor. At present, a family of four that earns $4,300 or less pays no taxes; under the President's plan, the cutoff would be raised to $4,500. The proposed relief was contained in Ford's endorsement of a big, complex tax-reform bill that the Ways and Means Committee has been wrestling with unsuccessfully since last year.

The bill stands little chance of clearing Congress this year, despite the planned post-election congressional session.

Nonenergetic Plan. After the tough talk by Ford and Secretary of State Henry Kissinger about the dangers to international peace and financial stability posed by extortionate oil prices and the actions of the OPEC cartel to keep them artificially high, the President's energy proposals were a resounding letdown.

Administration officials who had been pushing a 100 or more increase in the gasoline tax, or an oil-import quota, said that the effect of Ford's proposals--on achieving unity among oil-consuming nations and pressuring OPEC to relent on prices--could be "deadly." "Grossly inadequate warmed-over stuff," huffed a top Senate Interior Committee aide.

Whether in energy, investment incentives, public service employment or tax relief for the poor, the Ford program, taken as a whole, represents a modest package. Summarized Republican Senator Jacob Javits of New York:

"I don't think it goes far enough. But I believe the temper of the Congress is to build on it and push it further."

The President's proposals in detail:

TAXES. Easily the most contentious proposal is the temporary surtax for 1975. For corporations, it would be 5% of the tax due before taking any tax credits. The surcharge would apply only to individuals whose income was $15,000 or more in the case of married tax payers filing joint returns, or $7,500 in the case of a single person. After subtracting standard deductions and exemptions, this works out to a taxable income of $10,000 for married couples and $5,450 for single people. The surcharge would be levied only on the tax due on income above those levels.

A family of four, for instance, earning $20,000 and itemizing deductions equal to a typical 17% of gross income, now owes $2,660 in federal income tax. According to the Treasury Department, the surcharge would raise that by only $42, or 1.6%. A similar family with gross income of $50,000 owes $11,465 in federal tax, which the surcharge would increase by 4.2%, or $482. A single person earning $15,000 would have his tax raised by $78, to $2,627.

INVESTMENT CREDITS. The President proposed increasing the 7% business-investment tax credit to 10%. The credit, which is available only for machinery and equipment, not buildings, would also be raised from 4% to 10% for cash-strapped public utilities. Total cost to the Treasury: about $2.5 billion.

Ford specifically endorsed a part of the tax-reform bill that would lower capital gains taxes on stocks, real estate and other assets held for long periods of time. He also proposed allowing companies to deduct as business expenses the dividends they pay on preferred stocks issued for cash. The proposed change, which would cost about $100 million in lost revenue, would cut nearly in half the cost of raising money through this type of preferred stock (because making the dividends deductible would reduce the companies' taxes by 480 for every dollar paid out).

All these changes aim to keep alive next year the capital-goods investment boom that is now the economy's principal prop. Many economists are not sure that the changes would make much difference. Fed Chairman Burns, for example, told a joint economic subcommittee last week that because the corporate income tax rate would be increased by the surcharge at the same,. time, "the effects tof the investment incentives] are not easy to judge."

SPENDING. Ford proposed a "target spending limit of $300 billion" for the current fiscal year. "When Congress agrees to this spending target, I will submit a package of budget deferrals and recisions to meet this goal," promised Ford. In an attempt to keep from antagonizing voters immediately prior to an election, the Administration delayed specifying where it wants to cut the budget until the post-election session convenes next month. Nevertheless, Treasury Secretary William Simon has warned legislators that they face a "political nightmare" when they return, because the cuts will be so wounding.

ENERGY. No mandatory energy-conservation measures were proposed by Ford, to the acute unhappiness of Simon and Federal Energy Administrator John Sawhill. The President urged citizens, in effect, to dig out last winter's check list: lower thermostats, keep cars tuned and tires properly inflated, reduce settings on hot-water heaters, use cold water for laundry, ride public transportation, increase car pooling, insulate homes and put up storm windows.

Businesses were urged to reduce energy use, but again there was no compulsion. States were asked for strict enforcement of the nationwide 55-m.p.h. speed limit. Ford wants some electric-utility generating plants that now use oil or natural gas to switch to coal and new plants to use coal or nuclear fuel.

And he has asked automakers to improve average auto-gasoline mileage by 40%, to 20 miles per gal., within four years--a goal so high it caught even FEA officials by surprise. If Detroit balks, says one Administration official, "we'll seek legislation."

The object, said Ford, is to cut costly U.S. imports of "foreign oil by 1 million barrels a day by the end of 1975, whether by savings here at home or by increasing our own sources" (see charts).

To orchestrate the effort, Ford named Interior Secretary Rogers Morton, who will head a National Energy Board charged with reducing oil imports voluntarily and developing a national energy policy.

A minor controversy erupted later over whether the Administration is planning to decontrol prices for domestic oil, about 60% of which is fixed at $5.25 per barrel. Ford said that he favors eliminating the oil-depletion allowance, but only if price controls are lifted. Simon, however, maintains that there are no plans to decontrol prices except for oil produced by expensive artifical methods that increase the flow of oil from older fields. Even that would mean that the uncontrolled portion of U.S. oil would rise from about 40% of the total to more than 60% and increase oil-company income by an estimated $4.4 billion a year.

WAGE-PRICE RESTRAINTS. No Other part of the package is as weak as this one. Speaking of his new Council on Wage and Price Stability, Ford said, "I emphasize, in fact re-eniphasize, that this is not a compulsory wage and price control agency." By seeking authority to impose wage and price controls on concentrated industries that have the power to administer prices, the President might have been able to damp inflation, though perhaps at undue political and bureaucratic cost.

The President promised only that the new council would "monitor wage and price increases in the private sector" and hold public hearings if necessary. Arthur Burns, disappointed that Congress has rejected stand-by authority for the President to put on effective controls, said, "Let's live with the present legislation for a few months and see how it works. But let's not live with it indefinitely if it doesn't work."

HELPING THE CASUALTIES. Besides the small amounts of tax relief for the poor, Ford proposed two limited programs to help the unemployed. First, he wants an additional 13 weeks of special unemployment compensation for people who have exhausted their 39 weeks of eligibility and a new 26 weeks of benefits for many domestics, migrant farm workers and others who are not now covered.

Second, he called for an expanded $500 million public service employment program to be triggered when the national unemployment rate is at or above 6% for three straight months. If it reached 6.5%, another $750 million would be authorized, and at 7%, yet an additional $1 billion. These jobs would pay no more than $7,000 and be limited to a new community-improvement-project program. Only workers who have exhausted their unemployment benefits would be eligible. A separate $1 billion public service employment program is already in operation.

Congress is likely to expand what Ford has proposed. At 6.5% unemployment, for example, the existing program, plus the Ford recommendations, would provide only 378,000 jobs.

FOOD PRICES. The major action came before the speech, when Ford moved to block shipment of 3.4 million tons of corn and wheat to Russia (see story page 55). He also asked Congress to remove all remaining acreage limitations on rice, peanuts and cotton, a rather insignificant move that could help push down prices for those commodities. Last month's encouraging 2.8% decline in wholesale farm prices has already been reversed by more bad weather, and some Administration economists say that retail food tags could increase next year by nearly 15%.

HOUSING. Ford pledged to make at least $3 billion available for home mortgages if Congress would pass an emergency bill authorizing the Government to deal in conventional mortgages as well as those insured by FHA and VA.

The Senate promptly passed the pending bill but attached an interest-rate limit of Sl/4%. With current mortgages going above 10%, such a low rate would mean a substantial federal subsidy for the home buyer, and raised the prospect that Ford might veto the bill. About 100,000 home purchases could be funded with the $3 billion.

LIGHT TOUCH. In one way or another, Ford's program touched on all the nation's major economic problems: unemployment at 5.8% and rising, overall consumer prices climbing at an annual rate of more than 12% a year, the dis array in U.S. capital and housing mar kets. Yet on many of these, the touch was feather light.

But the fact that a U.S. President was at long last addressing these prob lems helped send the depressed stock market to its best one-week rally in history. The Dow Jones industrial average roared up 74 points, closing at 658. At that level it is still low relative to corporate earnings and the economy's longer-term prospects, but the sentiment is that the bear market is not over. Still, investors were grasping at straws of good news: the prime lending rate declined to 11.5%, and if just for one month, the wholesale price index rose at an annual rate of only 1.2%. Investors also appreciated that much in Ford's program had the potential to help industry, including his calls for greater investment tax credits, deregulation of natural-gas prices, easing of the Clean Air Act (see ENVIRONMENT), liberalization of the capital gains tax and tax deductions for preferred dividends.

There are still plenty of economic shocks ahead. Unemployment will soon pass 6% and might reach 7%. Alan Greenspan, chairman of the Council of Economic Advisers, predicts that although there will be declines of two or three percentage points in some inflation measures by next spring, the consumer price index will be slow to show improvement. "We can see the light at the end of the tunnel," says Simon. "The question is, how long is the tunnel?"

No Credit Crunch. Burns repeated his pledge that the supply of money and credit will expand to meet the needs of the economy. He said that it will expand appreciably in coming months to make up for the exceptionally slow money growth--1% at an annual rate over the past three months--and that there will be no credit crunch. That determination was underlined last week when Burns for the first time declared, "I would say that we have a recession, a recession for which there is no precedent in history." Monetary policy has indeed loosened in recent weeks. Short-term interest rates are coming down, and the strains in the banking system have eased substantially.

Based on his unusually candid critique of Ford's program, Burns will be one voice urging future flexibility, including perhaps some mandatory wage-price and energy controls and more federally funded jobs and tax aid for the unemployed and poor. If Ford's present proposals do not do the job, some of his other advisers, including William Seidman, his economic policy coordinator, will probably join Burns in that advice.

But unless the economy continues to deteriorate badly, Ford's basic tax, budget and monetary policies will not change. Both Burns and Greenspan think that the economy will not resume growing until some time next year; but, largely because investment by business should remain strong, they do not foresee the bad declines predicted by some economists, notably Walter Heller (see following story). The real test of Ford economics lies ahead--and a large part of how well it fares will depend on how willing he is to be flexible.

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