Trying to Build Confidence
Unemployment is down, inflation up. Houses are selling fast, cars moving slowly. Consumers are spending freely, businessmen deferring plans to build plants or buy machinery.
Personal incomes and corporate profits are both rising, while the dollar totters abroad and stock prices nosedive. One survey shows consumer confidence at a five-year high; another puts it at a two-year low.
Such are the jolting contrasts that make the U.S. economy a puzzling picture at the moment--as, indeed, it has been during most of Jimmy Carter's first year in the White House. To the public at large as well as to economists and businessmen, the contradictions appear to mirror an equally mixed-up management of the economy by the Carter Administration. Policy zigged from talking up a tough tax reform to abandoning most of it, zagged from professing unconcern about the dollar's slide to intervening actively in currency markets to prop up the greenback. Noting Carter's propensity for listening first to one economic adviser, then to another, Washington wits began quoting, accurately or not, a scathing description of Franklin Roosevelt supposedly offered by Economist John Maynard Keynes: "The President is like a big, fluffy pillow. He bears the imprint of the last person who sat on him."
More important, businessmen from Wall Street boardrooms to Main Street hardware shops have developed a set conviction that the Administration is unwilling, or perhaps unable, to craft any consistent, coherent economic strategy. That mood of mistrust is dangerous, not just to Carter but to the nation. As the White House now clearly recognizes, consumer spending has done about all it can to prolong the U.S. economic expansion; continued growth in the next two or three years will depend largely on business spending for new factories, new machines and, ultimately, new jobs.
That realization has come hard to Populist Carter, who, in the words of one top adviser, "has a block about Big Business." But it is a natural enough view for his Secretary of the Treasury, W. (for Werner) Michael Blumenthal, who, after a rocky beginning in his post, has in the past few months gained clear pre-eminence among the President's economic aides. Blumenthal is a former Big Businessman himself--he was chairman of Bendix Corp. before he came to Washington--and, though he has never been fully accepted by corporate leaders as one of their own, he knows how his former colleagues in the executive suite think.
It was Blumenthal who successfully promoted a fellow businessman, Textron Chairman G. William Miller, to become chairman of the Federal Reserve Board. It was Blumenthal, more than anyone else, who persuaded Carter that to try to push a sweeping tax reform program through this session of Congress would only frighten businessmen. It was Blumenthal, too, who decided in December that the time had come to intervene in money markets to halt the disorderly rout of the dollar, and who won Carter's approval to start the program while the President was traveling overseas.
Most of all, it was Blumenthal who last fall finally imposed some order on Carter's chaotic policymaking apparatus. Early in the Administration, programs were supposed to be coordinated by an Economic Policy Group, but its meetings were attended by as many as 30 second-level officials, who set up a babble of unfocused talk, while their bosses saved their serious proposals for private discussions with the President. Blumenthal organized a small "steering committee" that works out a consensus on policy over Thursday-morning breakfasts of sausages, eggs and Danish in Blumenthal's private Treasury dining room. Among those attending: Council of Economic Advisers Chairman Charles Schultze and Budget Boss James T. McIntyre Jr. Dissents are noted in reports to Carter, who of course reserves final decision for himself. But, says one breakfast clubber, "in the past three months Blumenthal has dominated that group and in effect had veto power over anything going to the President." The steering committee got its final recognition as a power center in November, when Vice President Walter Mondale began dropping in on its breakfasts--not for the food, but to find out what Carter was hearing about economics.
At just about that time, the Blumenthal group faced a deadline of sorts: In late January every President normally submits to Congress and the people his State of the Union message, an economic report and his budget. Blumenthal and his steering committee decided Carter should seize this opportunity to try hard to convince business and the nation that he does have a thought-out strategy by spelling out his economic plans in considerable detail.
Carter took the advice, and last week he delivered a barrage of pronouncements that did add up to a reasonably coherent program. It was unexciting, unsurprising, unadventurous, but it seemed designed to appeal to the nation for those very reasons. The aim, apparently, is to present Carter as a prudent manager, aware that the tangled complexities of guiding a growing but troubled economy prevent any President from doing everything at once, ready to put off those goals that are merely desirable in favor of those that are essential. The program's main elements:
> Tax cuts of $25 billion--$17 billion net for individual taxpayers through rate cuts, $6 billion net for business in the form of more generous investment tax credits and a drop in the tax rate on most corporate profits from the present 48% to 45% late this year, 44% in 1980. Another $2 billion would be provided by repeal of the federal tax on telephone calls and a cut in unemployment-insurance taxes levied on companies. The overall aim: to offset the bite of higher Social Security and energy taxes, which the President conceded would otherwise drag the economy down by the end of 1978, and give businessmen more cash to invest. If Congress agrees, the cuts will take effect Oct. 1.
> A tight budget, with spending for fiscal 1979, which starts Oct. 1, held to $500.2 billion, roughly 8% more than this fiscal year. (The President stressed heavily that, adjusted for inflation, the increase would be only 2%.) The deficit is expected to shrink slightly, from $61.8 billion in fiscal 1978 to $60.6 billion. Though many businessmen grumble that spending and the deficit should have been reduced by $20 billion or more, the President did resist pleas for still higher expenditures. and McIntyre turned out to be something of a tiger at slashing spending requests.
For example, Carter and McIntyre threw out the Department of Housing and Urban Development's first try at a departmental budget and ordered a redraft that knocked out expensive new spending programs. Moreover, Carter pledged that he would try to reduce the role of Government spending in what is now a $2 trillion economy* from about 22% of gross national product next fiscal year to 21% by the time his first term ends in 1981. That is a goal that the most crustily conservative Republican businessman could wholeheartedly endorse, if he happened to believe that the President meant it.
>An anti-inflation program focusing on what sounds like the mildest kind of presidential jawboning. The White House will attempt to knock half a percentage point off the inflation rate (6.5% to 6.8% in 1977, by various measurements) by urging union leaders and corporate executives to hold wage and price boosts below the average for the past two years. To that end, Administration officials will try to convene informal panels of labor and corporate bosses to work out wage-price goals for specific industries, bearing in mind that some will need bigger increases than others. Said Carter firmly, and to much applause, in his State of the Union address: "I do not believe in wage or price controls." In fact, there will be no enforcement provisions, not even numerical guidelines. Says Reginald Jones, chairman of General Electric: "One of the facets of this package most attractive to all of us is that it involves nothing more than discussion."
The program makes some bows to liberal ideology. It gives the most generous income tax reductions to people with taxable incomes of less than $15,000 a year, on the theory that they need help most and will spend every cent that Uncle Sam lets go of, rather than put their tax savings in the bank. Carter also proposes a modest innovation: $400 million this year to companies that hire hard-to-employ workers (details to come in March). The reasoning is that an expanding economy does not automatically reduce unemployment among the groups most plagued by joblessness; employers who need more help turn first to the most experienced workers, and these generally turn out to be adult white males, whose unemployment rate already is low.
Some special inducement is needed to prompt companies to hire blacks, women and youths.
On the whole, though, the President's policy gives the economy only gentle stimulus. In total, the tax cuts Carter proposes will not do much more than cancel the effect of tax increases already legislated, and for a sizable slice of the population they will not even do that for long. The principal reason is that Social Security taxes are rising this year, and will jump much more sharply in 1979 and later years under a law that Congress passed in December at Carter's behest.
Blumenthal estimates that almost 91% of all taxpayers will get a net reduction this year (correcting a figure of 96% that the President tossed out in his State of the Union speech). But in 1979, the Treasury Secretary figures, fewer than 83% of all taxpayers, those earning about $20,000 a year or less, will enjoy a net saving; those earning more will find Social Security increases outweighing the income tax cuts. Two examples: in 1979 a typical family of four earning $15,000 a year would pay $258 less income tax, shell out $42 more to Social Security, and save a net of $216. A family earning $25,000, however, would save $320 on income taxes, pay $439 more to Social Security, and wind up forking over an extra $119 to the Government. Many economists are already speculating that still more income tax reductions will be needed to keep the economy expanding next year. The President in his economic message last week came close to conceding the point.
At minimum, however, Carter has sorted out his economic priorities. He badly confused businessmen early in his Administration by setting goals of reducing both the unemployment and inflation rates to 4.5% or less and balancing the budget besides--and doing all that by 1981. Executives and economists rightly protested that reaching paradise so soon would be flat-out impossible. They wondered how long it would take the President to realize that, and which aim he would concentrate on when he did.
The new program clearly gives first place to keeping production growing and unemployment coming down gradually. Though the President talks of reducing the inflation rate, some economists outside the Administration suspect that Carter has quietly reconciled himself to price increases averaging 6% or so for the next year; indeed, the Administration's private estimate for 1978 is 6.5%. And Carter last week conspicuously did not mention balancing the budget by 1981, even as a hope.
As Secretary of the Treasury, Mike Blumenthal will take on the job of selling this program to Congress and his fellow businessmen. He has already started, visiting New York two weeks ago to brief the influential Business Roundtable on the President's plans, taking to national TV over the past weekend to explain and justify the Administration's policies. The task is one to which he is less than ideally suited. His laconic, low-key manner does not make for stirring public addresses, and he comes across better chatting frankly with individuals and small groups. But his firm grasp of policy and its rationale is unmistakable.
Last week, in an interview with TIME Washington Economic Correspondent George Taber, Blumenthal candidly discussed the Administration's position. Draping his legs casually across a simulated colonial chair in his office and puffing on his cigar, he conceded: 'There has been much comment in the press about the lack of business confidence, and commentators have written about mutually inconsistent goals. I think there is some substance to this. [Last year] there was insufficient attention given to the relationship between various programs. It is also true that economic decision making in the early months was anything but smooth."
Now, asserts Blumenthal, the Administration has its goals in order: "People will still say they don't like the policy; that's unavoidable. But I am hopeful that most reasonable observers will say, 'At least we know where we stand.' The first priority is to get [Carter's] energy program passed, because it is the key to everything else. The second priority is to continue bringing down the level of unemployment gradually. Reducing the budget deficit is a high priority, but that can be achieved only as rapidly as the developing strengths of the economy allow."
An all-important aim is to convince businessmen that they can now invest with confidence since they know what the policy is, and that the Administration will help them by cutting their taxes. The President, who in October scared the wits out of many executives by thundering that Big Oil wanted to "rip off' the people, sprinkled his State of the Union message and economic report with flattering references to private business as the great provider of income and jobs. Blumenthal expounds on the point: "Business investment, which has been too low, is the key not only to keeping the economy going, but also the key to fighting inflation." His reasoning: if companies do not build, expand and modernize factories, production bottlenecks and shortages will develop as the economy expands, and price increases will speed up.
But convincing executives that the Administration now loves them and wants to help them will take a hard selling job by Carter. The Administration's priorities, while clear enough, are emphatically not those that businessmen would select. Most executives are frightened by inflation, fear that it may bring an end to the expansion in a year or two despite Carter's tax cuts, and think the President should crack down on it by cutting federal spending and the budget deficit more than he intends. Businessmen and economists, like Murray Weidenbaum, a member of the TIME Board of Economists, consider his anti-inflation program "a puffball," and fear that the Administration is not yet sufficiently aware of how damaging a further decline in the value of the dollar could be.
Initial reaction to the State of the Union speech--about the only pronouncement that businessmen had time to digest last week--indicates that Carter made a small start toward soothing business anxiety but has a very long way to go. Said John Wilson, an economist at California's Bank of America, the nation's largest: "I think he demonstrated he has a good grasp of short-term and long-term economic problems, and he presented a balanced package." J. Sidney Webb, executive vice president of TRW Electronics in Los Angeles, thought Carter sounded "more like a conservative Republican than a conservative Democrat. I'm not sure he can do all the things he says, but in general I liked the speech."
But the favorable responses were outweighed by skeptical or negative ones. Richard Peterson, senior vice president of Continental Illinois National Bank, complained that "there was nothing to help solve our rate of inflation." Joseph Lanterman, chairman of Chicago's Amsted Industries, manufacturers of railroad and industrial components, asserted that "Carter has not removed any of the uncertainties that plague the economy." Irving Seaman, chairman of Sears Bank and Trust in Chicago, called Carter's address "a bland, nothing speech. I'm even more apprehensive about the economy than before."
Throughout such comments runs a strange paradox: many executives profess faith in the strength of business in one breath, then voice grave worry about Carter's economic management in the next. Says John P. Thompson, chairman of Southland Corp., an operator and franchiser of convenience food stores that has its headquarters in Dallas: "I think 1978 will be a good year. It is starting off at a higher clip than 1977." Simultaneously, he grouses: "I think the business community to a man reflects the uncertainty he [Carter] has projected." A fellow Texan, M. Lamar Muse, president of Southwest Airlines Co., bubbles: "We are expecting to do extremely well in 1978." His opinion of the Administration? "I have never seen a group that seemed so inept."
To a large extent, this split-level thinking reflects a similar schizophrenia in the economic outlook: no one can deny its brightness as the year began or the clouds over the longer-term picture. The stock market and the dollar to the contrary notwithstanding, virtually every immediate indicator is coming up roses. The best news, of course, is that unemployment by Government calculation fell to a three-year low of 6.4% of the work force in December. Many economists outside the Administration think that figure is too low, but no one questions that the economy is creating new jobs at a speedy pace. Carter's aides are permitting themselves to hope, though not yet to predict, that the rate will fall below 6% by the end of this year.
A stream of reports last week gave reason to think that unemployment may indeed drop lower. Housing starts in 1977 jumped 29%, to just under 2 million, and closed the year still going up; the annual rate in December hit nearly 2.3 million. Permits issued for new construction prac tically guarantee a healthy building pace early this year. Personal income in December rose 1.1%.
The gross national product (the total output of goods and services in the econ omy), adjusted for inflation, rose at an annual rate of 4.2% in the fourth quarter. That was down a bit from the previous three months but much stronger than expected in early fall. Moreover, the decline was accounted for mostly by a drop in business inventories, which were cleaned out by brisk Christmas sales. So businessmen will have to restock their shelves and warehouses early this year, and that will give a new push to production and employment. The Administration figures that real G.N.P. this year would rise 4.5% even without a tax cut; with one, the increase might even be a bit more than the 4.9% of last year. Some private economists are also starting to make their forecasts for 1978 a bit more cheery, but a few others are sounding warnings of a new recession some time in 1979. Economist Terrence Larsen of the Philadelphia National Bank figures that Carter's tax cuts will stave off a slump this year, but "into 1979 the possibility of recession does increase. The odds would be 1 in 2."
The main reasons for worry:
Inflation. To a man, dozens of businessmen and economists queried by TIME correspondents expect price increases to remain rapid in 1978 or even to speed up a bit, perhaps to a 7% pace by year's end, partly because of actions that Washington has already taken. Employers will pass along in higher prices their share of Social Security tax boosts. A 45% rise by 1981 in the minimum wage that Carter proudly signed will kick up business costs and prices. So will restrictions on imports of foreign steel, shoes and TV sets that the President agreed to in order to avoid all-out protectionism.
Painful enough in itself, inflation also "ultimately produces higher unemployment," observes Kent Sims, senior vice president of the San Francisco Federal Reserve Bank. That happens if prices rise to the point that consumers become unwilling or unable to buy. There is one small sign that the process may be starting already: the drop in auto sales since mid-November. That could signal a buyer rebellion against the prices that Detroit is charging for many 1978 models that are smaller--though more fuel-efficient--than those of earlier years.
Interest Rates. Higher demand for loans and Federal Reserve Board efforts to prevent inflationary growth of the U.S. money supply are pushing up lending charges. The bank "prime" rate on business loans has jumped from 6 1/4% at the start of 1977 to 8% now; some Wall Streeters predict it will reach 8 3/4% or even 9% by year's end. The rise makes it more expensive for consumers and businesses to buy or build with borrowed cash. It could put an end to the housing boom by causing savers to pull their money out of savings banks and savings and loan associations--the prime source of mortgage loans--and instead buy Treasury bills or bonds to get the higher interest rates that they offer. Some lenders fear that this process, known to economists by the jawbreaking name of "disintermediation," is already beginning.
The Dollar. It steadied after Washington began buying up unwanted greenbacks to prop their price, but dipped a bit again at week's end, apparently because Carter's State of the Union speech failed to convince foreign moneymen that the Administration has a handle on the economy's problems. In the long run, dollar stability will depend on U.S. progress in reducing its gargantuan trade deficit of almost $30 billion--and not much progress is expected this year. Congressional passage of an energy bill--almost any energy bill --would help by demonstrating American determination to cut oil imports, the biggest contributor to the deficit. A dollar slide aggravates other troubles: it worsens inflation by increasing the price of imports, and causes the Federal Reserve to raise interest rates more than it otherwise would in an effort to make dollar holdings a more attractive investment.
The Stock Market. The Dow Jones industrial average has fallen on eleven of the 14 trading days so far in 1978, for a decline of 54 points, and it closed last week at 776.94. In stock traders' minds, worries about inflation, interest rates and the dollar have outweighed all the good news. Though the stock market does not directly move the economy, it can have an important psychological effect by making people feel poorer--and with reason. Says Albert H. Cox, chief economist of Merrill Lynch, the brokerage giant: "By our estimates, at this point almost $100 billion worth of values in listed stocks has been wiped away--$62 billion last year and another $30 billion plus just in the early part of this year. That has to have some dampening effect [on the economy] after a while."
Investment. Council of Economic Advisers Chairman Schultze figures that business spending for new plant and equipment, adjusted for inflation, must rise 7% this year and 9% next year to keep the recovery rolling. Capital investment increased 8% in 1977, but Commerce Department surveys indicate a rise of only 4.5% this year. Townsend-Greenspan, a consulting firm headed by Alan Green, span, a member of the TIME Board of Economists, calculates that the rise may really be a mere 3%, and warns that even that puny an increase will not be achieved unless the dollar steadies enough to remove the threat of a violent leap in interest rates.
The trouble in tackling any of these problems is that a too vigorous attack on one may well aggravate another. Considering only economics, the standout example is the unemployment-inflation dilemma. Aggressive stimulation of the economy through heavy federal spending or extra-deep tax cuts might initially slash unemployment, but it might also push up prices; an all-out attack on inflation involving deep cuts in spending might bring on a recession, with rapidly rising unemployment. But the White House cannot confine its attention to economics; political and social claims must be weighed too. Thus any presidential economic program is a series of uneasy compromises, and Carter's is decidedly no exception.
In the field of tax policy, for example, the President totally committed himself during the campaign to reforming a system that he called "a disgrace to the human race." While he now accepts Blumenthal's argument that tax cuts must take precedence, he could not simply abandon his campaign pledges. So he coupled his rate-slashing proposals with a call for a modicum of reform.
The most consequential reform would be replacing the present $750-per-person income tax exemption with a $240 credit. The exemption reduces the amount of income on which tax is paid; the credit would be subtracted directly from the amount of tax due. For complex technical reasons, the effect would be to give an extra tax break to people earning less than roughly $22,000 a year, while reducing the benefit of tax cuts for people who earn more. Other reforms that the President proposed would further restrict certain tax shelters for well-off people, end a scheme under which companies can defer taxes on part of the profits earned by exporting goods, tax more speedily the profits that U.S. -based corporations earn overseas, and cut in half permitted deductions for business meals--an attack on the by now fabled three-martini lunch.
Oregon Democrat Al Ullman, chairman of the tax-writing House Ways and Means Committee, last week voiced opposition to most of the remaining reform ideas, especially the provision about business meals, which he feared would cripple the hotel and restaurant industry. Congress is likely to knock out many of the reforms, and that would push the whole program askew. Without the revenue-raising reforms, Carter's proposals would result in tax cuts totaling $34 billion a year--$24 billion for individuals, $8 billion for business, $2 billion in excise and payroll tax elimination--and that amount might be inflationary. The President himself, in a special tax message, said: "The full cuts in personal and corporate tax rates which I recommend would not be desirable in the absence of significant reform."
The justification that Administration officials give for the weak anti-inflation program amounts to saying that they could not think of anything else.
If you have to do something about inflation, and if you feel you must accept a $60 billion budget deficit for the sake of growth, and if you rule out wage-price controls or anything smacking of them as unlikely to work, what is left but a plea for voluntary cooperation by management and labor to hold down pay and price increases? And if the whole economic program depends on business cooperation and confidence anyway, why not make the attempt? Blumenthal's defense of the plan is notably un inspiring: "Don't call it a mouse too fast. There won't be a loving embrace of the plan, but there will be a cautious and sober willingness to give it a try. We're going to fail in the fight against inflation unless we can find a way for people to say 'We're all in this together and we're going to collaborate to solve it.'" In all economic policymaking, a key consideration is balance between conflicting goals and clashing claims. Balance was precisely the quality that the Administration's procedures lacked in the early days. Carter then would consult with aides singly--White House Assistant James Schlesinger, who is now Secretary of Energy, on fuel policy, Labor Secretary Ray Marshall on minimum-wage legislation --and reach decisions without weighing sufficiently the impact that the programs they suggested might have on the economy. Blumenthal suffered as much as anyone from this presidential propensity. In public, he loyally though unenthusiastically supported Carter's plan for a $50-per-person tax rebate last spring, advising one Senator to "hold your nose and vote for it," only to have the President suddenly pull the rug from under him by abruptly abandoning the proposal.
Just how much coordination Blumenthal can now bring to the policymaking process is still problematic. In all likelihood neither he nor anyone else in the Carter Administration will ever play as dominant a role in shaping economic programs as Secretaries of the Treasury John Connally and George Shultz did under Richard Nixon. Though Carter is getting over his penchant for trying to decide every aspect of every program, and is delegating more authority to Blumenthal and others, he still immerses himself in the details of economic policy more than Presidents generally do. While the budget was being prepared, the President carefully studied 25 black briefing books averaging 150 pages each, and scribbled in the margins such comments as "Let's not do that. JC." He also invited middle-level officials to meetings on departmental budgets, and encouraged them to debate figures with him while their bosses listened.
But Blumenthal's steering committee has established enough authority in selecting the choices to be presented to the President to disgruntle Labor Secretary Marshall and Commerce Secretary Juanita Kreps, who complain that they have been cut out of economic policy-making by not being invited to the Thursday-morning breakfasts. Within the committee, Blumenthal has no visible rival for preeminence. Charles Schultze these days often secludes himself in his office, and McIntyre sticks strictly to budget matters.
That leaves Blumenthal not only the chief policy planner but the Administration's unofficial ambassador to business as well. Though Blumenthal's background might seem to fit him perfectly for the job, he has yet to master the assignment. Many businessmen still blame him for much of the Administration's early waffling, especially about the dollar. Blumenthal's December decision to support the greenback represented something of a conversion. Earlier he had taken the lead in arguing that the dollar's slide was no cause for alarm, and he made the point more strongly than he may have intended; he gave many businessmen the impression that he actually wanted to see the dollar drop farther. Despite his reversal, they still view Blumenthal as the man who talked the dollar down, and they have not forgiven him.
Whether Blumenthal can change the skepticism about him is crucial. The Carter program simply will not work without business confidence--and Blumenthal helped mightily to design it that way. He has gained greatly in self-assurance, and knowledge of the arts of Washington infighting, and sold the President on what for a Democratic Administration is a very conservative program. Having won over his new colleagues in Government, he must now gain the support of his old acquaintances in the boardrooms--and paradoxically that seems much the harder task.
* Gross national product in current dollars reached a $2 trillion annual rate last Tuesday. Jan. 17. according to the Commerce Department; Manhattan's Morgan Guaranty Trust Co. figures, with tongue-in-cheek precision, that the rate will be reached this Friday at 2:36 p.m., "give or take a few minutes." After taking most of two centuries to achieve a $1 trillion G.N.P., the U.S. added the second trillion in a little more than seven years. Alas, the milestone is a monument more to inflation than to growth: Morgan Guaranty calculates that about two-thirds of the second trillion came from higher prices rather than increased output.
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