The Economy: Ready for Escalation

Nervous and emotional, uncertain and perhaps a bit illogical, the stock market lost another $8 billion in paper values last week. Small investors sold more shares than they bought; big institutions stuffed their steadily rising funds into safer, short-term Treasury bills or corporate bonds and just waited. The Dow-Jones industrial average fell for four days in a row, struggled up just a bit in the final session, and closed at 864—down 16½ points for the week.* Everybody on Wall Street was waiting for news from Washington and looking for a firmer fix on three uncertainties that overhang the market: Viet Nam, steel labor, and the immediate future course of the U.S. economy.

No Controls. Though Wall Streeters have built their fortunes on speculation, they dislike uncertainty, and they can scare easily. What worries them now is that a greater U.S. commitment in Viet Nam might somehow impede the progress of the domestic economy and lead to the kind of controls on prices, wages and credits that were brought forth during the Korean war.

But the situation is far different from what it was in the 1950s. The Government reports that it has no plans to impose controls. It figures that controls would not be necessary because both the private and the public sectors of the economy are large enough to absorb military escalation without much of a wrench. Treasury Secretary Henry Fowler, who during the Korean war was director of the Office of Defense Mobilization, points out: "When Korean fighting broke out, we had a defense budget of $10 billion. And there was no force in being to sustain large-scale fighting. By contrast, the defense budget for the past ten years has totaled more than $400 billion, and we have a much larger economic base."

Probably no nation has ever gone to war quite so well prepared to meet its defense commitments and continue growing at home. U.S. spending for Viet Nam is now about $1.5 billion annually, during the current fiscal year will grow to at least $2.5 billion; orders are already rising for such items as fighter planes, helicopters, rifles. At the same time, economic expansion should increase federal revenues by some $7 billion, even though corporate taxes have been cut during 1965. The Government may be forced to delay or moderate its plans to slice taxes further, but few of the costly, recently launched programs of The Great Society are expected to be markedly reduced.