The Economy: Avoiding Overcure

The U.S. economy is facing its most perplexing situation of the fabulous 1960s. Production, profits and personal income are at record highs and still rising. Yet last week the auto industry, at least temporarily, cut back production because of disappointing sales, and the stock market shuddered through its worst fall since 1962. Amid these conflicting currents, Lyndon Johnson continued to ponder one of the toughest decisions of his presidency: whether to raise taxes to forestall the kind of inflation that would inevitably lead to a downturn later or to avoid a tax hike for fear that it would hurt business this year.

Washington's Dilemma. The advocates of a tax rise last week picked up such prominent recruits as Walter Heller, former chairman of the President's Council of Economic Advisers; Pierre-Paul Schweitzer, chief of the International Monetary Fund; and most important, William McChesney Martin.

The Federal Reserve chairman said out loud what he has long argued privately:

"The logical way to fight inflation is to put through a simple, clean-cut, across-the-board increase in taxes that would be both temporary and moderate."

Martin is the first top Government official to call for a tax increase.

Johnson's other advisers responded to Martin's words by calling on business men for even more acts of self-denial.

Gardner Ackley, chairman of the Pres ident's Council of Economic Advisers, told businessmen that they have no reason to raise prices, because they are earning so much already (see following story). Pointing out that profits after taxes jumped 88% between early 1961 and late 1965, he said: "It is time to ask whether a further rise in the share of profits in the national income is in the interest either of the health of the nation's economy or in the interest of business itself." Treasury Secretary Henry Fowler declared that the economic outlook is so uncertain that to battle inflation by boosting taxes now "might present some danger of 'overcure.' "

Detroit's Downturn. Even if Johnson eventually calls for a tax hike, he will have trouble selling it to Congress during an election year. So far in 1966, Congress has aggravated the inflationary danger by appropriating $3 billion more for nonwar spending than Johnson asked for. House leaders contend that they will not support a tax hike unless Viet Nam spending swells enormously—which it may well do. Appropriations Chairman George Mahon believes that Viet Nam "is going to cost us many billions more than asked for in the fiscal 1967 budget."

How then to avoid inflation? Last week men who presumably know business best, 543 executives at the annual meeting of the U.S. Chamber of Commerce, voted by an 18-to-l ratio to urge a slash in federal spending instead of a tax rise.