The Economy: The Rattles in the Engine

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People feel less boomy because of a sense that the economy has come into increasing imbalance. The U.S. since early 1961 has had a well-balanced, noninflationary expansion, with demand and supply rising in tandem and prices remaining relatively stable. During that beneficial period, unemployment dropped from 7% of the labor force to only 3.7%, the average weekly wage of factory workers jumped from $89.31 to $110.27, and industrial production soared 50%. Now the nation's durable prosperity is feeling several sorts of stress and strain. Credit is tight and costly; labor and materials are running short; prices are climbing; and the economy is threatened by that old boom slayer, inflation.

The irony is that while auto production is falling, demand for almost everything else has been rising beyond the economy's ability to meet it. A major reason for this is that the Johnson Administration is trying simultaneously to wage the war in Viet Nam and build the Great Society at home, without being willing to pay the price in hard economic terms. In a time of exuberant demand and full employment, when every tenet of new or old economics dictates that the Government should exercise restraint, Washington is pumping billions into the economy by running a hair-curling deficit. And because it turns over so many times, every dollar of federal deficit adds $3 in spending power to the economy.

Though Johnson hopes to hold the fiscal 1967 deficit to $1.8 billion—largely by using such ledgerdemain as selling off billions of dollars in federal mortgages and other assets—the fact is that Congress has already added $3 billion to his planned spending. Some top Congressmen predict that the deficit will be $5 billion to $10 billion. Says Chicago Economist John Langum: "This is Johnson's inflation."

Corporate chiefs are rushing to borrow more for expansion, figuring that they can repay later in cheaper dollars. Companies this year plan to increase their capital budgets for expansion and modernization by at least 16%, to $56 billion. Because of this overbuilding and overbuying, wholesale prices have gone up 4%, and consumer prices have jumped 2.8% in the past year. Everybody agrees that the economy is breathing too hard and cannot sustain its pace without stumbling a little bit now or perhaps badly later on. Says Arthur Okun, a member of the President's Council of Economic Advisers: "A continuation of the recent rate of increase in demand and prices could not long be tolerated."

Taxes & Spending. A remarkable consensus of economists from left to right—Walter Heller, Paul Samuelson, Arthur Burns and Raymond Saulnier, among many others—has urged the President to raise corporate and personal taxes moderately and temporarily. Businessmen generally oppose that idea, though they say that profits are handsome enough for them to absorb higher taxes without too great a wrench. As an alternative to tax hikes, they have been calling on the President to pare back some of the Government's nondefense, postponable spending, typified by the rent-subsidy program and farm subsidies. Lyndon Johnson seems dead set against swallowing either of those two bitter political pills this late in an election year.