The Economy: If Peace Comes

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Peace in Viet Nam may still be a long way off, but even the prospect of negotiations has created a new mood for much of U.S. business. As they look toward war's end, most businessmen see economic possibilities that range from pleasant to dazzling. Says Economist Arthur Smith of the First National Bank in Dallas: "No single event would do more good for the nation's economy than ending the war."

Wall Street quite obviously agrees with the prognosis. President Johnson's March peace overtures gave the stock market its sharpest two-week surge in two decades. And last week the market quickly shook off the subsequent dip prompted by the Federal Reserve Board's increase in interest rates. The advance carried the New York Stock Exchange index of all issues traded on the Big Board to a record high of 54.26, up .87 for the week. "The only thing capable of reversing the prevailing psychology," says Analyst Robert T. Allen of Shearson, Hammill & Co., "is a complete breakdown in peace negotiations." A Dean Witter & Co. report reflected a widely held Wall Street sentiment: "A truly fundamental change has taken place in the investment outlook. Resolving the Vietnamese conflict would free the U.S. to attack domestic problems deferred too long—and will create great demands."

Fiscal Dividend. The Presidents Council of Economic Advisers estimates that peace in Viet Nam might permit a $15 billion decline in defense spending, stretched over 18 months. If so, the armed forces might well be reduced by 900 000 men to about 2,600,000, a little below their pre-Viet Nam strength. Up to a third of the returning veterans presumably would go back to school, leaving some 600,000 to help meet industry's need for skilled manpower. With lower defense spending, plus the ordinary growth of the economy, the CEA calculates that the Government will be able to distribute a $30 billion "fiscal dividend" to the nation. Part of it should be lower taxes to stimulate civilian demand, says the council, and part of it should be a rapid boost in federal outlays for education, health, housing, pollution control, highway beautification and the fight against slums.

"There is a transition problem of converting to peace," admits CEA Chairman Arthur Okun, "but we think we can handle that." One reason for his optimism is that for all its high price tag, the $29 billion-a-year Viet Nam war absorbs only 3% of the total national output of goods and services—only half the proportion consumed by the Kore an War. The total defense budget today accounts for only 9% of gross national product, compared with 41% at the height of World War II and 13% at the Korean peak. More important, the end of the Korean fighting caught Washington with a huge oversupply of military goods. And to make matters worse, peace plans were unready; cutbacks in defense spending led to a recession with a 6% unemployment rate before the economy rebounded. This time, the Pentagon expects to taper off procurement slowly, as it rebuilds its depleted stockpiles, and Government planners are already deciding how tax cuts and civilian-spending increases should be timed to stabilize the economy.