Business: NIXON AND THE ECONOMY: A Delicate Balancing Act

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RICHARD NIXON will probably have to move cautiously in working his will on the U.S. economy. Besides facing a Democratic-controlled Congress, the new Republican President will have to live until at least next summer with budget decisions already made by the Johnson Administration. Moreover, the narrowness of his election victory can hardly be interpreted as a mandate for sweeping economic change. Even his aides admit that Nixon will be forced into the role of an "economic neuter," as one of them puts it, during his first months in office.

As he enunciated them during the campaign, one of Nixon's main objectives is to keep the economy on a forward course while reducing the disturbing rate of inflation—currently more than 4% a year—to about 2.5%. That, in turn, would go a long way toward strengthening the position of the dollar abroad. Yet excessive zeal in combating inflation could throw the nation's economy into reverse. The new Administration, says Yale Economist Henry Wallich, a onetime economic adviser to President Eisenhower, will find that it must perform a delicate balancing act "between policies that would bring on a recession and ones that would continue inflation."

Belated Cooling. The stickiest task involves Nixon's campaign pledge to allow the 10% surcharge on federal income taxes to expire next summer—or at least to reduce it substantially. That promise may have made obvious political sense at the time, but the economic wisdom of cutting taxes is not nearly so clear. Only belatedly does the surcharge seem to be having the desired effect of cooling off the economy. As one piece of evidence that the tax is finally working, the Federal Reserve Board reported last week that the U.S. money supply grew by only 4.5% during the third quarter, barely half as fast as the quarter before. Also, the Commerce Department reported that retail sales declined in October for the second straight month.

These indicators raised expectations that the long-predicted economic slowdown would at last materialize early next year. If it does, says Economist Arthur Burns, Eisenhower's former chief economic adviser and now a key Nixon man, some sort of surtax reduction will be possible. On the other hand, a tax reduction could well touch off a new round of inflation. With the inflation threat obviously in mind, Pierre Rinfret, Manhattan economic consultant and another Nixon adviser, conceded in London last week that Nixon might conceivably have to retain the surcharge, or even raise taxes. "I don't think," said Rinfret, "that the surcharge can be eliminated easily."

Warning from Wilbur. It certainly could not be readily eliminated without corresponding reductions in the federal budget, and that task will not prove to be easy either. During the campaign, Nixon promised that he would hold increases in Government spending to $10 billion a year, which he estimated would be more than covered by $15 billion or so in new tax revenues that would be generated by the normal growth of the economy. He may be hard pressed to keep his spending increases to that both because of the increased outlays for defense that he advocates and the built-in budget boosts for items like wage increases for federal employees and expanded social security benefits.