The Economy: We Are All Keynesians Now

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argues that the Government should continue pushing and stimulating the economy, even at the risk of some inflation, in order to bring unemployment down to 3%. Treasury Secretary Henry Fowler's aides argue just as firmly that the Government should tighten up a bit on spending and credit policy in order to check prices and get the nation's international payments into balance.

The man whose counsel will carry the most weight with Lyndon Johnson and who must make the delicate decisions in the next few weeks is the President's quiet, effective and Keynesian-minded chief economic strategist, Gardner Ackley. "We're learning to live with prosperity," says Ackley, "and frankly, we don't know as much about managing prosperity as getting there."

The Sword's Other Side. Prosperity will bring the Government an extra $8.5 billion in tax revenues in the next fiscal year, and that means the U.S. can afford to boost its total federal spending by $8.5 billion without causing significant inflationary pressure. If spending bulges much higher, the economists can fight inflation by brandishing the other sides of their Keynesian swords. Though Keynes spoke more about stimulus than restraint, he also stressed that his ideas could be turned around to bring an overworked economy back into balance. Says Walter Heller: "It should be made entirely clear that Keynes is a two-way street. In many ways we're entering a more fascinating era than the one I faced. Essentially the job is to maintain stability without resorting to obnoxious controls as we did in World War II and Korea."

In the event demand heats up too much, Lyndon Johnson's economists will recommend one or more restrictive moves, probably in this order: cutbacks in domestic spending, still-tighter money, higher withholding rates for income taxes (up from 14% to 20%), and lastly, temporary tax increases. The step that businessmen fear most—general , and deflationary controls on prices, wages, profits, materials, mortgage and installment credit—would be taken only as a desperate final resort. Johnson almost surely will not turn to controls for the key reason that defense spending is unlikely to amount to more than 8.5% of the G.N.P. as against 13% during the Korean War. Ackley says that controls are "very remote."

Better than '65. Next year's challenge will be more easily manageable because business and Government pursued intelligent policies this year. The Labor Department reckons that businessmen's exuberant capital spending—they have invested $190 billion in new plants and machines in the past five years—will pay off with a 3% productivity gain in 1966. That will serve to temper inflation, and so will the fact that the medicare bill will lift social security taxes $5.5 billion yearly beginning Jan. 1. As of now, Government economists expect that consumer prices will rise about 2.5% and wholesale prices will increase 3%—which is not bad enough to require stern corrective measures.

Economists in and out of Government are much more bullish than they were a year ago. The economy is not only running close to optimum speed, but has no serious excesses and few soft spots. Says Economic Adviser Okun: "It's hard to find a time when the economy has been closer to equilibrium than it is today." Orders are