The Economy: The Year of Tight Money And Where It Will Lead

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The balance of payments is particularly nettlesome because this year the U.S. ran a deficit of about $1.5 billion; the Viet Nam war alone caused a drain of $1 billion, and nobody expects the U.S. to get even until the war is over. The trade surplus shrank from $6.9 billion in 1964 to $4.8 billion, and the picture would have been much darker ex cept that U.S. bankers brought back $3 billion from their overseas branches.

The Fed still leans to higher taxes. Treasury Secretary Henry Fowler argues for a "change in mix"— a moderate tax boost and an equivalent easing of money, which would reduce capital and consumer spending but help out the housing industry and credit-starved small business. Economist Walter Heller, who still exercises strong influence on President Johnson, urges a strictly temporary and quickly reversible 5% surcharge on personal and corporate taxes in order to close the inflationary budget deficit and permit an easing of money. While most corporation chiefs oppose a tax increase, Banker Peterson supports Heller, believes that a 5% surcharge in exchange for easier money would be a good bargain.

Prices & Wages. As Government and non-Government economists, and as bankers and other businessmen assess 1967's prospects, they conclude that forecasting is much more difficult than usual. But out of the mass of facts and figures before them, it is possible to arrive at a consensus of likelihoods.

Inflation will continue in 1967 — but at a slower pace, and with a difference. Prices will probably rise something less than 3%, going up not so much because of swelling demand but because of increased labor costs. Labor contracts in an unusually large number of basic industries will be up for renegotiation, almost twice as many as in 1966 (see following story), and even moderate labor leaders expect trouble in controlling their truculent rank and file. The most explosive situation is in the auto industry, where the minority of electricians, tool-and-die makers and other skilled craftsmen in the United Auto Workers recently won power to veto any proposed contract, are demanding hourly raises of $1 or more, and are cockily talking strike. If the nation's most influential industry is forced into a prolonged stoppage after contracts expire on Sept. 6, that could gravely damage the whole economy.

Barring major strikes, unemployment will remain close to 4% — it is now 3.7% — and whenever it holds that low, prices tend to rise and productivity slackens. One reason for the economy's strength from 1961 through 1965 was that productivity (output per man-hour) gained an average 3.6% annually; this year, it rose only 2.8%. Meanwhile, wages went up by an inflationary 4%, partly because President Johnson, in a political bind, unwisely went along with a 5% increase for airline workers. Says former U.S. Budget Director Kermit Gordon, an author of the shattered but ostensibly still guiding 3.2% guidelines: "If we get through 1967 with no more than a general 5% wage increase, we'll be damn lucky."