Business: Seeking Muscle for a Flabby Recovery

(3 of 4)

Productivity usually leaps when the economy climbs out of a recession, since rising demand enables manufacturers to use machines and workers more efficiently. The trouble is that if recovery is creeping, productivity will not rise as much as it could, and wage increases are more likely to force up prices.

Rising Temptations. How can the recovery be pepped up? Heller offers a five-point program: 1) pull forward into this year the $4.5 billion of income tax cuts scheduled to take effect in 1972 and 1973; 2) have Washington pay now all of the costs of extending state unemployment compensation benefits for an additional 13 weeks, up to a maximum of 39 weeks; 3) enact the Family Assistance Program bill, setting national minimum income levels for welfare recipients; 4) give states and cities a temporary 10% federal "bonus," on top of the grants-in-aid that they now receive, for various programs; 5) provide federal funds that state and local governments could use to fill about 150,000 new public service jobs.*

Such moves, board members think, would have to be combined with an incomes policy to fight inflation. David Grove fears that businessmen whose profits have been acutely squeezed by the recession will be tempted to raise prices as soon as they feel that demand is strong enough to support such action —especially if they have to pay large wage increases. The heart of an incomes policy would be Administration guidelines for noninflationary wage and price increases, and presidential "jawboning" to unions and companies that violate those guidelines.

The wage standard might be 3% to cover long-term productivity increases, plus an add-on to compensate partly for rising prices. Members of the Board of Economists concede that President Nixon could hardly put forward a wage guideline now; it would seem to be aimed specifically at the United Steelworkers in their current negotiations (see story, page 80). But the economists think that a guideline promulgated after the steel settlement would have a strong impact on the next round of labor bargaining in 1972.

Activist Alliance? The Nixon Administration plans to wait until mid-July, when second-quarter figures will be in, before deciding whether to pursue a more expansionist program. Right now, Washington's policymakers are stalemated. Federal Reserve Chairman Arthur Burns has been arguing for a year in favor of an incomes policy, and lately he has been saying that he also favors more fiscal stimulus. So far he has been blocked by Budget Boss George Shultz, who, in Robert Nathan's words, is "ideologically, conceptually, religiously" against an incomes policy because it would interfere with natural market forces. Paul McCracken, chairman of the Council of Economic Advisers, is thought to be on the fence, ready to propose an expansionary tax and spending program if asked.

The balance of power within the Administration quite possibly will be held by the newest member of the President's economic team: Treasury Secretary John Connally. If it appears that a sluggish business pace will hurt the Administration at the polls, Connally may well form an alliance with Burns for economic activism—more fiscal stimulus plus an incomes policy. One final and perhaps decisive argument against a slow recovery is that it does not produce votes.