Operation Reassurance

Now that Lyndon Johnson's wage-price guideposts lie splintered for all to see, figuring out what to do next to check inflation is giving the Administration one of its biggest headaches. Two factors combined as nothing else had to dramatize the strength of inflationary pressures: the failure to settle the air lines strike quickly despite a generous wage offer, and the President's inability to head off steel price increases. Both the business community and the general public have begun to show more than minimal worry. Although mild inflation normally helps the stock market, one reason for the market's lurching descent (see U.S. BUSINESS) is fear that a serious inflationary spiral must eventually end in recession.

Showiest Production. To counteract these fears and simultaneously give a public display of activity, the White House last week produced three days' worth of verbiage -- a sort of Operation Reassurance. The showiest production was a Cabinet meeting in which Johnson received reports from several members and then had them repeat their presentations for the press. The Cabinet admitted that strong inflationary forces do exist, but insisted, with the help of 22 charts, that inflation is under control while prosperity continues. Items: the U.S. balance-of-payments deficit fell in the second quarter of 1966 by some $500 million; productivity, or output per man-hour, has risen considerably so far this year; corporate profits were unchanged from the first quarter.

The President also held an impromptu press conference in which he demonstrated that the U.S. has suffered far less inflation than other industrialized countries. While consumer prices in the U.S. have risen only 8% over a six-year period of economic advance, Germany, Britain, France, Italy and Japan have experienced rises of from 17% to 39% . It was a clear attempt to head off political criticisms of inflation in this fall's election campaign, but it must have seemed somewhat irrelevant at all the supermarket checkout counters.

Johnson, like Commerce Secretary John Connor and Treasury Secretary Henry Fowler the day before, also showed reluctance to bury the guidepost concept entirely. But, he said, "we are constantly looking for something better." The feeling among many economists in and out of Government is that the President and his Council of Economic Advisers should have administered something better in the way of anti-inflation medicine months ago: specifically, a general tax increase. Johnson chose instead to gamble on relatively mild measures in the hope that pressures would abate, but things have not worked out that way. One of the reasons why is that organized labor, in the face of higher consumer prices and hefty corporate profits, has chosen 1966 and 1967 as the time to enlarge its share of the gravy. The White House has totted up the major labor contract expirations and wage reopening dates through December 1967--and they come to an awesome total of 32.

Learning by Example. As for industry, some businessmen feel that it is so close to full capacity--93% right now--that inflationary forces cannot go much farther without causing serious strains, especially since money for expansion is becoming steadily more difficult to find. Johnson and his men know, of course, that too strong a reaction on their part could trigger a recession. Still, something more must be done, and soon, before inflation grows any stronger. Perhaps Lyndon Johnson should learn a lesson from Britain's Harold Wilson, who let the British economy drift for so long that he finally had to take drastic and unpleasant government action. The U.S. has little taste for such drastic measures, and would take even less kindly to them than did the British.

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