Foggy Days

After three weeks of recuperating in sunny Texas, Lyndon Johnson returned last week to some foggy economic weather in Washington. If the visibility was rather poor, the President had himself partly to blame. He has been screening his economic moves -and intentions -so thoroughly that speculation about them has become an almost obsessive pastime of the nation's economists.

Before leaving the ranch, Johnson got around to announcing what everyone had long expected, but what he had steadfastly refused to confirm all year: that between $9 billion and $10 billion in additional funds will be needed to finance the Viet Nam war in fiscal 1967. That doubles the Viet Nam tab, raises the current defense budget to $68 billion and overall federal spending to $127 billion. It also means that the deficit for the fiscal year ending in June will total at least $10 billion.

With that kind of deficit at a time when inflation is still around, a tax increase would normally be called for. In fact, it should have come earlier in the year, when Johnson and Defense Secretary Robert McNamara first saw that a good deal more money would be needed to pay for the war. Now, because the President declined to act earlier, the case for a tax rise must be balanced against the state of a somewhat discombobulated economy.

Apparent Signs. At the beginning of the year, there was a chance to cool the economy's growing inflationary fever through a combination of moderately higher taxes and slightly tighter money. With an election in the offing, the President chose not to raise taxes then. With that, the Federal Reserve Board felt compelled to carry the entire burden of dampening inflation. Using tight money as its weapon, the board drove interest awfully high awfully fast. Result: while the economy is still laboring under inflationary pressures, largely because of war-spending, it has simultaneously begun to slow down.

The signs of the slowdown are increasingly apparent, from Detroit's production cutback and the slowing of business expenditures for plant and equipment to last week's report from Washington that wholesale prices and retail sales both fell in November for the second consecutive month. In view of these events, the President's problem is whether to try for a tax rise that would certainly help out his budget but that might nudge a hesitant economy toward recession.

Chorus of Advice. Despite the remaining inflationary tugs, most of his advisers are now cautioning the President against a tax hike. The economy, said one White House aide, is in approximately the same shape as Baby Bear's porridge when Goldilocks found it: "Not too hot and not too cold -just right." Most of the Government's economists now see a modest increase in the gross national product of 4% or $50 billion (to some $790 billion) for next year, an indication that the economy has lost much of the steam that has kept it percolating since 1961 at G.N.P. growth rates of close to 5.5% or 6% .

If the President was not getting enough counsel close to home, a chorus of tax advice descended on him last week from just about every other quarter. Some influential voices continue to insist on a tax increase, of course, such as those of Walter Heller, former chairman of the Council of Economic Advisers, Harvard Economist John K. Galbraith and Chase Manhattan Bank President David Rockefeller. But the nays increasingly have it.

M.I.T.'s prestigious Paul Samuelson is against a tax increase. So is New York's First National City Bank, which warned that it could have a "perverse" effect on the economy. Richard Nixon said last week that a tax hike might cause a recession that "would wipe out the gains of the past ten years." House Minority Leader Gerald Ford believes that it would be a "tragic mistake." Democratic Senators Vance Hartke of Indiana, George Smathers of Florida and William Proxmire. of Wisconsin all oppose it. The President's influential fellow Texan, Chairman Wright Patman of the House Banking Committee, flatly insists that a tax hike would plunge the U.S. into a depression.

Instinctive Distaste. With all those guns trained on him, Lyndon Johnson is not likely to go for a tax increase unless he feels that he absolutely has to. Wall Street, at any rate, seems convinced that there will be no rise; during the week, the Dow-Jones industrial average climbed 23.55 points, the largest one-week rise since October. Ultimately, in assessing the entire economic situation, Johnson will probably turn his decision mainly on the tight-money problem. A shortage of mortgage money has sent the housing industry into a tailspin (see U.S. BUSINESS), shaking up businessmen in a dozen allied fields and clouding the outlook for the entire private sector of the economy. A Western Populist with an instinctive distaste for high interest rates, Johnson in the past two weeks has ordered federal agencies to pump $750 million into mortgage markets. Moreover, many bankers detect signs of a gradual loosening-up of money, are hopeful that 1967 will bring real improvement.

If it does not, Johnson might feel compelled to strike a bargain with the Federal Reserve. He might order modest increases of perhaps 5% in personal and corporate taxes in exchange for a reduction of 1/2% or 3/4%, in the board's tight-money rate. This would raise approximately $4.5 billion in taxes and loosen credit considerably. There is little betting in Washington on what the President will do; he says that he has yet to make up his mind. A failure to say anything until his State of the Union message in early January would leave the economy floundering for another long month of uncertainty.

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