The Rising Attack on "Nixonomics"

THE only way to stop inflation, President Nixon's economists have tirelessly insisted, is to follow a deflationary policy that will produce a slowdown in business. They have now achieved the slowdown. Indeed, the U.S. may well be in the early stages of a recession --but inflation seems to be speeding up. In December, when industrial production fell for the fifth straight month and housing starts slumped to the lowest point in two years, the consumer price index jumped at an annual rate of 7.2%--its fastest advance since last June. Millions of Americans are suffering from the one-two punch of an inflationary recession. While prices continue to rise, as the altered signs in the picture above show, cutbacks in factory hours have reduced the average take-home pay of a production worker. He now has less buying power than he had four years ago.

"Our policy is working," says Treasury Secretary David Kennedy, echoing the Administration's official line. In his view, it is only a matter of time before price increases become fewer and smaller. Paul McCracken, the President's chief economist, argues that the U.S. can still avoid a recession. Many bankers and businessmen agree, though quite a few of them would not be overly displeased to see a recession. Increasingly, the argument is being heard in boardrooms that employees have become too demanding, too casual in their attitudes toward performance and productivity --and that a recession would alleviate many of these problems. Only a few conservatives used to whisper that "a little more unemployment would be good for the country," but more and more businessmen are saying it out loud.

Naturally, not everyone agrees. While the Administration continues to counsel patience with its policies, economists have begun to wonder whether there may not be a better way to stop inflation and its related woes. In sum, is a recession really necessary?

There is no doubt that the U.S. could stop inflation cold if it really wanted to. Some economists, notably including Arthur Okun and Walter Heller, * point out that many basic prices would come down quickly and sharply if the Government eliminated most farm-price supports, oil-import quotas, fair-trade laws and tariffs. The U.S. could also strike a mighty blow against inflation if it attacked union apprenticeship rules, which limit the supply and drive up the wages of skilled craftsmen. Economists concede that such structural changes are politically difficult if not impossible to enact. Still, the Government could change some policies that actually promote inflation. At a time of sharp increases in food prices, the Agriculture Department early this month asked Florida growers to set marketing quotas for themselves in order to keep the price of tomatoes up. The Johnson Administration pressured European and Japanese steelmakers to impose "voluntary" quotas on their exports to the U.S., and the Nixon Administration has maintained those quotas. Partly because of them, some U.S. steelmakers raised prices last week without much fear that customers would turn to cheaper imports.

Within the Administration, there is some talk about loosening the steel-import quotas. Hendrik Houthakker, a member of Nixon's Council of Economic Advisers, has been recommending that the U.S. also allow more oil and beef imports to enter. On the other hand, Nixon is committed to limiting the imports of textiles, and he does not seem ready to take big steps toward freer trade.

Jawboning and Arm Twisting. A number of critics have been urging the Administration to abandon its hands-off policy toward specific wage and price increases. Robert Roosa, the former Treasury Under Secretary who is now a partner in Brown Bros. Harriman, makes the extreme proposal that Nixon should appeal for a six-month voluntary freeze on all wages, prices and dividends. He argues that inflationary psychology has become so deeply ingrained that it will not be wiped out by a business slowdown "unless it reaches the disastrous scale of a depression."

Other critics, not going that far, nonetheless maintain that much could be accomplished by a return to the old wage-price guidelines. Advocates admit that the guidelines collapsed while the Johnson Administration pushed a clearly inflationary budget policy, but assert that they would be much more effective when combined with the present credit curbs and tight budget. Heller suggests that Nixon set up a "watchdog" agency in which business and labor leaders would join in setting "ground rules" for what might be acceptable wage and price increases. He also urges that Nixon adopt the policy of "phone calls, behind-the-scenes confrontations and friendly arm twisting" that Lyndon Johnson followed. Okun claims that such methods would be effective in preventing price increases in concentrated industries like steel, copper, aluminum, autos and oil.

The Administration vehemently rejects wage-price guidelines as ineffective, inequitable and incompatible with free-market principles. It also rejects Johnson-style jawboning and arm twisting, though Nixon has addressed general admonitions to businessmen and labor leaders to be more responsible. But "Nixonomics" must soon produce a measurable slowing of price increases to remain a viable political strategy during an election year. Most politicians agree that inflation is shaping up as the No. 1 election issue. The Democrats so far have been unable to capitalize on the public unease created by the threat of an inflationary recession, largely because they have lacked any real alternative for fighting price rises. Nixon's critics are providing them with at least the beginnings of such a program.

* Both onetime chairmen of the President's Council of Economic Advisers and both members of TIME'S Board of Economists.

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