Nixon's Temptation to Shift Policy

AIOARD Air Force One on the flight back to Washington from San Clemente on the day after last week's elections, President Nixon huddled with advisers to discuss the budget that he will send to Congress in January. Over the next few weeks, he will have to decide how much he dares to spend to get the economy moving faster. There is a good chance that he will let the budget drift into a big deficit for 1972, even at the fearful risk of running a higher rate of inflation than he wants.

Economic issues, especially rising unemployment, hurt some Republicans severely in congressional and gubernatorial races. Unemployment now stands at 5.6%. The President knows that the economy must do better before he faces the voters again. He has pledged by mid-1972 to restore "full employment," which his aides define as a jobless rate of about 4%.

Ways to Speed Up. The task will be formidable, if not impossible. Herbert Stein, a member of Nixon's Council of Economic Advisers, calculates that if full employment is to be reached on schedule, real gross national product--not counting price increases--must grow at an annual rate of 6%. His estimate closely parallels the view of Democrat Walter Heller, a former CEA chairman. Said Heller last week: "I am happy to see that they are starting to catch up with our arithmetic." The economy is far away from Stein's goal. Real G.N.P. rose only 1.4% in this year's third quarter, and it may decline in the current quarter if the General Motors strike drags on much longer.

There are two major ways to speed up the growth rate. The Government must either run a sizable budget deficit or rapidly expand the money supply by more than 7% annually. The Federal Reserve Board has been pumping the money out at a 4% to 5% rate this year. It would probably be willing to increase that rate substantially only if Nixon tried to contain the inflationary effects by adopting an "incomes policy"--some form of wage-price guidelines, or at least direct and vigorous White House preachment against excessive increases. That sensible idea has been steadily gaining among private business leaders and even reluctant Government policymakers. Nixon, however, has consistently rejected the notion as unworkable, almost sinful and certainly inimical to free-market principles.

The President's best device for pepping up the economy seems to be the budget. Aides say that he will send to Congress a fiscal 1972 budget with a planned deficit--amount uncertain--to follow the unplanned deficit of about $15 billion that the Government is likely to run this fiscal year. That will be distasteful for a Republican President, especially Nixon. He has consistently, and correctly, blamed inflation on the deficit run up by Lyndon Johnson. Administration officials are bandying about ideas for making the deficit look smaller than they expect it really to be. Treasury leaders, for example, are urging the President to propose a "value-added" tax--a complex kind of sales tax widely used in Europe--and to include the revenues that it would produce in his budget estimates. Almost no one in Washington thinks that Congress would pass such a tax.

Nixon, of course, must by law present an official budget estimating what revenues actually will be. But the President has begun to distract attention from the forthcoming deficit by stressing an idea known as the "full-employment budget." This is a theoretical measure that, instead of calculating actual Government income, figures how much the U.S. would have taken in if there were full employment. Thus, a deficit under ordinary accounting might well turn out to be a surplus in the full-employment budget. Example: in this fiscal year, the Government stands to spend about $210 billion and collect roughly $195 billion, thus running a deficit of $15 billion or so. But under full-employment accounting, the U.S. would show a surplus--because it would have taken in well over $210 billion if the optimum number of people had jobs.

That Extra Lift. While this fiddling with figures may seem like another bit of political gimmickry, it is economically sound. The full-employment budget is a fairly reliable gauge for determining whether the amount of Government spending is restraining or stimulating the economy. To stimulate the current slack economy, a fairly large full-employment deficit is called for.

Tne key figure in Nixon's current discussions of full-employment budgeting is close to $230 billion. That is what present tax rates probably would bring in during fiscal 1972 at full employment. Nixon's dilemma is whether to hold federal spending to about that level or let outlays go still higher. So far, his aides have been passing word to department heads that spending is to be held to $225 billion. That strategy would allow Nixon to claim, correctly, that a planned deficit in the official budget would not be inflationary. But it would hold out little hope of lifting the economy toward full employment by mid-1972.

Nixon thus will be sorely tempted to shift policy and give an extra boost to production, profits and jobs by allowing Government spending to rise still higher. Some Administration officials think that such a course would risk starting again the price spiral that the U.S. has only begun to curb, but they are frankly afraid that the boss will do it. Nixon and his advisers, says one Administration economist, "discovered that inflation started slowing down after the economy slowed down. Now they may do the reverse: speed up the economy and let the inflation come afterward--after the 1972 elections."

This file is automatically generated by a robot program, so reader's discretion is required.