Set of Unpalatable Options

IN public, the Nixon Administration professes serene confidence in its economic strategy. But backstage, a gnawing unease is growing. Indeed, President Nixon has recently called on his advisers, and some outside economists, to suggest alternatives to the tattered anti-inflation policy of Phase III. From board room to checkout counter, public pressure is building for some decisive action to deal with an economy that seems to have spun out of control into the kind of inflationary binge that historically precedes recession.

Signs of this economic runaway proliferate regularly. New ones last week:

Manhattan's First National City Bank reported that its latest survey of corporate profits showed them rising a huge 24%, after taxes, in the first quarter. Earnings on each dollar of sales rose too--to 5.7%, or .5% more than a year ago, by one preliminary estimate. Generally, high profits are good news: they fuel the engine of a free-enterprise economy. But in this case, the gains are one more sign of an overheating boom --and, more specifically, they threaten to start the wage-price spiral whirling again by prompting labor leaders to make outsize pay demands.

Union men already are vocally angry about the economic situation. Last week AFL-CIO Chief George Meany charged the Administration with using "the big-lie technique" to cover its economic bumbling. Meany singled out a New York Times article signed by Budget Director Roy Ash, which offers a series of glowing statistics and assertions.

Most are at worst debatable or subject to varying interpretations, but one is simply wrong. Ash claimed that the rate of inflation is only 2.9% "today," but Government figures show that prices rose at a 6% annual rate in the first quarter, according to the most comprehensive measure. The article was written in the White House publicity mill, which called the inaccuracy a "typing error."

Ash also contended that "confidence for the future is high"--but last week the University of Michigan Survey Research Center reported the sharpest drop in consumer confidence in the 22 years that it has been taking soundings. Its index fell from 90.8 at the end of 1972 to 80.8 in February and March of this year. Consumers are deeply afraid of both further inflation and future recession. Ironically, these very ideas are making people rush to buy appliances, cars and houses before prices go even higher and before bad times come; such scare buying tends to prompt exactly the price boosts that consumers fear. Another index of confidence in the economy, the stock market, also took a pounding last week; the Dow Jones industrial average fell 41 points, to a new 1973 low of 922.

What can Nixon do to take charge of the economy and calm the groundswell of concern? All the options open to him are to some extent unpalatable.

Theoretically, he could:

> Again impose a temporary wage-price freeze to give tightening fiscal and monetary policies a chance to take hold, and/or go back to the formal controls of Phase II. To combat shortages, which are already helping to power an oldfashioned demand-pull inflation, the Administration could also institute an embargo on exports of grain, meat, lumber and other commodities--but only at the risk of hurting the nation's balance of payments. This course would constitute a humiliating admission that the voluntaristic Phase III was a mistake from the beginning. Treasury Secretary George Shultz and Chairman of the Council of Economic Advisers Herbert Stein oppose a freeze on the grounds that it would only delay inflation; prices, they fear, would spurt up again when the freeze ended.

> Raise taxes in order to sop up excess purchasing power. One ingenious plan, proposed to the President by Economist Pierre Rinfret, is a surcharge on individual and corporate incomes, with the money going into a kind of escrow account to be returned to the taxpayer later when the economy cools. Even some businessmen, who are worried despite their fat profits, favor a similar course. Last week A.W. Clausen, president of Bank of America, called on Congress to enact a standby income tax surcharge that would automatically be activated by a sharp increase in prices or an abnormal rise in the federal budget deficit. But any tax boost would violate one of Nixon's most vehement campaign pledges, and risk arousing voter rebellion. Wilbur Mills, the most powerful voice on economics in Congress, has shown a marked coolness to increasing taxes.

> Leave the job of restraining the runaway economy to the Federal Reserve Board. So far this year, the board has held the growth of money supply to a frugal annual rate of 2% or less, compared with 8% last year. If this tight money policy is continued for long, however, it could well lead to oppressive interest rates, a drying up of credit and a dangerous slowdown in the economy comparable to the 1970 recession.

Nixon's range of choice is wide. This week Congress is expected to approve a simple one-year extension of the President's power to control wages and prices, giving him a free hand to direct the economy as he sees fit. So far, it appears that Nixon will stay with Phase III for a while longer--with some minor corrections. Shultz and Stein have consistently argued that prices are now approaching their peaks and will soon begin to decline, enabling the economy to glide into a more sustainable growth pattern. If they are wrong, Nixon and his Administration could be in for yet another severe political pummeling.

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