America's elusive balance MONEY

JOHN GRAHAM

Washington—King Pellinore spent the greater part of his life hunting the questin' beast, one

of the most elusive animals to be found, or not found, in the jungle of literary fantasy. King Johnson is now spending the greater part of his time chasing two equally elusive creatures, peace in Vietnam and equilibrium in America's balance of payments. The Vietnam peace has at least been tracked down to a borrowed lair in Paris. But the payments equilibrium is no nearer capture than it has ever been, and those officials who are in the hunt are getting hot and bothered.

The figures for the first three months of this year looked good. The deficit has been cut from $1,850 million in the last quarter of 1967 to a mere $600 million. If this kept up all year, the annual deficit would have been reduced by a full third, which would not be bad at all. Unfortunately, even the Office of Business Economics—which works out the figures and is considered to be the government's best collator and interpreter of statistics—admits that the $600 million is a phoney figure.

The figure is phoney not because the books have been cooked, but • because there were several big special factors operating. There was a dock strike in New York, for instance, which held up exports more than imports. Now there are always special factors. It so happened that from January to April they worked in favour of the American balance of payments to the tune of $250 million. This means that the real deficit, or the underlying deficit, or the continuing deficit, was more like $850 million than $600 million.

The arithmetic from here on is simple. Four times $850 million is $3,400 million. The loss last year was $3,600. At this rate, the improve- ment this year over last could be a picayune $200 million. It is difficult to find anyone in Washington who is professionally concerned with the balance of payments to bet on a deficit for 1968 smaller than $3,000 million.

Which is odd: surely the Americans are sup- supposed to be engaged in a major chase to re- duce, if not to eliminate, the payments deficit. This was what January the First was all about, when the President made his surprise announce- ment that he was going to cut the deficit by no less than $3,000 million. And yet here we are, more than a third of the way through the year, and the deficit appears to be as big and irredu- cible as ever. It is causing a good deal of alarm here, in the Council of Economic Advisers, in the Federal Reserve Bank, and wherever else You care to look. The alarm is seldom expressed now, except by Mr Martin, the Chairman of the Federal Reserve Board, who has never been known for taciturnity.

What i's to be done? There is no doubting the genuineness of President Johnson's wish to do something, or the genuineness of his plan at the start of the year. But the plan is not working properly, yet. Perhaps the Americans have become so used to big spending, to living on credit, that it is impossible for them to balance their books without a major retreat to isolationism or protectionism: without bringing

back every GI, without uprooting or selling their foreign factories, and forbidding their citizenry to go to Paris. This would be the quick way to capture equilibrium, but it would be disas- trous if it happened. Luckily, it is not likely to happen.

There is, in fact, a -road to equilibrium, but it is a slow road. The dollar outflow caused

by the military effort, the striving for a pax Americana, will almost certainly get better when the war in Vietnam is over, although even

then it will not get better fast. But the Paris tqlks will take a long time, and they may not even be successful. la the shrirt term, therefore, there is practically no chance of cuing can military spending overseas. Civil spending can be cut, indeed it is being cut, by reduced embassy staffs etc: but the sums involved are tiny.

On capital account there is room for manoeuvre. Foreign loans by American banks have been drastically cut back this year, and thanks to the splendid system of voluntary coercion that operates within the Federal Re- serve system, the banks in the first three months

virtually met their savings target for the whole year. Company investment is a different matter,

and there are not yet enough figures to tell whether the President's New Year programme will save the $1,000 million it is intended to.

As for tourism, it is proving just as hard to stop Americans travelling abroad as everyone said it would be. This is not the sort of thing you can force Congress to foist on the Ameri- can people. Freedom of movement is considered a basic individual right, and millions of Americans would probably be surprised to know that it is not actually written into the Constitution. The administration and the travel industry are quite rightly concentrating now on the other side of the coin: getting more foreigners to come to the States. This may achieve something, it is too early to say. Riots do not exactly help.

That leaves the trade balance, and herein lies the key. There is simply no other way to reduce the payments deficit this year than by running a large trade surplus. What would happen to the payments deficit if the us went into trade deficit as well is too appalling to contemplate. Hence, the constant efforts, arm-twisting if you like, by the Americans to persuade the Euro- peans to buy. These are bedevilled by European feelings of anti-Americanism, and also partly frustrated by the domestic economic picture. With wages rising by between 6 and 7 per cent,

and prices by about 4 per cent, American ex- ports are becoming less competitive.

Nevertheless, the dominant tactic now is to show a tremendous increase in American exports for the rest of the year, and if possible a decrease in imports. This can only happen if the demand for imports here is dampened, and if Western European countries move to- wards expansion, and this is what everyone is hoping. A business boom in Western Europe would do wonders for the American trade sur- plus, though its major effect might well be on next year's books rather than this year's. As for checking the appetite for imports, this is part of the job that the tax increase is sup- posed to do. This notorious tax increase has become a symbol to the rest of the world that America really is trying to do something to `put its economic house in order,' whatever that means, by lessening both the budget deficit and the payments deficit. The tax Bill is still not off the sick list, but it is looking healthier now than at any time since it was first mooted.

One last item in the jigsaw is the behaviour of ordinary Americans. Last year they started to save at an ..accoa! rate. The rate has fallen this year, to 6.8 per cent, but Luis much higher than it has been in past years. There is no norm for personal savings, but recent history has had it at about 5.5 per cent. There is thus room for a consumer boom.

Should a consumer boom develop, a goodly part of it would consist of the purchase of foreign goods. Some people are even saying that Americans may buy a million foreign cars this year. This wouldn't do anything at all for the strength of the dollar. It may never happen, but it helps to explain 'the uneasy summer and autumn' that are upon us. The Americans have sprung a whole lot of traps, but the questin' beast refuses to be snared.