Same old mess

AMERICA-2

WILLIAM JANEWAY

America has made a habit of solving its social problems by ignoring them. That is, it has over- come social conflicts and met new demands through the ability of its economy to stretch itself as required without tearing under the strain. When the economy fails, as in the 'thirties, all bets on American stability are off. The economy which President Nixon is faced with administering is stretched taut today. And both internationally and domestically, it has begun to tear.

The President-elect faces a variety, a surfeit of economic problems. On the international side, the shaky underpinnings of a world mone- tary system based on national currencies are being further undermined by America's loss of competitiveness in world markets: massive American trade surpluses, necessary to finance alohal financial and strategic commitments, are

no more. At homei_the tatin is suffering its worst bout of-ififlation since the Korean War, Max fnetto -unemployment rises to the flash-

point of social conflict. Too much is being de- manded —by consumers, investors, and govern- ments—from an economy whose structure, like

that of the society it feeds and powers, requires reform and reconstruction of an increasingly radical kind.

Radical reform is not, of course, what is to be expected from the new President. And even before structural reform of any sort can be con- templated, Nixon will confront the continuing responsibilities of any President: management of America's international responsibilities and management of the American economy as a Is hole. Even if a cease-fire in Vietnam is

negotiated, there remains the constant threat posed by similar open-ended American commitments to maintain the status quo—in Latin America, in Greece, and elsewhere in Asia.

Whatever happens overseas, the new Admini- stration will bear responsibility for the state of

the American economy. Overall, this means responsibility for keeping employment high and inflation low, for keeping America competitive in the world economy and the dollar sound in the world's financial markets.

One danger stands out on this front. The last six months have witnessed the seeming failure,

of an effort to 'fine-tune' the American economy by means of one of the meat-axes at the dis-

posal of the economic managers, fiscal policy.

The June tax increase was intended to dampen down inflationary pressures by marginally re- ducing the amount of spending by the nation's consumers. But the consumers refused to be fine-tuned and, instead, worsened matters by saving less and spending even more. The danger is that failure of one economic meat-axe will open the door for an attempt to use the other one, monetary policy, for the same sort of deli- cate adjustment. The danger is all the greater because the theory to which a number of Nixon's economic advisors subscribe places critical emphasis on monetary policy as the key to economic management.

Aside from the niceties of economic meta- physics and the relative merits in practice of different thedretical approaches, there is an overriding problem of economic management which has confounded the outgoing Admini- stration and which seems likely to confound the incoming one, as well. The American economy

is simply too big and too complex to be fine- tuned by either of the policy meat-axes. fiscal or monetary. Large-scale shifts in the Federal government's net contribution to overall demand or in the availability of funds to the private sector are suitable when large-scale changes in economic performance are desirable.

But marginal shifts in fiscal or monetary policy are just as likely to be swamped by compensat-

ing changes in the economy or to set off a pro- cess of economic overkill, as they are to be effective. As matters stand, price stability in

America means an intolerable level of unem-

ployment—perhaps as much as 6 or 7 per cent (which means well over 10 per cent in the ghetto). And average unemployment below 4 per cent means an intolerable level of inflation

at home and accelerated loss of competitiveness abroad.

The new President has already pledged him- self to two policies which seem bound to con- tinue and exacerbate the present disruption in the nation's market for long-term capital. He gas made clear his intent to accelerate Ameri- can defence spending far beyond any conceiv- able savings due to a Vietnam cease-fire. And simultaneously he has based his programme for the cities on turning over Federal revenue to private enterprise, in the form of tax credits for ghetto investments. Implementation of either of these policies (the former is far more likely than the latter to receive Congress's approval) would mean a bigger Federal deficit.

Similarly, on the labour side, Nixon's stated plans offer little hope for relief. American in- dustry is suffering from an unprecedented long- term cost push, with which automation cannot keep pace. Opening up the unions (more and more guild-like even in the most standardised occupations) is only one side of the problem. New numbers of workers, with individual skills and social mobility, are needed, too.

International economic stability, too, depends upon the Nixon Administration's confronting the structural problems within the American economy. The worldwide backlash from America's financial mismanagement during the past two years came close to producing chaos in international monetary relations. So far, the new Administration's policy on maintaining the price of gold and pushing world monetary re- form remains open—too open for comfort. And world trade will be the victim if an American failure to regain competitiveness produces a protectionist clamp down on imports to the United States.

But the overriding hazard for America and the world will be the acceptance by the Admini- stration of the terms of the economic problems it inherits. Concentration on the dilemma of in- flation versus unemployment is likely, under Nixon, to lead to greater economic restraint, with America's social stability and the world's economic growth the losers. Even more, the Nixon Administration's ability to maintain any sort of coherent and effective economic policy will be at risk. For what is true of American society at large is true of the American economy as well: the prerequisite for stability has become radical change. Organisation of the capital market and integration of the labour market are now the basic requirements for re- storing the elasticity of the American economy. And failure on the economic front will be fatal for the slim chance that the new President will, in fact, be able to govern the nation which so reluctantly elected him.