MONEY Economic lessons from Nixon
NICHOLAS DAVENPORT
On Friday President Nixon sends his State of the Union message to Congress, I know what he is going to say, for he has said it already. In a television interview he has declared: '1971 will be a good year and 1972 will, be a very good year'. It will have to be because at the end of 1972 he will be up against a challenging Democrat in the Presidential election. But the reason for his remarkable optimism is that at long last he has discovered Keynes. He used to jibe at President Johnson for allowing the budget to run into huge deficits but he is now con- fessing to a deficit of over $15,000 million in the financial year ending in June and as he is reducing corporate taxation immed- iately, he will probably run into another deficit for the next financial year. In other words, he intends to put a finish on the re- cession and pull down unemployment, which has grown to 4.6 million, by the simple Keynesian technique of deficit spending. 'I am now a Keynesian in economics', he told his startled television audience.
No politician in the western capitalist world can hope to stay in power if he allows unemployment to rise too high. In America 4.6 million is the highest number out of work for nine years and accounts for 6 per cent of the labour force. The President is grappling with it in a sensible capitalist way. He is going to cut business taxes. He is extending the depreciation allowances on capital expenditures which can be .set off against tax. These are expected to reduce company tax payments by $2,600 million in 1971. 'Past experience', said Mr Nixon, 'demonstrates that depreciation liberalisation will stimulate the spending on new plant and equipment which has been levelling off, and thus create jobs'. Capital expenditures had, indeed, been forecast to slump badly. Manu- facturers in 1970 had been working at only 75 per cent of capacity.
Significantly, Mr Wilbur Mills, chairman of the House Ways and Means Committee, and other conservatively minded Congress- men, approved this resolute Keynesian action. They wisely decided that if deficit spending was likely to promote economic growth through these tax allowances it would have no adverse effect upon the inflation or ultimately on the budget. The recession after all did not kill the inflation but only helped to slow it down to around 4 per cent. Recently some alarm has been caused by the announcement of Bethlehem Steel that it was putting up the prices of some of its products, but the President has intervened, threatening to allow higher im- ports of steel, and there is a good chance that this steel jockeying will be stopped. The important point of Keynesian principle which has been accepted is that when you have an economy operating well below capacity you can push for economic growth without worrying about inflation, The President's Council of Economic Advisers have, in fact, pressed for a real growth target of 7f per cent in the GNP
from the last quarter of 1970 to the last quarter of 1971. Without some form of incomes policy this is not likely to be' accepted by the Federal Reserve, who have control of the money supply, but so far the Federal Reserve have fully backed an ex- pansionist policy, bringing their discount rate to member banks down to 5 per cent. This has enabled the commercial cost of money to be brought down by two points or more. The 'prime' rate of the commercial banks is now 6 per cent, having been as high as 81
per cent less than ten months ago. The demand for business loans still remains slug-
gish, indicating that the recession is by no means over, but the fact that the monetary Establishment is behind the President in his
expansionist policy is some assurance that the economy will be moving up again before long. For which we should all be thankful in the UK, What effect expansionism will have on the dollar is anybody's guess. The world has had another package ,of dollars handed out• from the payments deficit in 1970 and may have another in 1971, which will be put to good use in the Euro-dollar money market. This does not necessarily mean that the dollar is over-valued or that the dollar price of gold must be raised. The American government is confident that the dollar is the world's trading currency and that if any country is not satisfied with its present rate of exchange with the dollar it must adjust its own rate, that is, up-value its currency in terms of the dollar. But the dollar with its fixed measure in gold will remain un- changed. In other words, the official price of gold remains at $35 while the unofficial price of gold on the free market can go where it likes. Lately it has been as high as $38. We may expect some countries to con- vert more of their dollars into gold or suits but as long as the American expansion is orderly and not too rapid I do not anticipate a major monetary crisis in 1971. All in- dustrial countries have an inflation problem and none should throw bricks at America, for solving hers in an intelligent way.
Economic conditions in the us are, of course, quite different from those in the UK —we have a more virulent type of wage- cost inflation and less unused resources— but it would be foolish of our Government not to draw some lessons from Mr Nixon's activist and expansionist policy. Mr Wilson has been saying that the Government has no economic policy at all. This is an absurd comment. Mr Barber has repeated that until the unreasonable and inflationary wage claims have abated he cannot endorse a reflationary policy. But it would be a fair comment to say that the continuation of very dear and very tight money is a wrong and dangerous policy. The stream of bank money which irrigates commercial and industrial life is drying up and more and more companies will be driven into bank- ruptcy.
No one can complain of inefficient companies being pushed out of business but this harsh monetary squeeze is indiscriminate and many useful and efficient companies may be driven to the wall. To sacrifice our economic growth on the altar of a doc- trinaire monetary policy would be the height of folly. Last week I gave the tech- nical reasons why Bank rate should be iM- mediately reduced. Cheaper money, even If the supply is still restricted, is the crying need of the hour. America has acknowledged it and we should follow its lead.
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