Stormy New Year in America
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By NICHOLAS DAVENPORT
IT is always useful for businessmen—not to mention journalists—to have an economic blueprint for the year issued in January by the head of state, even if it is tendentious, but this year the State of the Union message from the President is really meaningless. Some time ago Mr Johnson dropped a hint through his usual channels that he did not want to reach a final decision on extra taxation until the middle of the year. He should, of course, have raised taxes long ago, but with the cunning natural to a Texan politician he has been hiding the real cost of the Vietnam war and leaving it to the Federal Reserve authorities to offset the infla- tionary pressures by very dear money and a very tight credit squeeze. As a result, the build- ing and automobile industries have already suffered a sizeable setback. Housing starts are down by a over a third from the 1965 annual rate (which was about 1,500,000), bringing distress to the furniture and household durable trades. Motor-car sales have been falling since March and the total 'auto product' will be down by 10 per cent compared with 1965. Business out- lays on factories and plant are now estimated to rise in 1967 by only 5 per cent, according to one private survey—and by only 3 per cent ac- cording to another—against a rise of 16 per cent per annum for the past three years. Certainly these portents of recession made an increase in taxes seem too late. Could it be wise to raise corporate taxation when company profit margins and trading profits are already declining? Could it be wise to raise personal taxation when personal liquidity is sharply falling? (According to the National City Bank of New York, the liquid assets of households increased last year at the slowest pace for five years, namely, at an annual rate of $23,000 million against $37,000 million in 1965.) In the face of these ominous facts even conservative bankers had been coun- selling the President not to raise taxation in the January budget. Even Professor Samuelson had agreed with them. So Mr Johnson had good justi- fication in concluding that there was no need to apply more restraint than he has already done. And this has been plenty. In October last he suspended for sixteen months the tax credits on new business investment and the higher depre- ciation rates and at the same time he accelerated the payment of taxes for corporations. He might honestly claim that he killed the investment boom which had been overheating the economy.
But the absence of new taxation is not going to make anyone happier in America. It is a safe forecast that tempers will rise this year much more than the economy. In the first place, the mounting cost of the unpopular war in Viet- nam is making most people very angry. Up to June 30 military expenditures will be increasing by more than $3,000 million a quarter, bringing the war cost to an annual rate of between $20,000 million and $30,000 million and the total defence bill to an annual rate of 572,000 million (not far short of total personal incomes in the UK). Thereafter, according to Mr McNamara, military spending will decline, for the call-up is being slowed down, but six months' bitterness lies ahead. In the second place, there are thirty- two important labour contracts due for settle- ment this year and labour is in a truculent mood, having been angered by the rise in the cost of living last year (close on 4 per cent). The unions will be demanding double or treble the present guide-lines of 3.2 per cent. Indeed, managements are expecting their labour costs to rise between 5 and 10 per cent over the year. In the third place, businessmen have become exasperated with President Johnson, who misleads them about the cost of the war, who keeps them guessing about his fiscal intentions, who leaves them to fight dangerous wage claims in a slowing-down eco- nomy. Having been promised 'guns and butter,' the American nation is beginning to hate the guns and become browned off with the butter (which still leaves a section of the population living in more or less poverty). It can hardly be said that they are enjoying their booming 'full employment.'
The State of the Union message is not, how- ever, without meaning for the UK. As the Presi- dent has had to ask for an additional war appropriation of some $10,000 million and no longer has a subservient Congress to sanction extra taxation, he is still obliged to allow the Federal Reserve to go on running the economy. This means that they will probably not make money any easier or cheaper. They have already eased up more than many businessmen expected. Seeing the coming fall in investment spending, they have increased the money supply to the banks and brought down the Treasury bill rate quite sharply—the six-month rate by lf per cent to 411 per cent. That would seem to be the limit of the relaxation. If they eased up further they, might cause a flight of hot money and upset the capital side of their balance of payments. The war in Vietnam is costing the Treasury $900 million directly in foreign exchange and much more if the decline in the visible trade- balance is added. Imports of consumer goods last year were 25 per cent higher and the visible trade surplus has declined from $7,000 million in 1964 to $4,800 million in 1965 and to under $3,000 million in 1966. The lesson for us is written on the customs wall. While the Vietnam war lasts our exports will go on rising—perhaps at 6 per cent or more a year—but as soon as it stops our exports will decline. And in the meantime money will remain dear in America, which is not helpful for the start of reflation in the UK.
The City cannot therefore look for much en- couragement from Wall Street. The year closed with the Dow Jones index of industrial shares down to 785, which is above the worst but 20 per cent below the top. The well-known columnist Mr Eliot Janeway, who foretold the big slide, is still bearish, largely because of the growing lack of confidence in the President and the mounting muddle over war finance. Dear Mr Callaghan, is it not time for us to detach our monetary system from the long clawing hands of the American Federal Reserve?
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