THE ECONOMY
Whatever its cost in human terms, the buildup in Viet Nam will neither stimulate nor strain the American economy to any important extent. These will be the likely effects:
· SPENDING: The rise in defense outlays—a moderate $1 billion to $2 billion now—will not significantly affect the deficit in the federal budget. The deficit for fiscal 1965 was $3.5 billion, is expected to be $4.2 billion in fiscal 1966. Additional step-ups in Viet Nam spending later on may indeed swell the deficit. Even so, the Government does not expect to cut back its spending for construction and welfare programs, though the pace of some of them may be slowed.
· TAXES: Washington has no intention of canceling the second stage of its excise-tax cuts, scheduled to increase consumer purchasing power by another $1.5 billion annually beginning Jan. 1. It will probably postpone further reductions in income taxes, which some federal economists had hoped for next year.
· PROCUREMENT: Most of the extra defense spending will flow immediately into the domestic economy, will have as much stimulus as the Government’s other spending programs. One significant increase: the Pentagon expects to order 800 more helicopters this year.
· JOBS: The doubling of draft calls, to 35,000 a month, will trim unemployment in the under-20 age group where the rate is a high 16% (v. 4.4% for the labor force as a whole).
· MATERIALS: In a $660 billion economy, the mild and manageable defense demands are not nearly great enough to require allotments or rationing. If need be, the Government can draw upon strategic stockpiles of 100 critical materials from aluminum to zinc.
· CONTROLS: Because the demands are unlikely to create boom and inflation, they will not bring forth controls on prices, credit or wages. There are no plans to impose excess-profits taxes—because they are unnecessary, and because the Administration wants to help the economy escalate too.
The economy, as Lyndon Johnson observed last week, continues to be remarkably vigorous after 52 months of expansion. Corporate earnings are rising so rapidly that even at the present 48% corporate-tax rate, federal revenues will increase some $7 billion this year. The two largest steel manufacturers, U.S. Steel and Bethlehem, reported last week that second-quarter profits were, respectively, 34% and 12% higher than in the same period last year. General Motors’ second-quarter earnings were up 6%, and its first-half profits of $1,274,843,649—by far the largest for any corporation in history—surpassed its full-year profits for any year prior to 1962. Toting up the results of 526 companies that it regularly surveys, the Wall Street Journal calculated that their total profits had risen 15.9% in the second quarter.
On Wall Street, the combination of stronger earnings reports and milder presidential action than many people had expected was bullish news. After having been in the doldrums for weeks, the market started a rally on the morning of President Johnson’s televised speech. Defense stocks ticked up, and so did steels, autos, railroads, airlines, oils and most other major industry groups. The Dow-Jones industrial average advanced 4 points on the day of the speech, 6 points the next day, 71 points the next day—and closed the week with a gain of more than 18 points, at 881.74.
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