The Economy: Stanching the Flood

The dollar-bolstering campaign that President Johnson sprang on an unsuspecting world during the first day of 1968 was conceived in secrecy worthy of a major military maneuver. Even as Johnson was winging around the globe last month, cables were flashing between Washington and his silver-and-blue jet, Air Force One. In all, about 50 people — from the White House, the Commerce, Defense and Treasury Departments, the Federal Reserve and the Council of Economic Advisers—worked on parts of the package, but only ten or so knew its full dimensions. When the finishing touches were finally completed, newsmen were summoned to the airplane hangar at the L.B.J. ranch for what they were told would be an important New Year’s Day announcement.

Johnson greeted them with somber words. “The time has now come,” he declared, “for decisive action to bring our balance of payments to—or close to—equilibrium in the year ahead. The need for action is a national and international responsibility of the highest priority.” Continued deficits, he warned, could “endanger the strength of the entire free-world economy and thereby threaten our unprecedented prosperity at home.”

With that, the President moved to stanch the dollar drain with the most Draconian measures yet. He outlined a five-point program aimed at cutting the deficit by $3 billion in the year ahead. Principal features: a reduction in U.S. investment abroad, particularly in Western Europe, to save $1 billion; a cutback in U.S. loans to foreigners to save $500 million; scaled-down Government expenditures overseas—by the Pentagon, by heavily staffed U.S. embassies and by G.I.s and their dependents—to save $500 million; deferment for two years of all but what the President called “the most important, urgent and necessary” travel outside the Western Hemisphere to save $500 million of the $4 billion now being spent abroad each year by U.S. tourists; a series of export promotion aids to increase the U.S. trade surplus, which now runs at more than $4 billion a year, by an additional $500 million (see BUSINESS).

Target & Muscle. The deficit grows out of the nation’s vast commitments around the world—and the insatiable wanderlust of millions of its well-heeled citizens. In 1967, the outflow turned to a flood—between $3.5 billion and $4 billion. Major factors included the tourist rush to Canada’s Expo 67, the outpouring of private funds to finance Israel’s costly war, the slowdown in Europe’s economies and, most important of all, Britain’s devaluation of the pound, which caused a speculative rush for gold and put intense pressure on the gold-backed U.S. dollar.

Along with his program, Johnson initiated a spate of wide-ranging actions to implement it. “We have a target,” he said, “and we are going to put all the muscle that this Government has behind the dollar.” He meant it. Three teams were dispatched abroad to urge “cooperative action” from America’s allies—one headed by Under Secretary of State Nicholas Katzenbach to Europe, another led by Under Secretary for Political Affairs Eugene Rostow to Asia, a third captained by Assistant Secretary for Economic Affairs Anthony Solomon to Canada. Preliminary negotiations were under way to offset the cost of keeping American troops overseas by getting West Germany to buy $700 million in U.S. Treasury bonds, Japan $500 million. A task force headed by New Mexico Publisher Robert McKinney, former Ambassador to Switzerland, was looking into ways to lure more foreign tourists to the U.S. The Commerce Department was recruiting a force of dozens of specialists to watchdog U.S. investments abroad.

Pop Goes the Diesel. The balance of payments deficit amounts to a trifling one-half of 1% of the nation’s $800 billion gross national product. But a continuation of such deficits could erode confidence in the dollar to the point where the potent U.S. economic diesel might just go pop. Congressmen generally agreed that something had to be done—quickly. There was grumbling on Capitol Hill, to be sure. Minnesota’s Democratic Senator Eugene McCarthy said that the moves were “too defensive—like punting on first down.” A number of Congressmen objected to the idea of curbs on tourists.

Nonetheless, Johnson and his legislative liaison men did an effective job of preparing Congress, taking into their confidence such key men as House Republican Leader Jerry Ford and Wisconsin’s John Byrnes, ranking Republican on the House Ways and Means Committee. Most important of all, the President had been in constant touch with Ways and Means Chairman Wilbur Mills, the Arkansas Democrat who remains the keystone to passage of Johnson’s proposed 10% surcharge in income taxes. Said Mills when the balance of payments program was made public: “I support it. Our situation is serious. We have to do something.”

First Order of Business. However, if Johnson is hoping that his tough measures will spur Mills to swifter action on the tax increase, he may be in for a disappointment. In announcing his program at the ranch, the President declared, largely for Mills’s benefit, “No business before the returning Congress will be more urgent than this: to enact the anti-inflation tax which I have sought for almost a year.” But Mills and several Ways and Means colleagues are still deeply disturbed at the rate of Government spending, and they do not intend to move the tax surcharge bill out of committee until Johnson does more to cut federal spending.

That will not be easy. With his budget message due at month’s end, Johnson is weeks behind in getting it ready and billions behind in getting it into any kind of reasonable balance. As of last week, anticipated federal revenues for fiscal 1969 were $125 billion, and spending requests from Government agencies totaled $149.5 billion (including $101 billion from the Defense Department, whose budget for the current year totals $70 billion).

If Johnson can sweat enough money out of the budget to satisfy Mills, he may get his tax surcharge reasonably soon. A reduction in federal spending would also go a long way toward eliminating the worrisome balance of payments deficit. In any case, the President—until now preoccupied almost exclusively with the war—is at last turning his attention to fiscal problems that have long been neglected.