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What else can be done by Burns' Federal Reserve? It can scarcely expand the money supply much faster without risking a still greater surge of inflation. Burns is all too well aware that the Administration has failed to accomplish its prime gameplan assignment of keeping the budget in balance. And by not holding down its own spending, the Government has contributed to the demand that has been driving prices skyhigh. By not collecting enough taxes to pay its bills, it has failed to set a psychologically important example of belt tightening for business, labor and consumers. By not avoiding deficits, the Government has been forced to resort to heavy borrowing. In the middle of a cash shortage, that borrowing only diverts already scarce funds from socially desirable uses, such as housing.
Nixon has clearly let economic forces get out of hand. To keep part of an ill-advised campaign promise, he agreed to let Congress cut the 10% income tax surcharge to 5% at the start of 1970 and eliminate it entirely at midyear. He offered only feeble opposition when Congress turned a desirable tax-reform bill into a tax-cutting bill that set broad rate reductions for future years. On top of that, federal budgetmakers underestimated the severity of the economic squeeze that would be produced by their policies and those of the Federal Reserve. Interest payments on the national debt have been unexpectedly high because loan rates have not dropped as the Administration anticipated. Rising joblessness has boosted the bill for unemployment compensation. When the postal strike led to a 6% federal pay increase six months before schedule, the last hopes of a surplus vanished. Budget Director Mayo disclosed last week that the budget will show a $1.8 billion deficit this fiscal year, and a $1.3 billion deficit next year. Even those estimates may be optimistic. They are based on a January forecast that taxable corporate profits would hit $89.5 billion this year. In the year's first quarter, profits ran at a rate of only $85 billion. Unless the business upturn foreseen in the game plan starts soon, the U.S. stands to run a much deeper budget deficit.
Unfair and Slow
The failure of fiscal policy has left Burns in a position he devoutly hoped to avoid. In a sense, he is being forced to try to steer the economy by monetary policy aloneāor, as one economist put it, "play God." The Federal Reserve must try to gauge the exact amount of money that the economy needs, and economics is not that precise a science. Burns has other arguments against exclusive reliance on monetary policy. If money is squeezed, he says, the policy unfairly hurts particular types of borrowers. Among the victims: local governments, which often must sell bonds in order to raise the funds needed for schools, hospitals and other public works. Further, Burns argues, monetary policy moves in long lags; it takes from six to twelve months for a change in the Federal Reserve's money-supply operations to be felt throughout the economy.
Burns has recently been telling friends that "monetary policy has done about all it can. It cannot be expected to do much more." By recommending an incomes policy, he seems to