Tuesday,. September 1.4, 1971 THE MICHIGAN DAILY Page Seven Tuesday, September 14, 1971 YHL MICHIGAN DAILY Page Seven Reviewing prospects for the Nixon economic plan (Continued from Page 1) means that foreign c e n t r a l banks which have accumulated dollars are no longer free to turn them in to the U.S. Treas- ury in exchange for gold at a price of $35 an ounce as they were permitted to do before Aug. 15. In addition, a tempor- ary 10 per cent surtax has been applied to nearly all dutiable imports into the United States. " The President proposed a number of budgetary adjust- ments, the net effect of which is supposed to be to stimulate economic expansion and job creation. Tax measures proposed in- clude repeal of the seven per cent exise tax on automobiles, the enactment of a 10 per cent tax credit-to be reduced to five per cent after one year-for business expenditures on ma- chinery and equipment, and the moving up to Jan. 1, 1972, of certain reductions in the per- sonal income tax which are now scheduled to 'go into effect on Jan. 1, 1973. On the expenditure side of the budget, reductions were proposed which would amount to $4.7 billion during the current fiscal year. These include a post- ponement of federal government pay increases, a ten per cent cut in Federal employment, a ten per cent cut -in foreign eco- nomic aid, and postponement of the President's proposals for federal revenue sharing with state and local governments and for welfare reform. In appraising the President's program, let me begin with the breaking of the link between the dollar and gold, because I be- lieve this is the most clearly desirable element in the pro- gram. It has been said that by discontinuing gold purchases, the President has established a system of flexible exchange rates between the dollar and other currencies. Strictly speaking, that is not the case, since other countries can, if they choose, continue to maintain fixed rates by buying and selling dollars in exchange for their own currencies just as they did before the President took his Aug. 15 action. However the objective of the administration's a c t i o n was clearly to induce other countries to permit their currencies to float against the dollar. Indeed, the temporary import surcharge ,seems to have been designed to encourage other countries to float their curren- cies, with the understanding that when this process was well under way, the surcharge would be removed. (The surcharge is a dangerous measure, because it invites retaliation and risks the setting off of an escalating round of trade restrictions.) Most major currencies are in fact now floating and have risen in value relative to the dollar. The real question is what happens next. The President in his Aug. 15 speech referred to the severence of the tie between the dollar and gold as "tempor- ary.". This' suggests the possibility that when the free market has produced sufficient adjustments in exchange rates to correct the U.S. balance of payments, the Michiga Union Billiards $1/hr. Table Tennis 50c 10 a.m.-noon Mon.-Sat. 1 p.m.-6 p.m. Sunday link to gold will be restored either at the old gold price of $35 an ounce or at a somewhat higher price. This would be a great misfor- tune, because it would simply reinstate the old system which has been the source of a se- quence of international financial crises in the last few years. The present situation offers a great opportunity for the United States to take the initiative in negotiating fundamental re- forms to strengthen the system by introducing a greater degree of flexibility of exchange rates on a continuing basis. The wage-price freeze should be viewed as a measure designed to hold the line while the Cost of Living Council works out a more permanent and more flex- ible procedure for exerting re- straint over wages and prices. In the absence of a freeze, there would be a serious danger of price and wage hikes in an- ticipation of the restraints while they were being worked out. 4'T h e possibilities for post- freeze machinery range all the way from a mild system of wage-price guideposts, such as was employed with some appar- ent success by the Kennedy and Johnson administrations before the pressures generated by the V i e t n a m military build-up caused them to collapse, to for- mal compulsory wage and price controls of the kind employed during World War II and the Korean War. Something between these ex- tremes seems likely, however- ,perhaps a wage-price review board of the kind advocated by Federal Reserve Board Chair- man Arthur Burns (who is a consultant to the Cost of Living Council) to focus on wage and price developments in key in- dustries,- combined with some more informal set of guidelines applicable to the rest of the economy. Dylan Seeger Baez For the best in contemporary and traditional folk and blues music It seems generally agreed that if the program is to stand much chance of success, it must have the support-or at least the acquiescence - of key business and labor leaders. One of the major issues is likely to be the control of prof- its. Corporate profits b e f o r e taxes are currently less than eight per cent of GNP, a very low ratio by historical standards, If the economy expands in line with the administration's hope, both profits and rates of re- turn on investment are likely to rise substantially. This would simply be due to the expanded volume of produc- tion and sales even though prof- it margins do not increase. Such a rise from present depressed profit levels seems justified; the focus should be on trying to prevent sharp increases in profit margins. However, there is a danger that such a distinction will not be accepted by organized labor, especially because, as explained below, it feels that an excessive share of the tax reduction pro- posed by the Nixon administra- tion would go to business. An excess profits tax has been proposed in some quarters as a means of siphoning off "un- justifiable" profit increases, but I believe most economists would oppose this because it would be likely to lead to waste, ineffic- iency, and evasion. A good deal of evidence has accumulated to suggest that it is not possible by monetary and Borders Book Shop Sfine used books ~'art books Sall paperbacks 1/2 price Swe order new books we search out of print titles Now at a new location 518 E. WIIAM corner of Maynard-& William 668-7653 fiscal policies alone to achieve a combination of reasonable price stability and high employ- ment that the American public is willing to accept. Accordingly, many economists, including myself, welcome the efforts of the Nixon administra- tion to develop a program of wage-price r e s t r a i n t (often called "incomes policy" in other countries). It should be recognized, how- ever, that it is a very difficult task-one that is not rendered any easier by the many past statements by the President and his advisers branding wage-price policies of the kind now being espoused as either ineffective or stifling and intolerable. The President's fiscal propos- als are the most questionable element of the new program. In part, the problem is one of rhetoric. The statement in the President's speech that "Tax cuts to stimulate employment must be matched by spending cuts to restrain inflation" im- plies that private spending cre- ates jobs while public spending merely causes prices to rise. The fact is that both fiscal theory and empirical evidence strongly suggest that a dollar of public spending is no more and no less potent in creating jobs than is a dollar of private spending, whether on consump- tion or on investment in ma- chinery and equipment. Indeed, on paper, the Presi- dent's program matches expen- diture cuts against tax reduc- tions so precisely as to raise doubts that it would create any additional jobs at all. In fact, however, the Presi- dent's proposed fiscal program does seem to provide some mod- est stimulus to the economy, This is because some of the ex- penditure cuts he proposed for the current fiscal year involve expenditures for programs__ notably revenue sharing and welfare reform - that Congress was unlikely to have enacted in any case. Moreover, the other parts of his program have some poten- tial expansionary effects, Many government programs provide for the expenditure of a speci- fied number of dollars without regard to prices. To the extent that the wage- price freeze and the post-freeze wage-price restraint program do hold down prices, these govern- ment expenditures will repre- sent a larger real demand for goods and services and will therefore have a greater stimu- lative effect on production and employment. The import surtax will raise the price of imports and lead some Americans to buy domesti- cally-produced goods -such as automobiles -- rather than im- ports. Likewise to the extent that the freeing of foreign exchange rates causes the dollar prices of some foreign currencies-for ex- ample the Japanese yen-to rise, there will be both reductions in U.S. imports and increases in U.S. exports, both of which will help to stimulate domestic pro- duction and employment. According to most economic forecasts, the economy was ex- pected to grow rapidly enough to reduce the unemployment rate slightly from the current level even without the Presi- dent's proposed New Economic Policy. Tentative forecasts that have been made incorporating the President's program suggest that it will further accelerate growth and reduce unemploy- ment. Finally, even if the President's fiscal program does i m p a r t enough stimulus to the economy to get it moving vigorously back toward full employment, some -- - -- - observers nevertheless find the program objectionable. There are two reasons for this. One is that in the eyes of some the tax reductions proposed are slanted too much toward busi- ness. The investment tax credit, when combined with earlier ac- tion by the Treasury Depart- ment to liberalize the tax treat- ment of depreciation, w o u I d provide about $82 billion of tax relief for business. This is much greater than the tax relief for individuals under the program. This imbalance in the proposed tax program seems not only inequitable but politi- cally unwise, because it reduces the chances of achieving or- ganiszed labor's acceptance of the new wage-price p o 1i c y, which is absolutely vital to the success of the program, Apart from the alleged im- balance in the tax program, some find the whole idea of the new tax cuts objectionable since they sacrifice some $10 billion a year of the long-term revenue capacity of the Federal tax sys- tem, which will be badly needed to finance vital social and en- vironmental programs in the years ahead. According to this view, which I share, our national priorities would have been better served if the President had proposed increases in federal expenditures rather than tax cuts. Dollar devaluation suggested (Continued from Page 3) In Washington, President Nix- on's deputy press secretary Ger- ald L. Warren had no comment on the action of the European finance ministers. He said Treasury Secretary John B. 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