September 15, 1971
While there is no firm evidence of a strengthening in business activity, expectations are more bullish and there are tentative signs of a quickening in business investment spending.
A special survey of the District's eight largest commercial banks disclosed no pickup in domestic business loans during August and early September. Domestic business loan demand continued sluggish in this period, with only a few banks expecting a revival in the coming months. Five of the banks reported an expansion of credit resulting from the unsettled international monetary situation. These banks reported that outstanding lines of credit to Japanese banks were drawn to their full, and there were reports that some banks were unable to satisfy the demand for foreign credit due to the banks' participation in the voluntary credit restraint program. One bank reported participating in Japanese loans while one or two other banks reached their guideline ceilings.
Most of our directors were on vacation this week and could not be reached. Both directors contacted indicated that President Nixon's economic policies have dramatically changed attitudes in the business community. The directors summarized the response as "a 180-degree shift in regard to prospects". While there is no firm evidence of a pickup in business activity, there are tentative signs of a revival in business capital spending, tied to the passage of the investment tax credit. A large machine tool manufacturer is finding increased interest, but no increase in orders yet. A district railroad is reported to have speeded up the introduction of automatic signaling equipment as a result of the investment tax credit. The processed engineering division of a large conglomerate is now increasing its order backlogs, as is a division manufacturing heavy industrial engines.
No problems were reported by bank directors arising from implementing the wage-price freeze.
All our academic respondents were concerned about the slow pace of the business recovery, despite the President's new economic policies. Professor Wallich was skeptical about the short-term impact of the President's announcement that the freeze would definitely end November 13. He felt that continuance of the freeze was the President's biggest weapon—that too much was given away too quickly. Nevertheless, Professor Eckstein believes improved price performance is a political necessity, and thus is confident that "the necessary steps will be taken after the freeze. Professor Samuelson and Tobin both expressed agreement with the Okun proposal for Phase Two. Tobin is philosophically disposed toward limiting the power of a wage-price review board to publicity and not giving it compulsory powers.
Eckstein's preferred fiscal package would include an increase in the minimum standard deduction, a "permanent" 10 percent investment tax credit accompanied with elimination of the accelerated depreciation allowance, and a "stabilization" surcharge on corporate profits; i.e., raising the corporate income tax rate by 5 to 10 percentage points. He feels that the proposed step-down from 10 to .5 percent in the investment tax credit rate is too disruptive and must be changed in one of several ways: (1) exact a (smaller) permanent credit, (2) make the transition more gradual, or (3) give the President discretion on the date for cutting or eliminating the 10 percent rate. Professor Samuelson felt the 10 to 5 percent step-down in the investment tax credit rate would have good intertemporal effects. He agreed that combining the tax credit with the asset depreciation range (ADR) system was "too much"; Professor Tobin feels ADR should be abandoned in any case. Opposing permanent losses in Federal revenues, Tobin advocates a one-year suspension of the auto excise tax and a one year 7 percent investment tax credit or, alternatively, a net investment credit.
There was some degree of agreement on the appropriate course of monetary policy among three of the professors. To Tobin, "this is not the time for running a restrictive monetary policy." He fears a repetition of 1968 in reverse; i.e., the authorities must avoid overestimation of the fiscal stimulus package. Tobin urges getting interest rates down to the levels of last March and would not be distressed if that entailed a 10 percent rate of growth in the money supply. Although Samuelson wants attention focused on the rate of the business expansion, not on any particular rate of growth of the money supply, when pressed, he said that he would be disappointed by a rate of less than 6 percent. According to Eckstein, the primary responsibility of monetary policy at present is to prevent long-term interest rates from rising. Similarly, short-term rates should be held "relatively easy" to "let the program have its effect". The secondary responsibility of monetary policy during this period of "watchful waiting" is to avoid a rate of growth of the money supply of 10 to 12 percent. If there have not been more tangible signs of improvement in the economy by the time of the next open market committee meeting, Eckstein concluded that monetary policy would have to accept more of the burden of stimulating the economy's performance. Professor Wallich, on the other hand, felt that monetary policy should focus on getting back to a 6 percent rate of money supply, as long as this did not yield "fabulous" short-term interest rates. He cautioned that continued rapid growth of the money supply risks building in future inflation.