CONGRESSIONAL RECORD — SENATE

January 18, 197

Page 576

NATIONAL ECONOMIC SURVEYS FROM THE NEW YORK TIMES AND THE WASHINGTON POST

Mr. MUSKIE. Mr. President, I would like to join in welcoming the new Members to the Senate and in welcoming veteran Members back for the 96th Congress.

1979 will be a critical year for the economy, and a critical year for the congressional budget.

Inflation accelerated last year to close to a double digit rate. The momentum of that inflation will persist into this year. On top of that momentum we face the pressures of the OPEC oil price increase, rising food prices, labor cost increases due to higher social security taxes and the increased minimum wage and major union wage negotiations.

The outlook for economic growth and employment has also worsened. Economists forecast that economic growth may slow late next year, pushing up the unemployment rate. Some economists believe that the economy may experience a recession.

This uncertain economic outlook will provide the backdrop as the Congress formulates the Federal budget for fiscal year 1980. We face the challenge of constructing a budget which seeks to control Federal spending and fights inflation but at the same time avoids a serious economic downturn that would sharply increase unemployment. That will not be an easy task.

I would like to take a few minutes to review the budget timetable for the months ahead.

On January 22, the President will announce his budget recommendations for fiscal year 1980.

During the 10 days following the release of the President's budget two important economic reports will be presented.

On January 25 we will receive the annual report of the Council of Economic Advisers.

On January 29 the Congressional Budget Office will release its economic report and 5-year projections.

In early February the Budget Committee plans to hold a series of hearings on the President's budget and the economic outlook for 1979 and 1980.

On February 6, Dr. Charles Schultze, chairman of the Council of Economic Advisers, will testify before the committee on the administration's economic forecast and budget recommendations

Later that day, Dr. Alice Rivlin, Director of the Congressional Budget Office will testify on the economic outlook and fiscal policy options.

On February 7, Jim McIntyre, Director of the Office of Management and Budget, will testify on the President's spending recommendations for fiscal year 1980.

February 8, Treasury Secretary Blumenthal testifies on the outlook for international trade and the dollar and on the administration's tax proposals for fiscal year 1980.

Later in the month, on February 21 Harold Brown, Secretary of the Department of Defense, will discuss the administration's defense budget.

And the following day, February 22 Federal Reserve Chairman Miller will appear before the committee to discuss the relationship between congressional fiscal policy and the plans and objectives indicated in the Federal Reserve Board's economic report, which will be released

on February 20 in accordance with the Humphrey-Hawkins Act.

Further Budget Committee hearings will take place later in February and into March.

During the next 2 months the committees of the Senate will be preparing their fiscal year 1980 budget recommendations. Those recommendations, which will be completed and sent to the Budget Committee by March 15, will provide the Budget Committee with essential information needed to mark up the first budget resolution for fiscal year 1980.

The first budget resolution for fiscal year 1980 should reach the Senate floor for debate in late April.

The schedule for preparing the fiscal year 1980 budget is clearly a full one, but putting together the fiscal year 1980 budget will be the most challenging task for the Budget Committee and the Congress since the budget process began.

Given the magnitude of our task, it is not too early to begin by taking stock of the economic outlook and taking a good look at some of the key policy issues Congress will face this year.

Senators interested in getting a head start on these issues may profit by examining two analyses.

One collection of articles was published January 7, 1979, as a supplement to the New York Times. Another review appeared in the January 14, 1979, edition of the Washington Post.

Mr. President, I ask that these articles be printed in the RECORD at the conclusion of my remarks.

They offer an informative and wide-ranging analysis of the outlook for the economy and the key policy issues facing the Congress this year.

The viewpoints expressed in those articles are, of course, those of the authors and not my own or those of the Budget Committee.

I urge my colleagues to look through this collection.

It is not too soon to start thinking hard about the tough budget decisions we face this year.

There being no objection, the articles were ordered to be placed in the RECORD, as follows:

[ From the Washington Post, Jan. 14, 1979]

BUSINESSMEN FRETTING OVER DOOMSAYERS

(By Bradley Graham)

The U.S. economy spun fast and furiously in the final lap and raced across 1978's year end mark in a robust finish.

Like kids on a roller coaster, business executives squealed delight at healthy fourth quarter sales figures and a rush of orders. But beyond the dizziness was the sobering fear that the thrills wouldn't last.

There was good reason to fret. Inflation persists, wage-price controls loom, interest rates spiral up, the unemployment rate is stuck, the dollar remains weak, and political uncertainties abound.

Little wonder the nervous finger tapping on boardroom tables has quickened and business confidence has crumbled. The latest confidence survey conducted by the Conference Board, a nonprofit research organization in New York, indicated that the 1,600 chief executive officers surveyed are as morose as ever about the overall economy for 1979. The board's November index of executive assessment of future business conditions hit a low of 33 on a scale of 100.

Such distress does seem exaggerated in view of what are some still very encouraging signs of economic strength. After all, production is up and so are incomes and the number of new jobs.

Also, corporations have been careful to keep inventories under control and have maintained strong cash positions.

But the polls suggest that business managers would rather believe the worst. They are listening to the forecasts of their economic advisers, which by-and-large are dismal, and adjusting their investment strategies accordingly — which is to say, they aren't spending or expanding more than is absolutely necessary.

It's hard to blame them. Never in recent times have so many forecasters foreseen a slowdown. If it comes, this recession will be the most widely advertised in memory.

According to the latest government survey of capital investment plans, capital spending will increase only 3 percent in real terms in 1979, as compared with 4.5 percent in 1978. Many analysts say this forecast is exceedingly optimistic and are predicting instead a real decline in investment this year.

"In the aggregate, the picture's relatively gloomy," said Robert Gough, senior economist with Data Resources Inc. in Boston.

The basic problem is one of attitude, not need, since the need for heavy investment is certainly there — in energy and transportation,in major bridge construction and railroad improvements, and in a variety of other industries where plant and equipment have aged.

"You have the underlying factors for a large capital goods type expenditure, if you could ever get it along," observed Kathryn Eickhoff, vice president for Townsend-Greenspan, an economic consulting firm in New York.

Further, there is considerable vigor evident still in a number of major industries. Most notable is the takeoff in aircraft which, on top of an influx of tool orders from the auto industry, has also propelled the machinery industry into a record boom. Elsewhere, the paper and petroleum industries are prospering; the electronics field is expanding aggressively to meet world competition; steel, having won protection from foreign competition, is picking up again; and retailing has surged.

But even in such pockets of good fortune, the outlook for future spending remains cautious and conservative. Machinery makers, for instance, have resisted the temptation to build new capacity to handle new orders, believing the upturn is temporary.

In other instances, companies have coped with higher sales simply by hiring more people rather than by adding plant space. One side benefit of this was a surge in national employment, resulting in the creation of 3.3 million new jobs last year. At the same time, this preference for short-term hiring over long-term investment helped depress further the nation's productivity rate and mortgaged the future of a number of industries at considerable later cost.

Where investment is going on, it is as in the steel industry's case, simply to update old equipment and make minor improvements rather than to add capacity. Elsewhere, it has been prompted not by expanded sales or the need for greater efficiencies, but by the demands of regulation.

A recent survey by the Manufacturing Chemists Association, for instance, predicts that the chemical and allied process industries will spend $7.8 billion on capital projects in 1979, a 7 percent increase over 1978. But 15 percent of that will go just to satisfy government health and pollution rules. Moreover, auto king Henry Ford has estimated that meeting government standards will gobble up 80 percent of his company's capital spending between now and 1985.

This funneling of capital outlays into projects mandated by regulation has been cited as a major cause of the lag in U.S. productivity and seeming slump in the spirit of inventiveness that once distinguished American industry. The feeling that something deep in the economy has gone awry became more pervasive and worrisome in 1978 as the signs became more evident.

Among the most disturbing indicators are these:

The number of U.S. patents issued each year to U.S. inventors reached a peak in 1971 and has declined steadily since. But the number granted to foreign inventors has increased steadily since 1963. Last year, foreigners claimed more than one third of all patents issued in the U.S. across a broad range of fields.

The U.S. balance of trade has worsened, due not only to increased oil imports as is often mentioned, but also to more imports of foreign manufactured goods.

Productivity gains have slowed severely. In the past decade, the rate of growth in U.S. productivity has averaged only half of what it was the previous 20 years. In contrast, productivity growth rates in Europe and Japan have been on the rise.

Spending on research and development isn't what it used to be. From 1953 to 1986, U.S. investment in research grew at an impressive rate of 10 percent annually in inflation-adjusted dollars. However, investment in research by all sectors in the U.S. over the past 10 years has shown essentially no growth in constant dollars. And what funds U.S. corporations are expending on R&D have been going into short-term quick-profit products rather than into long-term, basic research of the kind that leads to major breakthroughs.

No one quite knows just how to explain these alarming trends. Some claim that Yankee enterprise has been choked by both excessive government regulation and an unfavorable business tax climate. Others insist that the business community itself is largely to blame for its slump. The argument here is that managers, particularly managers of big businesses, have become lethargic, short-sighted and cranky. They have been especially slow to seize opportunities in foreign markets.

In any case, concern over what has happened to America's innovative spirit last year prompted the Carter administration to launch a major study of the problem. The study is being coordinated by the Commerce Department and involves more than 15 agencies. A final report, including recommendations for the president of things to be done to foster innovation in private industry, is expected by April.

One recommendation sure to be included in the final report will urge liberalization of the tax laws to provide incentives for investment and generally to put a greater emphasis on savings over consumption. Already Congress has begun to move in this direction.

Last year's tax bill included a cut in business taxes of $3.7 billion. Among the major changes were a paring of the top corporate rates from 48 to 46 percent, rate reductions for small corporations, a more generous investment tax credit and a new jobs credit targeted at the hardcore unemployed. In addition, investors received a reduction in the capital gains tax from 49 to 28 percent, worth an estimated $2.2 billion.

Unfortunately, passage of the tax bill came too late in 1978 to influence capital spending plans for 1979, and some analysts argue the changes still won't be enough to lift the American business community out of its doldrums.

To turn the prevailing mood around, the business view is that action is needed on several fronts, including a more liberal tax policy, a relaxed regulatory policy, a less aggressive antitrust policy, a national export promotion program, and, in general, a more cooperative spirit between business and government such as exists in Japan and leading Western European countries.

Above all, business leaders have called for greater certainty in government policy. They have applauded White House promises to hold federal spending in check and trim the budget deficit, and they appear willing to accept the discipline of the Federal Reserve's tight money program so long as it offers hope of wringing inflation out.

Their chief worry is whether President Carter and the Congress can hold to their conservative pledges in view of the pressures sure to build on them this year — from growing ranks of unemployed as the economy slows, from borrowers who can't afford high interest rates, from special interest groups seeking to preserve pet programs.

"We can live with slower economic growth in 1979 and 1980 — even a mild recesssion," Irving Shapiro, chairman of Du Pont told a gathering of corporate chairmen in December. "But we cannot afford a reversal of the policies now in place. One must hope that the resolve of the administration will be a match for the pressures certain to appear next year."

FOURTH QUARTER BUILT MOMENTUM — RECESSION WILL START LATER, LAST LONGER THAN EXPECTED, WHICH WON'T HELP CARTER

(By Art Pine)

President Carter is facing some good news and some bad news in this year's economic outlook:

The good news is that as analysts now figure it, the economy won't be falling into a recession as quickly as the forecasters once thought. The odds are now that the downturn won't come until sometime in the fall. A slump by spring or even midyear now seems unlikely.

The bad news for Carter is that when the recession does come, it's likely to be a bit deeper than most of the experts had been predicting — and it's apt to spill over well into 1980, leaving the unemployment rate high at the start of next year's presidential election campaign.

That means Carter is less likely to be able to pull off the trick some of his political advisers envisioned — that is, to get the recession "out of the way and done with" before the 1980 campaign begins. And if the recession proves deeper than expected as well, Carter's political troubles will increase.

The changes from the earlier forecasts stem basically from two factors:

First, the economic statistics for the fourth quarter of 1978 have been coming in far more robust than expected, suggesting there probably will be enough momentum to carry the economy through the first six months of this year. In particular, consumer spending has continued relatively high.

At the same time, the steeper than predicted oil price increase announced by the petroleum exporters' cartel last month is considered likely to add to inflation and make businessmen more wary of investing. Although the recession still is apt to be mild, the risks now are greater that it could deepen.

"There's no question the current outlook reduces the chances for a soft landing," says Arthur M. Okun, former Johnson economic adviser who earlier had been more ebullient about prospects for 1979. "There's no sign of a recession now," Okun says. "But it's hard to see how we can escape one."

Alan Greenspan, President Ford's chief economist, agrees the later than expected recession could leave Carter "in rather difficult shape" for 1980. "Rather than look benevolently on the numbers that are coming out, Carter ought to be apprehensive," Greenspan says. Ford lost in just such a box.

Here's where most of the private forecasts come out:

OUTPUT

The economy is likely to grow between 1 and 2.5 percent this year — a forecast that implies continued moderate increases during the first half of the year and small to moderate declines in the final two quarters — enough to qualify technically as a recession, and perhaps even more.

Most economists still expect consumer spending to taper off before midyear, as buyers realize they're too heavily in debt. Housing is apt to slow from its present pace. And business investment will remain flat. On the good side, the economy still is in balance, with no major distortions.

INFLATION

Although the Carter administration still is predicting that inflation will slow to just above '7 percent — from about 8.5 percent in 1978 — most private economists are forecasting that prices will continue at an 8 percent pace or so, even with the new guidelines program.

Besides the larger than expected oil price hike to contend with there's also the Federal Reserve Board's latest rise in interest rates, and a spate of government induced cost increases, such as the higher minimum wage and Social Security payroll tax hikes.

UNEMPLOYMENT

With the economy's growth rate slowing, it's almost certain the jobless rate will begin rising — perhaps to 7 percent by year end, from the present 6 percent level,and possibly to 7.5 percent in 1980 before finally edging down.

Although the high jobless rate isn't likely to hurt as much as in previous years — because workers are better protected by unemployment insurance and private jobless benefits — many low-skilled and "marginal" workers will be in bad straits. And that could spell trouble for Carter in 1980.

(These forecasts already include the likely impact of such outside forces as the increase in crude oil prices announced last month for 1979 by the Organization of Petroleum Exporting Countries, and the effect of the 1978 tax bill. The OPEC hike sounded big, but wasn't much larger than expected.)

There's still some debate about the depth, if not the likelihood, of the coming recession. The Carter administration, along with a minority of private economists, still is predicting there won't be any downturn — just sluggish growth ranging between 2.5 and 3 percent this year.

Although more realistic administration economic advisers gradually have been trimming back their forecasts, Carter himself is said to be convinced he can avert a real downturn. He told a group of businessmen recently the economy will fall into a recession only if Americans "talk ourselves into one."

But that kind of optimism increasingly is being abandoned by non-government economists, most of whom seem convinced a recession is virtually inevitable and now are arguing only about its timing and depth.

Otto Eckstein, another former Johnson economic adviser who now heads Data Resources, Inc., an economic forecasting firm, has just altered his 1979 forecast to push the recession into the third and fourth quarters, with a sharp drop in output in the final three months of the year.

Eckstein's figures, however, include a prediction of a 75 day long auto strike against General Motors during the fall. While the inevitable production loss stemming from the strike almost certainly would be made up in the first quarter of 1980, the shutdown would worsen the late 1979 performance.

The risk in whether the sluggishness deepens into a significant economic slump. Right now, analysts don't see that as likely, if only because the economy still is too well-balanced. The inventory pile-up that preceded the 1974-75 recession, for example, just isn't in the cards.

To many economists, the biggest uncertainties are in the two big areas over which Carter doesn't have any real control — the money and credit policies set by the independent Federal Reserve Board, and the fate of the dollar in the hands of foreign currency traders.

Thanks to the new six-month money market certificates, the economy has been insulated from the recent tightening of monetary policy. The Fed's steady upward push in rates has only begun to cut into the housing boom, and signs are new starts still will come in this year at 1.7 million or so.

But the fact is, analysts still don't know for sure how the economy will react if interest rates go significantly higher. The prime rate is expected to reach 13 percent or so by late spring. If economic activity slows sharply in response, it could quickly exacerbate the recession.

The dollar problem is even more uncertain. With the trade balance improving and the administration's dollar rescue plan in place, most analysts had expected the dollar to remain stable through most of the year, edging up some when the U.S. enters its recession. But now some say it could slip further.

For all the talk about continuing pockets of high unemployment, a good many analysts are convinced the economy already is approaching a "demand-pull" phase of the cycle, where economic overheating is likely to pull prices up even more rapidly. A mild recession could help stave off that situation.

It's too early to tell which prediction will prove correct for 1979 — the private forecasters' warning of a recession or administration's more optimistic scenario. But, to President Carter, at least, the race may prove more than academic. It could mean the 1980 election as well.

DOLLAR DRAMA COULD RETURN FOR 1979 SEASON

(By Hobart Rowan)

After a fairly tranquil 1977, last year proved to be traumatic on the international economic front. A dramatic collapse of the U.S. dollar in foreign exchange markets raised new doubts about the ability of the international monetary system to cope with world problems, and produced the first serious challenge to the role of the dollar — the European Monetary System.

As the new year starts, there is more confidence in Washington that there will be a greater dollar stability but this is far from a solid consensus. There are many analysts and officials who think that the dollar will undergo another testing period early this year. And even those American officials who are optimistic about the dollar concede that almost everything depends on a successful fight to slow the rate of inflation in the United States.

It would be very difficult to visualize a dollar course this year as erratic as in 1978. In the 13 months prior to the Nov. 1 emergency "rescue" package, the dollar dropped 38 percent against the Swiss franc; 34 percent against the yen and 26 percent against the German mark.

The spectacular recovery in three weeks after Nov. 1 recouped as much as one third of those losses. But in the final weeks last year, as much as one half of the post-November dollar gain was yielded, a response primarily to a larger than expected oil cartel price increase for this year, and the political-military upheaval in Iran, which scrambles the world oil supply outlook.

The net gain for the dollar from the October low point to the end of the year was about 9 percent against the Swiss franc and the Japanese yen and about 4.5 percent against the German mark. So the dollar starts off 1979 still substantially depreciated from levels prevailing during the fall of 1977.

Almost universally, experts expect that while the U.S. trade deficit will continue to be very heavy for at least a couple of years, it will be substantially lower this year than in 1978. And because of an enormous U.S. surplus on services and "invisibles," the closely watched current account should go down dramatically. By the end of the year, some of the more optimistic economists at the Treasury and Council of Economic Advisers think the current account could be coming into balance or even a surplus.

In part, this improvement would be the result of the depreciation of the dollar, which should help restore a traditional trading edge in manufactured goods exports, plus a slowdown in the U.S. economy that will dampen the import flow. Almost surely, the official administration figures understate the probable degree of sluggishness of the domestic economy in 1979.

Treasury calculations are that the overall trade deficit will drop from about $35 billion last year to about $25 billion in 1979, with a reduction in the current account deficit from about $17 billion — $18 billion last year to about $6 billion this year.

According to conventional wisdom, dramatic improvement in the trade and current accounts, coupled with the new American policy of strong and active intervention, which is backed by a $30 billion "hard money" kitty, should assure a stronger dollar. And in fact, that is the consensus that emerged from a survey of 250 businessmen and bankers conducted at the end of December by the American Express International Banking Group.

Yet, there are nagging doubts that the dollar's performance will match the statistical promise. For one thing, markets are anxious to see an actual turnaround in the trade deficit, not just the forecasts. Then, there are those who believe that neither President Carter nor the U.S. Federal Reserve System will have the spine to stay with austere policy long enough to wring inflation out of the economy.

A leading U.S. policy maker said that the official optimistic forecasts for a reduced trade and current accounts deficit "are very solid. If you assume, as I assume, that fiscal and monetary policy will stay tight, then it's unrealistic to think that the dollar will come under renewed pressure."

Foreign exchange markets probably have not yet fully comprehended the degree and extent of the American policy shift inherent in the Nov. 1 stabilization package. Without backsliding into a "pegged" rate for the dollar, the U.S. government has committed itself to preventing the kind of speculative, one-way assault on the dollar that took place before Nov. 1.

President Carter has a stake in making this policy work — indeed, his own political future may be tied irrevocably to the dollar's health — and it is clear that if all of the $30 billion kitty gets chewed up in dollar-propping activities (although no one expects that), officials plan to marshal additional intervention resources.

Meanwhile, Carter's advisers are steeling themselves for continued nervousness in the exchange markets. The sometimes dramatic movements of the dollar, the yen, and gold make good headlines for stories that are often overwritten. The "hype" comes through vividly on the radio and television news shows.

"Politicians, heads of state, financial analysts, financial writers, all haven't learned to live with foreign exchange markets as they have with the stock market" says CEA member William Nordhaus.

"We somehow have not got used to the fact markets are noisy things. To the extent that we have to live in a market-based system, we have to learn that the noise level is somewhat higher than we'd like."

There are many other important international problems or events coming up on the international economic scene this year, all related to each other, and to the dollar crisis itself:

Multilateral Trade Negotiations (MTN): This is legislative priority "A" for the Carter administration, which anticipates getting an MTN treaty through Congress after a political fight comparable in intensity and importance to the SALT agreement.

Lower tariffs — although the cuts will not be so deep as first hoped by Special Trade Representative Robert S. Strauss — and lowered trade barriers should help improve trade and help to counteract the creeping increases in protectionism in evidence last year. Congressional failure to approve on MTN would be a setback of the first magnitude.

Energy: President Carter is faced with the need to make a decision on decontrol of domestic oil prices. Every indication is that the higher prices and shortages created by the unexpected combination of the 14.5 percent OPEC boost and the Iranian production shutdown will postpone full decontrol.

Instead, a phasing out of controls over a number of years seems to be in the cards.

North-South issues: An acceptable "common fund" to help stabilize commodity prices — an urgent demand of the poor nations — has eluded negotiators so far. The dialogue has been abrasive.

But it is possible that a compromise may be reached this spring at the United Nations Conference on Trade and Development at Manila.

In reality, the rich nations think that the poor will get more benefit from a successful MTN than from a common fund. They will also benefit from a new issue of SDRs (Special Drawing Rights) by the International Monetary Fund, activation of the IMF's "Witteveen Fund," and, ultimately, from an expanded World Bank operation. In principle, the U.S. will go along with a World Bank executive board decision early this year to double the bank's capital.

The European Monetary System (EMS) : Although stalled by a spat between the French and the Germans over agricultural price supports, the common market countries are due to experiment with a new scheme designed to create more stability of exchange rates within Europe.

Officials here have little doubt that the EMS timetable was advanced because of concern over the dollar, with the hope that Europe could insulate itself from the dollar's erratic movements. But no one knows whether it will work. Perhaps its greatest significance — like the Nov. 1 dollar support program — is evidence that over the long haul, governments well may be forced to consider new and fundamental changes in the existing international monetary system.

The EMS is a partial throwback to a fixed exchange rate system, and the U.S. dollar support program is a dramatic modificationof the former commitment to letting the market have total say about exchange rates.

Whether these changes will constitute enough of a "reform" of the international monetary system, over the long run, is a question no one can answer with certainty at the moment.

The Tokyo economic summit: Fifth in the heads-of-state series, this economic summit will deal importantly with the mirror image of the U.S. trade deficit — the enormous Japanese surplus. To look at the bright side, one can consider that despite 1978's difficulties, the international adjustment system worked pretty well, leaving only two major imbalances — the U.S. current account surplus of about equal magnitude. German economic growth appears to be improving smartly (although the Germans once again are worried because inflation has climbed to the astonishing rate of 3 percent). And the OPEC surpluses have come down to modest levels.

Thus, it will up to the Tokyo summit, with Prime Minister Ohira as the host, to grapple with the U.S.-Japanese trade distortions, in the context of slow economic growth in most of the industrialized world. Quick fixes are not available.

Should the dollar still be in trouble when Carter and his peers go to Tokyo, it is possible that all of the old ideas and perhaps some new ones for international monetary reform will be brought up, although there is no formal plan now for such a discussion.

"When you get right down to it," says a leading administration economist, "economic policy in this area, as in all others, gets overwhelmed by actual events."

CARTER'S LATEST BUDGET POLICIES FAMILIAR, FULL OF IRONIES

(By Art Pine)

Three years ago, then-President Ford announced a tough new anti-inflation measure: a sharply pared-back "austerity" budget calling for massive cutbacks in traditional Democratic social programs. His theme: A "new realism" was needed for the economy. The only major question was, could he pull it off?

Next week, President Carter — who defeated Ford in part because of those very austerity policies and then stimulated the economy to create jobs — will propose a similar set of cutbacks that some out-of-work Ford aides may find familiar. The theme again: "A new reality" for the economy.

The fact that policy once again has come full circle may not be the only irony that onlookers find in the coming round of policy pronouncements. Carter is heading into 1979 facing still another paradox as well — and the question, as in Ford's day, still is, can he pull it off?

For the first time since the president took office, the administration finally has begun to get its economic policy act together: The White House now is united on the need to fight inflation. Carter has set a tight budget. He's imposed voluntary wage-price guidelines. And he's accepted high interest rates.

At the same time, however, in part because of its past mistakes, analysts say the administration probably has less chance than ever before of pulling off its twin economic goals — those of dampening inflation and averting a recession late this year and early in 1980.

Indeed, in the minds of many onlookers, the administration is facing a series of serious risks: Its voluntary wage-price guidelines are widely expected to blow up after the Teamsters negotiations in March. The coming recession could well bust the budget. And tight money could worsen the slump.

Moreover, Carter's decisions now could well prove crucial to his 1980 reelection chances. The policies the administration sets this month will help shape the economy in 1980. If the administration errs visibly now, there's little it will be able to do to correct its mistakes before the election.

Carter's 1979–80 economic program — an assortment of policies designed to cover all bases in the fight against inflation — includes these elements:

Budget: An unusually austere budget for fiscal 1980, which begins next Oct. 1, designed to hold overall spending to $533 billion and to trim the deficit to just over $29 billion, down from a red ink figure of $42 billion or so this year.

The overall spending total by itself is about $16 billion less than would be needed to maintain current programs intact in the face of inflation. But Carter plans to boost defense spending even more than is needed to offset inflation. So cutbacks in most other areas will be even heavier than some had thought.

Wage-price guidelines: The administration's new wage-price guidelines will prove their mettle — or else their ineffectiveness — this year, with enforcement beginning in mid-January after a few start-up snags. Few believe the effort will succeed. But Carter is pushing it anyway, to help slow the increase in wages.

The general expectation is that the Teamsters settlement will wreck the program, but the administration could well emerge only scathed — not mortally wounded — from the fray. There's also a battle looming over Carter's new "real wage insurance" tax rebate in Congress.

Monetary policy: Although the White House technically has no power to affect the Fed's money and credit policy, top officials have publicly embraced the Fed's new move to high interest rates, with Treasury Secretary W. Michael Blumenthal asserting that policy should remain tight until inflation wanes.

Carter's endorsement of the new higher interest rate policy marks a visible departure from the administration's earlier opposition to the Fed's tight-money moves. As late as last summer, top White House officials still were complaining publicly whenever the Fed boosted rates.

Taxes: Carter won't propose any further cuts in income taxes or even a rollback of the new boost in Social Security payroll taxes. But the White House will send Congress its proposal to offer a tax rebate as "wage insurance" for workers who may fall behind inflation because of the wage guidelines.

The proposal, scheduled to be unveiled by the Treasury this week, would offer refunds of up to 3 percent of the first $20,000 a worker earns, depending on how far the inflation rate outstrips the administration's 7 percent wage guideline. The plan would cost just under $5 billion if inflation were to hit 8 percent this year.

Congressional leaders already are fearful the House will turn the proposal into a plan to "index" the tax system for inflation — something Carter considers inflationary.

The series of proposals marks a sharp turnabout from 1978's economic policy prescription.

Carter went to Congress at this time last year seeking a tax cut for more economic stimulus and added public service jobs. And, despite some talk of austerity, the administration eschewed any tough anti-inflation moves.

This year, Carter significantly has made fighting inflation his No. 1 priority, coupling budget tightening with the new wage-price guidelines program and a push to trim back government regulations — all aimed at easing business cost pressures. To some, it's a born-again version of economics' old-time religion.

In a large measure, it has been the administration's own mistakes in 1977 and 1978 that have forced Carter policy makers into this year's austerity programs. Lack of White House attention to the worsening inflation problem helped drive the dollar down. And many of Carter's 1977-78 actions exacerbated the spiral.

It was the need for the emergency dollar rescue plan last November, however, that really cemented administration policy for 1979. Once that step was taken, it was almost too late for Carter to turn back. To make the dollar rescue credible, a tight budget was needed. The rest followed suit.

Coincidentally, the change of direction falls into line with the policy prescription most economists had been urging anyway. Even if inflation hadn't speeded up, the economy already had come so far that some analysts were worried about overheating. And the jobless rate has fallen far faster than expected.

The alarming speedup in inflation also resolved another one of Carter's big problems: It united his economic advisers and political lieutenants on the seriousness of the wage-price spiral — and the need to act boldly to try to do something about it.

In the minds of many analysts, the political-economic split — along with Carter's own refusal to recognize inflation as the paramount problem — had been a major cause of the confusion that characterized administration economic policy in 1977 and 1978.

Now, the administration appears to have begun to get its act together. Even house liberals such as Vice President Walter Mondale and domestic staff chief Stuart E. Eizenstat are spouting the anti-inflation line. And the fiscal 1980 budget due out Jan. 22 will show the results.

The question is, now that the administration has united behind a single, reasonably coherent policy, can it succeed In making its plans work? To some analysts, the wheel-spinning Carter did in his first two years in office only made inflation more difficult to deal with. The odds are tougher now.

There are these problems:

Carter's new pledge to hew to a $30 billion-or-under budget deficit — the heart of his new austerity program — may well go down the drain if the economy falls into a recession, with neither Congress nor the administration likely to be able to control it.

Any time the economy slows markedly, federal spending increases because the government has to pour more into unemployment benefits. At the same time, tax receipts are apt to be down sharply. And Carter's $30 billion figure is based on an economic forecast most analysts consider unrealistic.

The nation's inflation problem is likely to prove more stubborn than it would have a year ago — not only because the price spiral is moving more rapidly than it was last year, but also because the more rapid price increases have been "built into" higher wage boosts.

Moreover, many of the inflationary measures Carter endorsed — or at least did not fight — in 1977 and 1978 now are beginning to take root. Among them: the recent rise in payroll taxes, a higher minimum wage level, expensive farm subsidies and price boosts for sugar and milk.

If the guidelines program fails, it could set off a new round of wage and price increases in anticipation of mandatory controls. More importantly, Congress might be prodded into giving Carter controls authority if the current effort goes down the drain.

The economy could be buffeted by international pressures that aren't really under Carter's control — such as a new run on the dollar, which could add substantially to the domestic inflation rate. Any new moves in that direction would require even tighter policies here at home.

Carter also soon will have to face a decision over how rapidly to phase out controls on crude oil and gasoline prices — issues policy makers agree the White House must confront but finds difficult to do quickly with the current inflation. Almost anything Carter does will prove controversial.

Admittedly, there's always a chance that the administration may succeed in its 1979 policies — that inflation will wind down a bit, that the economy won't fall into a recession and that the dollar will recover its earlier losses.

As the nation heads into 1979, the odds still are stacked against the administration's new efforts. But the next few months will tell whether Carter has acted in time to get his economic policy house in order, or whether it's too late. As in the case of Gerald Ford, his reelection chances may depend on the outcome.

THE URBAN CRISIS HAS NOT BEEN REHABILITATED AWAY

(By Susanna McBee)

Every few years someone pipes up with the proclamation that the urban crisis has vanished..

Richard Nixon did it in 1973 when he declared, "City governments are no longer on the verge of financial catastrophe . . . The hour of crisis has passed."

Harper's magazine editors did it last month when they announced in a headline, "'The urban crisis leaves town and moves to the suburbs."

Such booming conclusions are at best illusory (and at worst fatuous) because they lead us to think of cities as a monolith. They are not. Some are in solid fiscal shape. Some are still in trouble.

The good news for 1979 is that many urban experts do not expect any other major city to teeter on the fiscal brink the way Cleveland, New York and Newark have done.

The bad news is that certain older cities in the Northeast and Midwest are still fiscally fragile and could suffer severe stress if the national economy takes a dive.

"When the country comes down with a bad economic cold, these cities come down with fiscal pneumonia," says John Shannon, assistant director of the federal Advisory Commission on Intergovernmental Relations.

Among those distressed cities are Detroit, St. Louis, Buffalo, Pittsburgh and Philadelphia, he said.

Such cities, according to economist Deborah N. Matz of Congress' Joint Economic Committee, never fully recovered from the 1973-1975 recession, "and if we have another one, they'll be in even worse shape."

Ironically, this is considered a good time for cities. We can see positive signs all around us. Look at Quincy Market in Boston, Logan Circle in the District, Fells Point in Baltimore or Queen Village in Philadelphia.

Houses are being rehabilitated; businesses are moving into charming arcades and malls; whole neighborhoods are being upgraded; developers are performing plastic surgery on the faces of downtown America.

To be sure, cities have had massive injections of federal aid in recent years.

Last year the total amount of federal aid to state and local governments was $80 billion, about $30 billion of which went to localities.

But the giddy days of federal wine and roses are over.

The cutoff of anti-recession aid, which in two years totaled $3.2 billion for state and local governments, had an extra sharp sting for a number of cities.

It forced Detroit to cut its city payroll by 348 employees; Newark dropped 441; New York decreed a hiring freeze; Chicago decided to sell off some unused city-owned land.

New Orleans was not hit directly, but a city spokesman said the cutoff "caused us to look down the road, and we saw what was happening with federal aid as a whole." So the city — swimming against the anti-tax tide — raised three local levies to avoid a $30 million deficit.

Donald Haider, a deputy assistant secretary of the Treasury, explained how important the anti-recession money was to cities, which had depended on it to maintain services and avert layoffs without raising taxes. "It was glue money," he said. "They could use it to plug leaks. Now they're telling us, 'You've blown a hole in our budgets: " Haider cited a new report by the Council of Economic Advisers that predicts that state and local surpluses, which dwindled rapidly late last year, will vanish completely this year.

Although the Carter administration has said it will try again to get an anti-recessionaid bill — sharply reduced and directed only at cities with severe problems — through Congress, many urban experts do not expect much new federal money for urban America.

Richard P. Nathan of the Brookings Institution here says, not at all facetiously, that "the heyday of urban policy may turn out to have been the period just before the announcement last March of the Carter urban program."

He noted that the administration backed down, last year on some of its efforts to "target" funds to distressed cities and that Congress Itself is leery of the idea.

MONETARY JUNCTURE CRITICAL

(By James L. Rowe, Jr.)

Monetary policy is at a critical juncture.

The Federal Reserve Board — which spent the spring, summer and early fall boosting interest rates to retard excessive money growth — is faced with a money supply that has suddenly begun to decline.

The question the Fed must resolve soon is whether that decline is a technical, flukey one or whether it is real.

If policy makers guess wrong, they run the risk of plunging the nation into a recession or exacerbating the very inflation they spent all of 1978 fighting.

Even if the decline is real — and the consensus of most analysts is that the contraction is temporary and the money supply will again grow sharply — the Fed will be confronted with the dollar problem. Should it ease up on its program of monetary restraint in the interest of preventing a recession, if that easing could trigger a renewed wave of dollar selling in foreign currency markets.

"It is a puzzlement," congressional economist Robert Weintraub said of the abrupt decline in the amount of currency and checking accounts. "If we have another two or three months of this we're not only going to have a recession, it'll be a wing dinger."

But, Weintraub concedes, he is no more convinced that money growth has really slowed than he is that the money growth will take off again within the next few months.

The Fed seems convinced that the recent declines in the money supply are temporary, that it must keep short-term interest rates high. The Fed has not budged one bit from the 10 percent target it set on its key interest rate (the so-called federal funds rate).

Although economists are divided on just how important the money supply is to inflation and economic growth, most now agree that if the money supply grows faster than the real output of goods and services, inflation results and if it grows more slowly, a recession can occur.

The Fed has been managing monetary policy for the last year with an eye to slowly winding down the rate of inflation without sending the economy into a tailspin.

It seemed up until October that the Fed had failed to curb demand for money. Despite near record interest rates, the money supply grew rapidly and demand for credit continued apace. But beginning in November, just after the President announced a dollar-propping program that included further sharp increases in interest rates, the money supply began to slow its growth, then actually fall.

According to figures prepared by the Federal Reserve Bank of St. Louis, the basic money supply that grew at an annual rate of 8.5 percent in the first 10 months of 1978, fell at an annual rate of 1.7 percent during November and December.

Although Federal Reserve Board chairman G. William Miller recently complained that the press had not taken notice of the Fed's seeming success in slowing money growth, the central bank, by its actions, appears convinced that it has not in fact succeeded in slowing money growth.

The sudden slowdown may be due to "technical factors" such as a run up in the size of Treasury accounts, which the government will reduce in the weeks ahead, giving renewed impetus to money supply growth.

Lawrence Kudlow, vice president of PaineWebber, said the brief abatement in money growth appears to be more related to such technical considerations rather than to Federal Reserve Board tightening. He expects money growth to "re-enter the highly in flationary 7.5 to 8.5 percent growth rang that has existed during most of the past two years."

But many monetary economists criticize the Federal Reserve for trying to reduce money growth using interest rate targets The agency tries to figure out what level of federal funds rate (the interest banks charge each other for overnight loans of excess reserves) is compatible with the money growth target it seeks.

Inevitably, these economists say, the Federal Reserve thinks it is tightening monetary policy because interest rates are going up, when in fact demand for credit is boosting interest rates. But at some point, the economists contend, the Fed does get a federal funds rate that not only begins to squeeze demand for credit, but squeezes too much. By the time the agency recognizes it has overtightened, so to speak, the economy is headed into a tailspin.

ORGANIZED LABOR HEADING INTO HEAVY BARGAINING YEAR
(By Frank Swoboda)

Organized labor is headed into a major new round of contract bargaining this year, with many unions publicly rejecting President Carter's latest anti-inflation program. The potential confrontation between labor and the White House has cast a shadow of uncertainty over the nation's economic outlook.

With approximately 3.8 million workers covered by major union contracts up for renegotiation this year, government labor relations experts already are predicting a sharp increase in strike activity as workers in key industrial sectors of the economy test the government's voluntary 7 percent wage guideline.

The outcome of this year's negotiations is particularly critical to the economy since it is the start of a new three-year bargaining cycle. Wage settlements this year will serve as the "pattern" for other unions through 1981.

In an apparent effort to avoid a direct showdown with labor at the bargaining table, the Carter administration already has eased its wage standard to accommodate some union critics.

The original wage standard proposed by the Council on Wage and Price Stability was the most rigid government wage standard in modern labor history. Of particular concern to the unions was the fact that the 7 percent limit applied to both wages and fringe benefits.

With inflation rising at double-digit rates and fringe benefits now accounting for as much as 30 percent of total compensation in major union contracts, the new standard would have limited "cash wages" to 3 or 4 percent a year. Wage increases could be even less, union officials argued, when the cost of simply maintaining existing benefits for such items as pensions and health care was taken into account.

Responding to this criticism, the White House excluded all costs for maintaining existing pension benefits and part of the health care costs from the 7 percent standard.

Key union leaders insist, however, that the government did not go far enough. As a result, many union leaders have called on their members to simply ignore the government anti-inflation program.

United Rubber Workers President Peter Bommarite, in a New Year's message to his union's membership, says the URW will ignore the government program when it negotiates new contracts this spring with the Big Four of the rubber industry — Goodyear, Firestone, Goodrich and Uniroyal.

David Fitzmaurice, president of the International Union of Electrical Workers, is equally direct in his instructions to union negotiators this summer in the electrical manufacturing industry.

"We've instructed our people to negotiate as if there were no guidelines — to negotiate for the needs of their members and to strike, if necessary," Fitzmaurice says. Fitzmaurice calls the White House wage guidelines "unrealistic."

The key to this year's negotiations, however, does not rest with either Bommarite or Fitzmaurice. Both the White House and other major unions are looking to this year's Teamster negotiations for a new national trucking contract to set the tone for the bargaining cycle.

It was basically to accommodate the Teamsters and some of their specific problems at the bargaining table that the White House relaxed its wage standard. The union has a large pension liability — no one is sure quite how large — as the result of various legal actions against the management of the union's retirement programs by the Labor Department. In addition, the union has large funding liabilities as a result of the 1974 federal pension law.

The new wage standard will allow the Teamsters to exclude all the added pension costs from the 7 percent government guideline.

So far, Teamster President Frank Fitzsimmons basically has refrained from any major attack on the White House anti-inflation program. After initially attacking the 7 percent standard as unfair, Fitzsimmons has avoided fiery rhetoric both publicly and privately. Negotiators at the union's mid-December meeting with trucking management say Fitzsimmons was even more moderate during the closed bargaining session than he was in public.

Clearly, the biggest negotiations after the Teamsters are the talks between the United Auto Workers and the Big Three of the auto industry — General Motors, Chrysler and Ford.

THE EASTERN GIANT AWAKENS TO TRADE

(By Jay Mathews)

PEKING.—Trade between the United States and China may triple in 1979 as American bankers, oilmen and hotel chain executives scramble to do business with the awakening giant of international commerce, businessmen and China trade experts in the Orient say.

The decision to open full diplomatic relations with Peking is expected eventually to win billions of dollars in contracts for U.S. companies to drill for oil in the South China sea. Peking's demand for new mines, tourist services, airplanes, trucks and steel mills could swell trade figures even more.

But even if two-way Sino-American trade does grow to about $3 billion this year, from about $1 billion in 1978, it will still approach only a tenth of total American trade with Japan and only half of trade with little Taiwan. Oriental trade experts think China's trade with the United States could climb much higher, but as one said, "There are just so many imponderables."

Congress, for instance, now in an unhappy mood over Carter's failure to consult in advance about normalizing relations with Peking, has to cooperate if Washington is to extend most favored nation status to Peking. China will continue to buy U.S. goods even without getting this lower tariff arrangement for its own exports, but analysts say the gesture in favor of Chinese goods would create good feelings, which would help American traders in situations where they compete closely with Japan or Germany for the Chinese market.

The often politically volatile Chinese must also stick with their extraordinary decision to shelve the economic self-reliance policy of the late chairman Mao Tse-Tung in favor of an unabashed effort to borrow billions of dollars from capitalist banks in Japan and the West. Peking earns $2 billion to $3 billion a year in foreign exchange by selling goods to and receiving overseas Chinese remittances from Hong Kong. Its exports to the rest of the world, particularly Japan, are increasing, but these are mostly low-grade consumer goods like fireworks, feathers and pig bristles that cannot hope to raise the capital needed for the post-Mao leadership's ambitious modernization program.

Wang Yao-ting, chairman of the official China Council for the Promotion of International Trade, has laid out in the clearest fashion to date China's willingness to go deep into debt. Wang said Peking was considering adopting methods suggested by foreign customers such as "use credit from foreign trade organizations or foreign banks." The previous Chinese method of delayed payments over five to seven years for purchases like the Pullman Kellogg fertilizer plants "could not meet the needs of our rapidly growing foreign trade," Wang said in an interview in the January issue of the official magazine China Reconstructs.

Petroleum could become one Chinese export that draws considerable foreign currency, but China needs to extract oil from offshore wells in quantities enough to feed both its growing industries and its foreign customers, and for that it first needs considerable investment in new drilling equipment and technical expertise.

The oil companies from the United States and other nations that eventually win the right to construct the new oil fields are expected to take payment in the form of oil from those fields. China will probably use this method of payment in many other manufacturing plant deals.

Louis E. Sauboulle, the Bank of America vice president in Hong Kong who specializes in China trade, said he thought Peking's new commitment to foreign commerce was "firmly based."

Recent increases in trade with the United States, however, have resulted largely from "increased sales of agricultural commodities to China, particularly wheat," he told businessmen in San Francisco.

Five American banks have now opened full correspondent relationships with the official Bank of China, including American Security Bank in the District. Many more are moving to offer the full resources of American investment capital to Peking. The other five banks include First National Bank of Chicago, which got a jump on competitors a year ago by severing banking ties with Taiwan; Citibank; Chase Manhattan and Bank of America.

U.S. banks must still use foreign intermediaries in some transactions until the 28-year-old problem of blocked claims and frozen assets is solved. Treasury Secretary Michael Blumenthal and Commerce Secretary Juanita Kreps are scheduled to visit Peking later this year. They may work out ways to pay off about $196 million in claims on formerly American-owned property in China with about $78 million in Chinese funds held frozen in U.S. banks since 1950.

When asked about the claims and assets issue in a press conference with U.S. journalists Jan. 5, Vice Premier Teng Hsiao-ping said he thought it was "not a big problem."

In recent weeks the Chinese have signed capital development agreements of enormous size that will affect trade figures with the United States for years to come.

The largest American deal to date was signed here Jan. 5. U.S. Steel agreed to build a huge iron ore processing plant worth about $1 billion in an area of Northeast China. The plant, scheduled to be completed in four years, will allow a 25 percent increase in Chinese steel production.

The Fluor Corp. signed a $10 million agreement to plan a copper mine that is expected to lead to a construction contract totaling $800 million over the next several years, the largest U.S.-China trade deal to date. The hotel subsidiary of Pan American Airways won a contract to build hotels in China worth $500 million, and manage them for several years. Other American-backed hotel chains have left Peking recently reporting similar arrangements.

Peking, which already owns several Boeing 707s, bought three Boeing 747s and took options on two more last month (December) for a total $250 million deal. Coca-Cola signed an agreement to sell and later bottle its product on the Chinese mainland for the first time in 30 years. This brought cheers from teetotalling foreign travelers who have had to make do with China's own medicinal tasting orange soda pop.

Some bankers in the Orient have begun to express vague worries about China's ability to pay for the size and speed of development it seeks. The National Council for U.S.-China trade, the principal American commercial liaison group, estimates Peking will purchase $40 billion in foreign technology between now and 1985. "By present international standards, they've got enough credit worthiness to absorb that," said one banker. He cautioned, however, that such figures remain for now just estimates.

The Chinese may find they do not have enough trained personnel, English-speaking guides and living facilities to absorb quickly so many projects directed by foreign experts. Some major foreign technology projects, like the massive steel mill outside Wuhan built with German and Japanese help, have experienced serious delays in the past, although these they have been blamed on political disruption, which the government now says is over for good.

Continued bad grain harvests could also cut into Peking's ability to pay for new technology. The 1978 harvest of 295 metric tons failed to meet the leadership's expectations. It forced the purchase of more than $500 million in American grain, a drain on foreign exchange that brings no lasting benefits to the nation's industrial base. Chinese officials have suggested that such large grain purchases will continue for years to come.

OPEC AND IRAN CLOUD OIL COST

(By Art Pine)

When Congress passed the energy bill last year, there was widespread relief that the U.S. finally had turned a corner. Although the new law isn't apt to cut consumption much, it was a symbolic commitment to a national energy policy. At last there was an overall framework for U.S. initiatives.

Now, barely three months later, the nation is facing its biggest uncertainty over energy since the days after the 1973 oil embargo. The political turmoil in Iran — and the steeper than expected oil price hike by the Organization of Petroleum Exporting Countries — have shattered the once favorable outlook.

Plans to lift government price controls over crude oil and gasoline early this spring have been dealt a new setback. And suddenly, policy makers have begun hinting that the nation may have to resort to rationing if the situation doesn't stabilize soon.

The cloud-shrouded picture stems primarily from the Iranian oil workers' strike. The unrest has slashed that country's daily crude oil production from 6 million barrels a day — about one-fifth of the oil cartel's total output levels — to practically zero, in the space of a few weeks.

While the Energy Department estimates that the U.S. can go as long as six months or so before feeling any pinch from the cuts private experts aren't as sanguine. Data Resources Inc., a private consulting firm, figures that the impact could be felt as early as April 1. After that, it's downhill — fast. But the Iranian situation isn't the only element in the energy picture for 1979.

Prices which moderated in 1978 after a big surge during the previous year, are expected to speed up sharply again in 1979. Consumption — mainly because of the coming recession — will remain flat. And imports will rise.

There are these predictions:

Prices: DRI's forecast predicts that overall energy prices will rise 13.3 percent this year — compared with 4.8 per cent in 1978 — primarily because of last year's natural gas deregulation bill and the expected phasing out of crude oil price controls beginning next May.

Of this, more than 5½ percentage points stems from expected decontrol of oil prices, 2.7 percentage points from higher electric utility bills, 2 percentage points from higher gas prices and 1 percentage point from increased coal costs. The OPEC price rises will add another 1½ percentage points.

Ronald M. Whitfield, chief of DRI's energy forecasting team, lists these changes in government regulations as major factors behind this year's price boosts: The new natural gas bill, eliminating the two-tier price system; oil price decontrol; new strip mining regulations; and more clean air rules.

Consumption: Mostly because of the coming economic slowdown, overall energy consumption is expected to remain relatively flat this year, rising by a scant 0.6 percent, following increases of 3.4 and 3½ percent in the two previous years.

Despite worldwide grousing about the huge — and, to foreigners, seemingly uncontrollable — U.S. energy appetite, consumption in this country has been tapering off steadily in the face of constantly rising prices ever since the 1973 embargo. If the recession runs deeper, intake could slow even more.

Imports: In large part because of the OPEC price rise, the dollar volume of U.S. imports of foreign produced petroleum is likely to rise moderately — perhaps to 8.4 million barrels a day in 1979, up from 8.34 million barrels last year, according to DRS.

Nevertheless, the overall U.S. trade deficit still is expected to shrink visibly, and the "current account" — the closely watched measure that includes not only trade but tourism, investment flows and military sales as well — is expected to approach near-balance.

(The OPEC price hike, while larger than expected, still isn't likely to be that crippling, at least according to most forecasters. While technically the rise totals a scary 14½ percent between now and next October, it actually amounts to 10 percent for the year — close to the 6 percent forecast earlier.)

Supplies: Apart from the Iranian oil situation, the rest of the energy supply outlook here looks relatively good: in the wake of last year's natural gas legislation, there's a surfeit of gas in this country, at least for the moment, and coal supplies are expected to hold their own through 1979.

The impact of all this on U.S. energy policy is to throw what had been a set of reasonably clear commitments into a sea of confusion.Before the latest OPEC price rise and the Iranian shutdowns, Carter had one distinct energy goal for 1979 — to begin pushing domestic prices toward the world market prices,

But now, however, with inflation and the larger-than-expected OPEC price boost making price raising so difficult politically, Carter is said to be seeking administrative alternatives to outright decontrol — by revamping existing regulations.

Moreover, while supplies are reasonably plentiful now, policy makers have raised the possibility that the administration also may have to move simultaneously to rationing if the Iranian cutbacks continue. Energy Secretary James R. Schlesinger mentioned the prospect a few weeks ago.

LOOKING FOR BETTER TIMES IN RUSSIA

(By Kevin Klose)

Moscow.— When Soviet police dragged Francis J. Crawford out of his silver-grey Volvo station wagon one night last June and held him in Lefortovo prison for 15 days' intensive interrogation on black market currency allegations, it seemed as though the KGB had deliberately aimed a body blow at American business interest in better bilateral trade.

After all, the chairman of Crawford's company, International Harvester, was Brooks McCormick, a staunch supporter of more east-west trade, and an active member of the U.S.-U.S.S.R. Trade and Economic Council, which aids companies seeking Russian or American markets.

The mood of most of the 23 permanent American corporate representatives, who were having another disappointing year of trade with the Soviets, turned bleak. One resident director quickly packed his bags and left for good, fed up with the difficulties and unpleasantness of life here. He was also reported to be apprehensive that he might become the next unwilling target of what Americans here regarded as Soviet retaliation. The Crawford case was felt to be a reaction to the arrest and pending trial of two Soviet United Nations diplomats on charges of naval espionage.

But six months later, with the hapless Crawford convicted in a transparent political trial and allowed to leave the country, it can be said that the Americans once more are looking cautiously if somewhat pessimistically for better times ahead for U.S.-Soviet trade.

Why this should be so is a bit of a paradox.

With few exceptions, the American businesses footing stiff annual bills to keep offices, directors, quarters and staffs afloat here — Marshall I. Goldman, associate director of Harvard's prestigious Russian Research Center estimates it at an average of $500,000 annually per corporation, have not found a paradise here for capitalists.

The vast new markets for sophisticated American goods and services that the 1972 Soviet- American trade agreement seemed to promise have never developed. The U.S. embassy here projects that U.S. exports of non-agricultural goods — machine tools, computers and the like — may total no more than $550 million for the year, down more than $30 million from last year's indifferent $586.7 million.

The Russians continue to be short of hard currency and stubbornly try instead for compensation agreements of little interest to American corporations. Soviet negotiation practices try the patience of an elephant and the resourcefulness of a Houdini. Most of the country's trade with the U.S. remains in agricultural products.

Continued dollar erosion has sent skyrocketing the costs of maintaining Moscow backup services in Western Europe. And foreign competitors are aided by the complexities and delays of U.S. government imposed licensing requirements for many technologically advanced, big-ticket items.

Business and politics have been inter-twined from the beginning of the new trade relationship. The Jackson-Vanik amendment to the 1974 Trade Act tied tariff relief for the U.S.S.R. to eased Soviet emigration restrictions. The Soviets refused to accept these and other conditions related to easier credit imposed by the Stevenson amendment.

These factors have inhibited trade in fundamental ways, creating an atmosphere of tension and Russian resentment that is now heightened by the sudden appearance of the Chinese in world markets as the U.S.S.R.'s bitterest foe seeks to modernize its backward economy.

Nevertheless, a number of American companies and the Carter administration now are hopeful that U.S. trade with the Soviets may improve.

Although the Pullman Corp. has withdrawn from permanent accreditation here, three other companies this year have gained permanent resident status: Dresser Industries, Armco International, and Control Data Corp., raising the total U.S. companies here to 25.

The U.S.-U.S.S.R. Trade and Economic Council during the past two years has added about 20 additional U.S. firms to its membership rolls. The council's 280 member companies pay dues starting at $1,000 to use low cost translation rates and other services when their representatives are here in Moscow conducting business or talking about future deals.

The reasons for the newly accredited companies are both tactical — impending major deals — and strategic — placement in the market if the future turns rosy.

Armco is currently engaged in complex negotiations to become the prime contractor for an immense rolled steel facility that could cost more than $400 million. Control data has had continuing success selling computers and related services to the Soviets, and Dresser has recently been cleared by Washington to sell a $144 million oil drill bit manufacturing plant to the Soviets.

More than 50 U.S. firms have signed long-term protocols setting forth specific trade relationships with various Soviet trade entities, and more can be expected. All these business contacts and dealings may ultimately generate substantially increased trade, but at present, U.S. exports to the U.S.S.R. account for only about 2 percent of total American exports. And bilateral trade turnover amounts to about 0.02 percent of the officially stated Soviet gross national product. One reason is that the political quotient continues to be a major factor in Soviet-American trade.

For example, Treasury Secretary W. MichaelBlumenthal and Commerce Secretary Juanita Kreps headed a U.S. trade delegation here in December, carrying a message from the White House that the president sincerely wants to improve trade with the Soviets. Kreps announced that 22 licenses being reviewed for oil field machinery and technology had been abruptly cleared and approved after some months' wait. It was largely a political gesture, clearing away bureaucratic functions that reflect the continuing American worries that U.S. technology will be used in ways inimical to American interests.

And more significantly, the cabinet officials made clear that any administration fight to repeal the Jackson-Vanik amendment, which the Soviets consider so onerous, must await a successful White House fight for ratification of a new Soviet-American strategic arms limitation treaty.

Final agreement on SALT II, thought by the Americans to have been within grasp at the Geneva talks just before Christmas, has slipped away. The U.S. negotiators said later that they were sure the Russians had delayed agreement at the last moment to avoid a mid-January Washington summit between Soviet leader Leonid Brezhnev and President Carter, a summit that was likely to be upstaged at the end of the month by a visit from Chinese Vice Premier Teng Hsiao-Peng.

If the Americans' well-informed hunch is correct, final SALT agreement appears possible no earlier than several months hence, followed by a Carter-Brezhnev summit and the signing. A Senate vote on SALT ratification seems unlikely before summer then, and is certain to be preceded by lengthy and perhaps bitter public hearings. That pushes any attempt at repeal of Jackson-Vanik into the fall or later, when the issue could run into deadly election year politics.

The SALT delay has somewhat dampened the enthusiastic reaction that set in after the Blumenthal-Kreps visit and a related plenary session of the U.S.-U.S.S.R. Trade and Economic Council that attracted almost 400 American businessmen to Moscow. It was marked by scores of cordial meetings between the Americans and their Soviet counterparts.

Meanwhile, potential opportunities for better business in the future seem to suggest themselves. The complex Soviet economy, while still expanding (it was up 4 per cent in 1978), desperately needs to acquire and utilize Western technology to reverse its steadily falling growth rate and supplement a dwindling manpower supply.

Demand for petroleum — both for crucial hard-currency earning export as well as domestic consumption — is outstripping supply and the exploitation rate must increase if the Soviets are to avoid an energy crunch. The U.S. has the technology to help.

The Russians also need infusions of Western knowhow to improve agricultural enterprise, compared with one in 20 in the United States. The U.S. produces far more bountiful harvests every year, while the U.S.S.R. fluctuates between bare sufficiency and outright shortage.

WOULD-BE OIL CUSTOMERS ARE LINING UP TO COURT MEXICO

(By Marlise Simons)

MEXICO CITY.— The local cartoonists have been having a field day with the "second conquest" of Mexico. One showed a group of conquistadors with gas cans rushing up to an Indian under an oil rig, shouting "Amigo!" Another had a buxom Mexican woman on Uncle Sam's lap, as he whispered in her ear: "I'm not after your money — there are other values as well."

The cartoonists, of course, are right. Mexico's spectacular new oil reserves have caused a sensation and led to a rediscovery of this country, to modify the cartoonists' view.

The wave of would-be customers from Europe, Japan and Latin America prompted Mexican oil chief Jorge Diaz Serrano to exclaim recently, "We are frankly as inundated with buyers as with oil."

Members of OPEC, the international oil cartel, have once again started to drop heavy hints, hoping to get the obstinate Mexicans to join their club.

But above all is a flurry of official reports and press accounts in the United States — which is suddenly feeling vulnerable in its energy supply by the turmoil in Iran — that bluntly ask: "What's in it for us?"

Mexico's firm retort so far was, "First of all, what's in it for Mexico?" And by all appearances, this may remain the Mexican administration's position for the remaining four years of its term.

Pemex, the state oil monopoly, has signed all of its crude export contracts for 1979, committed most of its 1980 production and drawn up production goals through 1982 that it is calling "rational." Whatever the changes in the geopolitics of energy, President Jose Lopez Portillo emphasized in an interview this week that he was determined to abide by these plans.

That decision, he said, was a combination of the country's ability to absorb the new income without distorting the economy and the oil industry's own capacity to expand without relying wholly on foreign equipment.

A cautious administrator who shifted the economy from crisis to near recovery and cut inflation in half — down to 17 percent — in two years, Lopez Portillo has frequently pointed at financial mismanagement in other oil producing nations. He regards avoiding congestion and rampant inflation as determining factors in Mexico's short- and medium-term oil strategy.

But in addition, the oil industry itself, according to oil chief Diaz Serrano, is bound by strict political and technical rules. Mexico's goal is to export petrochemicals rather than endless quantities of crude. And although the industry has recently grown at unprecedented rhythms — it virtually doubled its production to the current 1.5 million barrels per day in two years time — Diaz Serrano maintains that "we could not grow much faster than planned even if we wanted to."

A rare hint of obstacles to growth — Pemex has always been extremely discreet about internal operations — surfaced in a report released last week. It said that almost 8 percent of Pemex's 1978 budget had not been spent because of "a shortage of drilling equipment and of construction materials," as well as "problems resulting from land expropriations which led peasants in the oil regions to set up roadblocks and to occupy the land."

But regardless of the political or economic restraints Mexico's energy picture is impressively rosy.

Suspecting that there are oil and gas deposits under most of Mexico's territory, Pemex is feverishly exploring now in 27 of Mexico's 31 states and in large areas of the Gulf of Mexico.

The country's proved reserves — 11 billion barrels two years ago — have burgeoned; two weeks ago they were set at 40 billion barrels with estimated additional reserves at 4.6 billion barrels above that. Mexico's potential reserves remain at 200 billion barrels, far exceeding any other country in the western hemisphere. At current production rates Mexico's 40 billion barrels are sufficient to last the country 60 years.

However, predictions made recently that Mexico could fill 30 percent of U.S. import needs by the mid-1980s are being contradicted by Lopez Portillo and his staff.

Mexico's production targets are much lower. While 85 percent of Mexican oil exports last year went to the US., with the remaining 15 percent shared by Israel and Spain, Mexico's "export diversification plan" called for a cutback in the U.S. proportion of total exports of crude.

Pemex export director Juan Aizpura said that this year, for example, 80 percent of Mexican crude will go to the U.S., while by 1980 the U.S. share will be down to between 60 and 66 percent with the balance going to Europe and Japan.

But because Mexico's total exports will increase rapidly — they should reach 1 million barrels per day, double today's rates, by 1980 — the U.S. will not receive less but somewhat more Mexican oil.

That Mexico's nationalism is a force to be reckoned with became clear one year ago when the Mexican oil chief and U.S. energy secretary James Schlesinger clashed over Mexican natural gas sales in Washington. Diaz Serrano stormed out of Schlesinger's office after what a Mexican diplomat described as "unbelievable arrogance and insults from Schlesinger." The result was that Mexico decided to use its gas surplus domestically — and lose money — rather than accept the lower U.S. price.

Early last year, the U.S. Ambassador to Mexico was reportedly laughed at in the Department of Energy when he reported that much of Mexico's industry was switching from oil to natural gas as a source of energy. But the domestic gas pipeline feeding that industry will be inaugurated on March 18.

"Schlesinger was very important in raising our consciousness about not trusting the U.S. and carrying out our own plan," said a high Mexican official. "He did not realize it but he did us a favor in the end."

As Mexico steps up its oil production, however, additional vast quantities of gas will become available and they are known to be of interest to the U.S. The Mexican president has said he is willing to sell these "if the conditions are right." Lopez Portillo said he expects to discuss this with President Carter during his visit to Mexico in mid-February.

But referring to Schlesinger's statement this week that it is not in the interest of the U.S. to buy Mexican gas, an irritated Lopez Portillo said once again the U.S. was being "erratic."

"I know what to do with my gas. I'll use it at home and I'll sell it at a price that suits me," he said. "If they (the Americans) don't want to discuss it, that's it: We just won't deal with the matter."

MISMANAGEMENT, WAR PLAGUING BLACK S. AFRICA

(By David B. Ottaway and Carlyle Murphy)

LUSAKA.— War, political upheavals and bad management continued to wreak havoc on the economies of black-ruled nations across Southern Africa last year with the noticeable exception of those operating within the orbit of South Africa itself.

Acute shortages of basic commodities such as cooking oil, butter, flour, rice and corn persisted in Angola, Zambia, Mozambique and parts of Zaire where queuing before food shops seemed to rival soccer as the main national pastime.

National debts grew ever larger while production remained stagnant or dropped, and there was no significant rise in the price of copper, which constitutes the main money earner for both Zaire and Zambia.

Mozambique, Rhodesia, Zambia, Zaire and Angola all posted negative, or at best only marginally positive, growth rates in per capita income terms. By contrast, South Africa recovered from its 1977 recession to register a growth rate of 2.7 percent, and the small economies of neighboring mineral-rich Botswana and agriculturally based Malawi continued to expand at a respectable pace.

As the result of economic slumps and transportation bottlenecks in black African countries immediately to its north, South Africa continued to expand its trade relations with all of them, except Angola.

One of the main causes of the region's difficulties was the ever worsening war in Rhodesia that spilled over on an almost daily basis into neighboring Mozambique, Zambia and Botswana as the Rhodesians accelerated their efforts to wipe out nationalist guerrilla bases in these countries.

But the spread of fighting seemed to affect practically the whole region in 1978. In southern Zaire's Shaba Province, dissident Lunda tribesmen crossed the main mining town of Kolwezi, cutting the country's copper exports for a time and generally upsetting the whole economy.

In southern Angola, guerrillas of the National Union for the Total Independence of Angola (UNITA) continued to defy Cuban-backed government attempts to eliminate them. They kept normal trade between the north and south at a standstill and prevented the east-west Benguela railroad, which once served Zaire and Zambia as well as southern Angola, from resuming regular service.

Meanwhile, there was no sign of any reversal in the trend toward ever mounting debts in either Zambia or Zaire. Even as the International Monetary Fund and American and European bankers were pumping hundreds of millions of dollars into the ailing Zambian economy, they were showing increasing reluctance to continuing similar assistance to Zaire.

Zaire now has a 2.5 billion to 3 billion dollar debt, and Zambia is no longer far behind if the 18 months of non-payment for goods already received is included. Zambia now owes around $2 billion to its foreign creditors.

In addition to bogging down in wars and debts, most nations of this region were experiencing enormous difficulties in simply managing their economies, whether Socialist in orientation like Mozambique and Angola or capitalist like Zaire and Rhodesia.

A shortage of skilled manpower began to cripple parts of the white-run Rhodesia economy as the exodus of Europeans picked up. The same problem plagued Marxist Mozambique and Angola as their governments tried to fill the vacuums left by the departing Portuguese and take over more and more of the economy.

JAPAN'S OHIRA WON'T SET OFF ECONOMIC FIREWORKS

(By William Chapman)

TOKYO.— For those who expect changes of government to be followed by sharp changes in policy, Masayoshi Ohira is bound to represent a disappointment.

If his first moves as prime minister are a gauge, he will not offer any spectacular diversions in the economic arena. He doesn't intend any major shifts that would send the American dollar scooting up or down. He hasn't mentioned any tactics that would dramatically lower Japan's trade surplus. He bills himself as a slow-growth man in economics but the path he's choosing doesn't seem all that different from his predecessors.

The signs may be misleading and may reflect only the instinctive caution of a career bureaucrat and party manager accustomed to thinking hard and long about where he wants to go. Ohira's slow-moving cautiousness is almost a legend in political circles and next to him his predecessor, Takeo Fukuda, seems as reckless as a river boat gambler.

One story going the rounds compares him to a character in a Japanese proverb, a man so careful that before crossing any stone bridge he would patiently tap on each part to assess its strength. The only difference, so the story goes, is that Ohira taps every stone on every bridge and does not cross any of them.

One high-level government official said recently that if Ohira differs from Fukuda in any significant way it is merely in matters of style. Ohira is not the type, he said, to go to international summits and pledge his country to unlikely goals, as Fukuda did at Bonn last year in promising a 7 percent growth rate. If there is any constant thread running through his statements so far, it is Ohira's sense of the limits to what governments can accomplish.

Like every Japanese prime minister, and like just about every other world leader, Ohira thinks the American dollar should stay strong as the main force in currency stability around the world.

What he would do if there is another run on the dollar next year, like the one last year is not clear.

He has suggested that the Japanese yen could play more of a "supplementary" role, taking some pressure off the dollar. Surplus dollars, he has asserted, might be absorbed through the use of more of the International Monetary Fund's special drawing rights. Some expect Ohira to offer some alternatives to free-floating currencies during the Tokyo summit next summer, but no one seems to have an idea what it will be.

In the field of foreign trade, where Japan's big surpluses anger the rest of the world, Ohira may not face the rugged tests that Fukuda did. Japan's trade surplus in the current fiscal year ending in March is still a whopper and is likely to end up at the $15 billion mark. But when measured in yen or by actual volume, Japan's exports are tapering off, although they will continue to rise in dollar terms for several more months, most authorities believe.

Some of the more aggravating trade issues have been settled. Japan has agreed to import more agricultural products, enough to take the edge off the American charge of closed markets, but not enough to satisfy Robert Strauss, President Carter's trade negotiator, completely. Automobile exports are still drifting downward. Shipments of color television sets are within the limits negotiated with the U.S. One official of Japan's ministry of international trade and industry observed recently that only one specific export item — semiconductors — is likely to cause a trade crunch in the coming months as the U.S. and Japan get closer to a trade war over computer ware.

Some optimists even dare to suspect that the old criticism of Japan's import policy may be buried in the coming year. It is widely assumed that Japan's domestic market is arbitrarily closed to foreign manufacturers by an assortment of tricky regulations. But in the past six months Japan's imports have risen. True, the European exporters have benefited more than Americans, but that isn't Japan's fault. Some of the increase is rather artificial, reflecting Fukuda's decision to escape the international heat by "emergency" imports through government purchases, but not all of it by any means.

The big question in many minds is how forcefully Ohira will act to stimulate the Japanese economy and increase domestic demand. Some economists have contended all along that this — rather than artificially raising imports and lowering exports — is the key to resolving international trade friction. If the supposedly lush Japanese consumer market is greatly expanded, it is argued, the demand would be enough to wipe out the balance of payment problems gradually.

Ohira's track record in the field of economic expansion is murky and full of conflicting signs. His reputation was built in Japan's high-growth days of the 1960s and Ohira was an enthusiastic supporter of prime ministers who wanted the economic engines to run faster and faster. But in the past year, as he built up his campaign against Fukuda, Ohira has argued that the old days of high growth are over. He thought that Fukuda's 7 percent growth target was unrealistic; in fact, he has opposed even the idea of establishing percentage targets and then gearing the national economy to reach them.

On the other hand, a couple of Ohira's cabinet appointees are high-growth advocates prompting some to suspect the new prime minister is not so wedded to cooling off the engines. Furthermore, Japanese newspapers report that, after considerable internal bickering, the new government has settled for a growth target of 6.3 percent next year, which is higher than many prominent economic researchers think possible without more stimulants in the meantime.

CANADIAN ECONOMIC MALAISE CONTINUES
(By Nancy Ross)

While Canada maintains a sharp watch on the U.S. economy in 1979, America will be keeping an eye on Canadian politics.

A recession south of the border will probably mean a sixth successive year of sluggish growth for Canada. And since it is also election year there, the Carter administration may be interested to see if Prime Minister Pierre Trudeau, now trailing in the polls, can stimulate his economy enough to pull off an upset victory.

Economic malaise seems bound to continue in Canada, judging from private forecasts. Real growth, according to the Conference Board in Canada, can be expected to rise 3.4 percent, compared with an estimated 3.3 percent in 1978. Only six out of the 10 provinces can expect real growth this year. A national unemployment rate of 8.8 percent, up 4/10ths of a percent, is anticipated.

On the more positive side, productivity, which dipped to minus 0.3 percent last year,will regain its 1977 level of 1.4 percent. The Consumer Price Index will moderate to 7.8 percent from 9 percent in 1978, which was marked by a decline in the dollar and especially high food prices (up 16 percent overall, while beef jumped 42 percent in the year ending in October).

Other nongovernmental Canadian economists predict a real GNP as low as 2.2 percent, and a jobless rate ranging up to 9.3 percent. From abroad, the Organization for Economic Cooperation and Development foresees a 1979 Canadian GNP in the 3 percent range. Not surprisingly, Trudeau's government looks through rosier glasses. In his budget message last November, Finance Minister Jean Chretien opined that 1979 would bring a real national output of 4 or 4.5 percent, and price increases to an average of 6.5 percent.

He announced a 1979-80 budget deficit of $12.9 billion, up slightly from the previous fiscal year's estimated $12.1 billion and 1977-78's actual deficit of $10 billion. (These figures are expressed in Canadian dollars; were they in U.S. currency the deficits would appear much smaller because of the devaluation of the Canadian dollar, which has dropped 18 percent against the U.S. dollar in two years. Economic forecasters are predicting that the Canadian dollar will inch up to around 88 U.S. cents in 1979.)

Back in November, the Liberal Party's finance minister advocated a rather conservative fiscal policy. Chretien told the House of Commons, "I have been urged to cut taxes massively in order to stimulate the economy. Given the expansionary forces which are already at work, I do not think this would be wise, particularly when our cash requirements are so high."

Among the cuts he called for were a decrease from 12 to 9 percent in the ad valorem manufacturers' sales tax, amounting to $1 billion, which should be passed on to consumers in the form of lower prices, a $1.2 billion reduction in federal personal income taxes, and lower unemployment insurance premiums. He also called for more tax write-offs for mining, oil and gas exploration, and pollution control equipment as well as targeted incentives aimed at increasing investment tax credits for those regions in most distress.

Among the adverse factors influencing the Canadian economy this year are many sensitive labor negotiations following the end of three years of wage and price controls. The 300,000 unionized government employees, who received effective wage increases of 7.3 percent last year, compared with 8.6 percent in the private sector, are expected to demand a catch-up. Housing construction and consumption of durable goods will also be off in 1979.

Interest rates and stock prices will follow those of the U.S. Analysts warn investors of falling yields in the Canadian bond markets. They favor pulp and paper stocks as well as oil and gas stocks, helped by proposed price increases. The outlook is for more petroleum company mergers this year, following the announced $1.4 billion takeoverof Pacific Petroleum, formerly owned in part by a U.S. company, by the government owned oil company, PetroCanada.

The only significant source of growth this year, according to the Conference Board, will be renewed investment in machinery and equipment by business, up 5.7 percent in real terms compared with 2 percent in 1978, as a result of a significant increase in profits last year.

A quarter of Canada's GNP and 70 percent of its merchandise exports go to the United States. The Trudeau government is counting on its devalued dollar to stimulate exports and build a $4 billion trade surplus. But if the U.S. encounters a serious economic slowdown this year, leading to a fall off in consumer spending, and if Canada cannot market enough goods in Europe and the third world, a desperate Trudeau — running 20 percent behind his Conservative opponent in the last Gallup poll — may try to stimulate the economy further, even at the risk of increasing inflation.

COMPETITIVE BALANCE SHIFTING IN EUROPE

(By Murray Seeger)

BRUSSELS — Slightly more than a decade ago, Europe was warned that U.S. business was about to take over the continent, but the competitive balance has shifted and the Americans are taking another look at their strategy.

Some of the U.S.-based multinational corporations that flocked to Europe in the postwar period have slowed their investments on the continent and many are sending their U.S. executives home.

Some companies with plants in Europe now find that they can manufacture more cheaply in the United States. Others are discovering that exporting to Europe can be profitable.

Instead of dominating the world business scene as they once did, the Americans find themselves challenged in Third World markets by equally clever foreign companies offering products as good as or better than those made in the U.S.A.

While the U.S. firms have been adjusting to more and stronger competition overseas, foreign corporations and individuals have been taking advantage of the change in economic fortunes to invest at record levels in the United States.

"What we are seeing today is not the Americanization of Europe but the growth of a Western style of business culture and taste which covers Western Europe, the United States, Canada, much of Latin America and part of the Par East, Including Japan," the chief executive of a major U.S. manufacturer in Europe said.

The often-quoted warning about the U.S. commercial invasion of Europe was sounded in 1967 by the French journalist-politician Jean-Jacques Servan-Schreiber. He wrote that by 1982 "it is quite possible that the world's greatest industrial power, just after the United States and Russia, will not be Europe but American industry in Europe."

Now it seems clear that U.S. business has not taken over Europe. But neither has it been turned out of the continent. Instead U.S. business has become an integral, essential element in the European economy, existing side by side with revised European enterprises.

The American presence in Europe is so immense — and still so profitable — that even five years of steady decline for the dollar, world recession and heightened competition have not diminished its dimensions.

What has happened in the last few years is that the strong, well-managed U.S. corporations have elected to put down deeper European roots while the weaker companies have pulled up stakes and gone home, or moved to easier markets.

"American investment is down in Europe, but then all investment is down," an American government expert in Brussels commented. "There is no trend toward disinvestment."

According to a U.S. diplomat in Paris, there is no strong trend for investment up or down. "The strong are getting stronger and the weak are getting out," he added.

The U.S. Commerce Department reported in August that in 1977 U.S. investment overseas totaled $14$.8 billion, of which 40 percent — more than $60 billion — was in WesternEurope. Sales by the American subsidiaries in Europe that year totaled more than $220 billion, 20 percent more than the total output of Italy, and about 11 percent of the entire European economy outside the Soviet Union.

U.S.-owned companies in 1977 were responsible for nearly 15 percent of all sales within the European Economic Community, where most of their factories and offices are located.

Despite the generally sluggish world economy, U.S. companies in 1977 increased their overseas investment by 9 percent. Foreigners raised their investment in the United States by 11 percent, bringing the total to $34 billion.

The U.S. presence in Europe is small compared with the size of U.S. domestic business. But many of the companies that have established themselves abroad are conspicuous major participants in the European economy and have done extremely well.

Last year, for instance, Ford Motor made twice as much money overseas as it did at home. Citicorp,. the world's second-largest banking firm (after Bank of America) earned 90 percent of its profits overseas.

A 1974 survey showed that such companies as National Cash Register, Coca-Cola, Gillette, Hoover, IBM, International Flavors, Pfizer and Sperry Rand made half or more of their profits abroad.

More recent surveys have shown that U.S. corporations have slowed their acquisition of affiliates overseas and that multinationals based in other countries are the acquisition leaders.

This reinforces the conclusion that the Americans who have survived the five-year European recession are investing in their better affiliates and selling off their losers.

The EEC, which surveyed multinationals in 1976, found that while Europeans owned twice as many international companies and were expanding more rapidly, the U.S.-based companies were much more profitable.

EEC officials concluded from this that "American multinationals achieve a total turnover which is 43 percent higher than the turnover of approximately twice as many European firms."

To the casual observer, the U.S. presence in Europe seems greater than it actually is because of the conspicuous success of relatively few companies in some areas.

For example, U.S. owned companies produce 30 percent of the automobiles sold in Europe and a large portion of the gasoline that fuels them, as well as two-thirds of the computers sold on the continent. Western European airlines, with few exceptions, fly U.S. made aircraft. Yugoslavia, the most independent of the Communist nations, has in recent years bought for its national airline nothing but U.S. airliners

Walking any major city street in Europe, visitors are assaulted by U.S. brand names — Coca Cola, Marlboro, Levi Strauss, Wrangler, Kodak, Parker, Arrow. In some cities these traditional favorites have been joined by Mc-Donald's, Burger Chef, Baskin-Robbins, Tandy and Mister Minn.

Americans dominate some fields. In advertising, for example, they own the top five agencies in Britain, four of the first five in West Germany, three of five in Italy and Belgium and two of five in France, Spain and the Netherlands. And they continue to be strong in accounting, management, consultancy and banking.

In supermarkets, which reflect dramatic changes in European eating habits, Kellogg's cereals have expanded rapidly, as have different brands of Florida orange juice, some of it shipped frozen from the United States and some of it packaged in Europe.

One export product, bourbon whiskey, is finding acceptance in Europe for the first time, although it still lags far behind U.S. cigarettes as a symbol of the American's overseas presence. Most U.S. brands are manufactured locally. Some have been adopted as local.

"H. J. Heinz has been in England so long that people no longer think of it as an American company," a U.S. business expert in London commented. "Hoover is so entrenched that the brand name has become an English verb meaning "'to vacuum.' "

On the other hand, in the broader range of industrial output, U.S. firms have been set back by strong European competition.

Ten years ago, U.S. companies were the largest in 11 of 12 major industries — aerospace, automobiles, chemicals, electrical equipment, food machinery, steel, metal products, paper, oil, pharmaceuticals and textiles — as well as in banking.

In 1976, Americans led in seven, West Germany in three, British and Japanese in one each and one was jointly owned by British and Dutch interests.

"The American presence in multinational business remains the largest single presence, even though it was overstated in the late 1960s, as a good deal of research on non-U.S. business has now disclosed," according to Lawrence Franko, who participated in a massive survey of the subject for the Harvard Business School. "Other countries' multinationals are expanding, not retreating."

The movement is illustrated by the automobile business, which in the last year has seen General Motors and Ford expand in Europe while Chrysler was selling out to Peugeot-Citroen.

The tire industry shows a similar pattern. In the last two years, Goodrich has given up manufacturing in Europe and Firestone has cut back, while Goodyear has continued to make good profits and is expanding its research center in Luxembourg.

In Belgium, site of many U.S. investments, J. C. Penney is a major retailer through its Sarnia subsidiary. On the other hand, Sears Roebuck did not do well in Belgium and recently sold its retail outlets to a French company.

"Europe has become more and more competitive," a U.S. tire man commented. "In this industry, Europe's technology caught up and passed the American."

The big mover in the tire business has been Michelin of France, which developed the radial tire. It used its success to start manufacturing in the United States and to take a lucrative share of the market away from the huge U.S. rubber companies.

Some experts believe that the first multinational corporation was the Singer Sewing Machine Co., which opened a factory in Glasgow in 1867. At that time the old German Bayer chemical corporation had an analine plant in Albany, N.Y., and the Swedish Nobel company was making dynamite in Hamburg, Germany.

Westinghouse Airbrake came to Europe before World War I because it found a better reception for its products among nationalized railroads when it manufactured on the continent.

After World War I, Ford, General Motors,Proctor & Gamble, Remington Rand and Hoover invaded the continent.

The big explosion came between 1946 and 1970,when the value of the American presence increased more than twenty-fold to $21.5 billion.

"By the early 1970s, the United States had become more of a foreign investor than an exporter of domestically manufactured goods," Prof. Robert Gilpin of Princeton University wrote in a recent book on multinational corporations.

The overseas expansion was fueled by great sales successes. From 1966 to 1976 annual sales went from $40 billion to $207 billion, an increase of 500 percent at a time when theEuropean economy grew by about 300 percent.

The tide started to turn in 1975; in 1973 and 1974 U.S. affiliates saw their sales go up 33 percent and 30 percent, but in 1975 and 1976 the gains were relatively modest at 12 percent and 11 percent.

While sales fell and competition became sharper, operating costs continued to rise, European labor, which had worked longer hours for less money than U.S. labor, used the period of steady prosperity to bid wages and fringe benefits up at world record rates.

A Citibank survey found that between 1970 and 1977, in terms of local currencies, real labor costs (after eliminating the effects of inflation) went up the most in Italy (70 percent), followed by Belgium (61 percent), the Netherlands, West Germany and Sweden (all 48 percent). U.S. labor costs in the same period rose 12 percent.

Citibank found the highest wages in Sweden — $10.30 an hour compared with the U.S. average of $8.71.

Belgium and the Netherlands were also above the U.S. average. Britain, at $3.62, had the lowest of the 12 major economies, including Japan, that were examined.

As wages rose sharply, governments supported them by enacting a complex, expensive system of social benefits.

Also, the fall of the dollar has made it difficult for companies that rely on domestic sales for most of their profits to invest in strong currency countries such as Switzerland, West Germany,

Belgium and the Netherlands. American executives are not eager to move overseas unless their companies guarantee them protection from dollar erosion and pay them substantial cost-of-living differentials. Some of the most successful U.S. companies in Europe, such as IBM and Ford, have trained local executives to take the place of U.S. citizens.

As they look at the new investment possibilities, Americans in Europe carefully examine the economic and political factors.

For years, Britain was the most popular site for U.S. companies because of the common language and easy market entry. Then as the European Economic Community developed, at first without Britain, the Americans moved into the Benelux countries and West Germany because of their central location and strong industrial traditions.

Now France is getting attention because the French government clearly encourages foreign investment. Ireland gets attention because of its low labor costs, but its location poses a delivery problem. Spain is also attractive, because costs are relatively low and the country is expected to enter the EEC within the next five years.

"On paper, Britain is clearly the best place to make a new investment," an American executive based in Germany said. "As a practical matter, however, given the problems with labor unions in Britain, right now I would choose France for a new plant."

With the dollar so cheap compared with European currencies, and the European market about as large and rich as the American, many U.S. companies are discovering their potential as exporters.

U.S. automakers, despite big investments in Europe, are setting an example that has Europeans worried and is stimulating some consolidation among Continental automakers.

"There is no product being made by an American company in Germany today that couldn't be made at a lower price in the United States and sold in export," a U.S. trade official said in Bonn.

INFLATION: A SHOWDOWN IS AT HAND

(By Leonard Silk)

Sometime last year, inflation underwent a sea change in the United States; it changed from being regarded as a tolerable to an intolerable problem. And now the course of business will in large measure be shaped by the efforts of the Federal Government and the monetary authorities to solve this problem that has eroded confidence in the American economy, both at home and abroad.

 

Indeed, it was the loss of confidence abroad — erupting into a flight from the dollar that threatened to become a panic in late October — that finally produced the Carter Administration's decisive shift from rhetoric to action to bring the inflation under control.

To stop the dollar's fall, the Federal Reserve, with the support of President Carter, pushed interest rates sharply higher by raising the discount rate a full percentage point — the biggest jump since the Great Depression.

Only a week earlier, in announcing his anti-inflation package of Oct. 24, which included wage- price guidelines and a tax incentive proposal to coax labor into observing the wage guideline, President Carter had left out any reference to monetary policy, other than a brief, populist bemoaning of high interest rates. An anti-inflation program without a monetary policy was like performing Hamlet without the Prince of Denmark.

However, the Nov. 1 program of monetary measures to check inflation and support the dollar represented a dramatic change in Administration priorities — from keeping the economy buoyant in order to reduce unemployment, to arresting the inflation, even if this meant stopping the economic expansion.

The shift in priorities was reinforced by domestic political considerations, for the inflation was growing as intolerable to the great American middle class and to the business community as it was to foreign holders of dollars. American consumers and businesses have grown increasingly anxious over the relentless upward march of prices, costs and taxes.

Far from settling down to live with the chronic inflation, American voters on Nov. 7 manifested their acute discontent over the loss of the value of their money — and the garnishing of their paychecks by the tax collector — by swinging conservative in the Congressional elections. That swing has sunk deep into the consciousness of Mr. Carter and most of his fellow Democrats, in Washington and around the nation.

The majority of Democratic politicians have no intention of leaving the issue of inflation to the Republicans to exploit. Indeed, in late September, it was the President who said, "The most complicated and intractable and corrosive problem of them all — the problem of inflation."

Fighting inflation, the Administration knows full well, will not be costless, either in economic or political terms. But not fighting the inflation could be far more costly. What the Administration faced on Nov. 1 in the foreign exchange markets as well as in the security markets was the threat of panic — the sort of panic that, half a century ago, had enacted in a crash and the tearing apart of the world economic and monetary system.

This year, the 50th anniversary of the great crash, is not one in which the Administration is likely to grow forgetful and to reenact history by feeding an inflation in order to keep an expansion going. In 1929 the Federal Reserve was pouring out money to keep a stock market boom going and, until recently, the Fed was juicing up an already overliquid system to keep an economic expansion going — parallels that are close enough to command attention.

And there is, once again, the concomitant danger of a world monetary crisis. In fact, the scope of the danger is even vaster this time, with half-a-trillion dollars or more — in the hands of oil-producing countries, industrial countries, private corporations and individuals abroad. A failure to control United States inflation would, sooner or later, trigger a massive unloading of dollars that would end in a disaster for both the United States and the world economy.

So the question is no longer whether the Government means to fight inflation this year, but how; how far it will go and how fast, with what degree of Presidential muscle, to reduce the rate of wage and price increase — and how long it will persevere in that fight if the economy slides into the recession that so many private economists expect,but that the President and his economic advisers do not concede is bound to happen.

To be sure, no administration has even predicted that a recession would occur as a result of its own policies. Yet, there is no reason to think that Mr. Carter and his advisers are dissimulating; their economic policy is intended to slow the inflation down,without producing a recession.

Nevertheless, they know the risks of recession are real. Federal Reserve Chairman G. William Miller admitted in an unguarded moment, that it would take a "minor miracle" to avoid a recession.

In the United States economy today short-term interest rates have risen above long-term rates, signalling a developing credit crunch. And past credit crunches have almost invariably resulted in recessions; the crunches of 1956-57, 1959-60, 1970-71 and 1973-74 were all followed by recessions. Thecredit crunch of 1968 knocked housing down by almost 50 percent but resulted in only a mini-recession, because the overall economy was then being borne aloft by increased spending on the Vietnam War.

The odds are strong now that the emerging credit crunch will again take its toll from housing, sales of autos and other consumer durables, and from business spending for plant and equipment.

And the strong probability is that as growth slows, unemployment will rise.

The political costs to the President of a steep recession could also be serious. But he has apparently resolved to run that risk in 1979 rather than in 1980, when he is likely to run for reelection.

Mr. Carter has, in any case, asserted his belief that the political gains of fighting inflation will outweigh the costs of lost political support from much of the Democratic Party's traditional constituency, including organized labor, blacks and other minorities, "the cities" — that is, the poor in the central cities — and other low-income groups for whom unemployment and cuts in social welfare programs loom as a more serious problem than inflation.

The President's anti-inflation program may well undergo shifts in tone and emphasis in response to the pressures of the groups that will seek to shield themselves from absorbing the heaviest burdens of lost jobs or incomes that could result from the program.

Mr. Carter has every reason to try to check the inflation with a minimum increase in joblessness.

Even so, unemployment is likely to rise by a full percentage point or about a million workers. He will seek to avoid a deep slump, since it would not only send unemployment shooting upward, but would also put the budget into deep deficit and end by exacerbating rather than curbing inflation.

The Administration's anti-inflation strategy thus has three main components — monetary policy, fiscal policy and incomes policy.

MONETARY POLICY

The task facing the Federal Reserve is to reduce the availability of money and credit so that consumers and businesses will have to scale back their spending for goods and services. High interest rates become a major deterrent to borrowing, spending and long-term investment once inflationary expectations are broken.

To break such expectations monetary authorities must no longer appear to validate the assumption that borrowed money is relatively costless even at high interest rates, since money loses its value so fast that it is better to grab goods. The Federal Reserve under G. William Miller will strive to bring down the rate of monetary growth gradually to avoid jolting the economy too much.

FISCAL POLICY

But if the slowdown in monetary growth is not to result in a collapse of business investment, housing construction, the output of autos and other durable consumer goods bought on credit — and hence a huge loss of jobs — it will be essential that the Administration and Congress not throw undue or unbearable burdens on monetary policy.

A worsening of the Government deficit by excessive spending or tax cuts would require the Fed to offset that extra demand by tightening monetary policy still further. That would drive interest rates even higher, and risk bringing the economy down with a crash. The Carter Administration in the coming year will try to bring Government spending under tighter control. Its efforts, however, must be pointed at the fiscal 1980 budget, where it faces a fight within the Democratic Party on whether budget cuts ought to come out of defense or social spending.

But the course of fiscal policy for most of 1979 has already been set by the decisions of the last year. The current budget for fiscal 1979 is moderately stimulative, and this will keep pressure on interest rates during the early part of the year. This increases the risks of a turn down by midyear.

INCOMES POLICY

The President's program of wage-price restraints is intended to make it possible to reduce total demand without producing a recession. The object is to make it possible for slower monetary expansion to cover only a small increase in real output and a lower rate of inflation. If, however, the increase in wages and prices is not reduced by the actions of business and labor, the reduced volume of money and credit will choke off demand and real output. This is the reason Alfred E. Kahn, the President's chief inflation fighter, warned — before the White House politicos shut him up — that a failure of the wage-price guidelines to work could bring on a "deep, deep depression."

Rather than let that happen, will the Administration move to direct controls? Mr. Carter, although he has often said he opposes them, has left himself an out, saying he would resort to controls "only in an emergency." An emergency could occur if the guidelines fail and the country faces either worse inflation or depression.

The leaders of United States business, who dislike the guidelines, but hate controls and fear inflation, mean to lend their support to Mr. Carter's guidelines. This increases the probability that the rate of wage increase, at least, will be brought down to the guideline figure of 7 percent.

Further toughening in the Administration's so-called "voluntary"guidelines for prices and profits will be necessary if its price goal of limiting increases to 5¾ percent is to be achieved.

The leaders of organized labor are less willing to support the President's guidelines since they believe that the program is tougher on labor. For this reason a toughening of Administration pressures on business is likely.

It will require remarkable timing, finesse and determination on the part of the President and his aides for this three-pronged monetary, fiscal and incomes policy to work without triggering a recession. Has the Carter Administration the skill and toughness to make its program work? Skepticism reigns among American business, labor and much of the electorate on the basis of Mr. Carter's past performance.

But the United States economy does not depend solely on the economic knowledge or managerial skill of one man in the White House. The underlying balance of the American economy has not yet shown signs of serious weakness.

Nevertheless, this business expansion, already more than three and a half years old — a ripe old age for business cycles — appears due for a correction this year. And American business would rather get it over with than risk something worse by trying to prolong a failing and inflationary expansion. Business is prepared to sweat out 1979, hoping to move forward again in 1980.

[From the New York Times, Jan. 7, 1979]

STRATEGIES FOR A SLOWDOWN

(By Isadore Barmash)

Corporate America is willing to accept the likelihood of an economic slowdown this year, particularly in the final two quarters, but most business leaders are not wholly swallowing the forecasts of a recession. Indeed, many are convinced that there is still perceptible economic momentum, and, thus, are pursuing cautious but flexible policies, hoping to turn bad into not-so-bad and good, if it comes, into better.

Businessmen generally accept the negative panoply — the predicted rise in unemployment to 6½ percent from 6 percent, a smaller real gain in gross national product to about 2.4 percent from last year's 3.9 percent and a pre-tax profit gain of only 4½ percent, or less than the inflation rate. Still, they avoid the word recession. Some see it as a self-fulfilling prophesy; others cite their companies' minor or noninvolvement in the 1974-1975 recession.

"We really don't see a slowdown coming," observed William M. Agee, chairman of the Bendix Corporation, who succeeded Treasury Secretary W. Michael Blumenthal at that company. "There's still too much good out there. We expect to do well in our markets in 1979."

"I'm still optimistic," noted John T. McGillicuddy, president of the Manufacturers Hanover Trust Company. "I wasn't among those who anticipated a true recession in 1979 before the new policies of monetary and fiscal restraint were put into place, and I donot anticipate one now."

"No recession," says Thomas A. Murphy, chairman of the General Motors Corporation, who believes the economy will continue to maintain momentum and predicts sales of 11.5 million passenger cars this year.

Others are more cautious.

"We are of the recession school, and we are trying to make certain that all of our groups conservatively assess their markets against that background," said John L. Grant, executive vice president of American Standard.

Reginald H. Jones, chairman of the General Electric Company and often a spokesman for American business, does not see a deep recession, but he does expect a second-half slowdown with tight money and high consumer debt curbing housing and consumer expenditures. Business investment and strengthened defense outlays ought to keep the slowdown from turning into a deep recession, Mr. Jones said. And he expects the start of the year to be strong as a result of the tax cut, good housing starts in late 1978 and large capital goods backlogs.

Both in the consumer and industrial sectors such executives as Edward F. Gibbons, chairman of the F. W. Woolworth Company and Mr Agee of Bendix believe that there is an even chance that their sales will hold up and possibly top last year's. However, Mr. Gibbons added, "my big fear is inflation, but I don't think mandatory controls are the answer. Let's try the guidelines."

Nonetheless, it appears that no year since 1975 has opened for business with more uncertainty than 1979, and that calls for keeping a sensitive hand on the throttle — one that can react quickly to sudden developments. Among the strategies being adopted are:

The United States Steel Corporation, hoping that the Federal Government will become more aggressive to curb steel imports, plans to return capital outlays to the $800 million level this year after a cutback last year when earnings slid. The company has increased its long-term debt in recent years so that it now has about $1 billion in cash, which Bruce Thomas, executive vice president for accounting and financing, says is invested with a return of 10 percent to 11 percent. It "will be available for expansion, for investment opportunities and for other needs," he said.

Obviously with the steel industry still under considerable cost and import pressures and United States Steel now deriving a large part of its pretax profits from nonsteel diversification it is likely that some of those funds will go into more remunerative fields than steel, Mr. Thomas indicated.

The Great Northern Nekoosa Corporation,one of the country's largest paper manufacturers, has an ongoing $250 million expansion project in its white-paper operations, which have bigger backlogs than either its printing paper or newsprint divisions. But if cash flow withers, it will lessen capital outlays by slowing down on new approvals, said Robert Hellendale, president of Great Northern Paper.

The Eltra Corporation, a diversified electrical products company, has generated an "exhaustive" divisional cost reduction program. "We are resisting price increases that we consider too high," said Jack A. Keller, chairman, "even if we have to change old suppliers. In some product lines, we feel that a 5 percent price increase is too much."

In the consumer goods area, new products, promotion and capitalizing on new indicated potential mark the year's game plans, but there are also moves to control inventories carefully.

While Robert Gwinn, chairman of the Sunbeam Corporation, thinks 1979 will be a "tough year," he said that "the way to hit a slowdown is to emerge with new products." Two such new Sunbeam housewares products due for a major push are the electronic memory bath scale and a solid-state electric blanket. Woolworth plans a promotion blast centered on its 100th anniversary celebration "which, we believe, will be an offset against any possible buyer slowdown," Mr. Gibbons said.

Stringent inventory control and expense tightening are under way at Levi Strauss Inc., the nation's largest apparel producer and the leading maker of jeans. Nevertheless, the company is making a major investment in its women's apparel division by substantially adding to its sales staff.

"We've beefed up our women's staff 50 percent to 105, many of them women, and we have dramatically revised our sales estimate for the division," said Peter E. Haas, the concern's president. "It should pay off this year."

Tight money and indications that interest rates may go as high as 13 percent are compelling some companies to plan for a possible cutback of capital outlays late this year. The Armco Corporation, a major producer of carbon and other steel, has such plans, as well as a "contingency plan" to maintain profit margins in the event of a sales cut. Harry Holiday Jr., president, said the plan involved cutting shifts in less capital intensive divisions and reduction of inventories.

Oddly enough, one company, American Standard plans to "become more aggressive" on capital expenditures if a slowdown occurs. Mr. Grant, the executive vice president, said, "If that happens, we will increase our expenditures 10 percent to 15 percent at a time when our capacity is down because making the capital additions to the factories will be a lot less disruptive than when they are at capacity."

The Bendix Corporation recently concluded arrangements for a $150 million line of credit as well as a $50 million loan with an insurance company, according to Mr. Agee, the chairman. "If there is a money crunch, that will give us $150 million on call," he said. "That's also a disaster plan because if there is a squeeze on working capital, that money would be available."

And perhaps because the domestic economy is so murky, some concerns, such as Levi Strauss, are considering foreign investments. But others feel that the European economy may have even slower growth. Woolworth, for one, with its far-flung international operations, sees more slowdown coming in West Germany, which has a dearth of good store sites, in Spain and in Canada.

Will there be as many corporate mergers in 1979? One merger specialist, Louis Perlmutter, senior partner at Lazard Freres Inc., predicts that there will be, even if the cost of money continues to grow. "Tax laws allow interest on debt incurred to finance acquisitions to be deductible," he said. "So with the current merger boom, I don't see the higher interest rates being a deterrent."

CONSUMERS PILE UP DEBT TO BUY HOMES, FURS, AUTOS
(By Barbara Ettorre)

"Last year I brought a house on waterfront property," said Arthur Britten, owner of a merchandise buying office in New York. "I had a condominium, but I feel the value of the land will appreciate and the pool and tennis court will give me luxurious living and offer good resale possibilities. I'm not depriving myself of anything."

Mr. Britten's observation typified two consumer trends apparent in 1978: Consumers put their money Into real assets such as housing and land and they didn't blink an eye at their expenditures and their outstanding debt.

Consumer spending is stretched like a taut bowstring, and the question for 1979 is whether that string will break. To many it is one of the biggest economic questions of the year, because consumers have been the mainstay of the economic recovery and their spending represents almost two-thirds of the gross national product.

"The consumer has been saying that it is far more rational in a world of high or rising inflation to save in the form of real assets — real estate or durable goods — than in the form of financial assets,"said Mary Gottschalk, assistant vice president and an economist at Citibank.

"Consumers tend to be rational, to make judgments about expenditures in the same way as corporations," she continued. "Having made the decision to buy, they can either buy now or save for it, then buy."

What worries a number of economists is that while consumers have been spending at a brisk rate for services and for durable goods, such as appliances and automobiles, they have been borrowing heavily to support these buying habits. During this economic expansion, consumers have accumulated debt at a faster rate than at any other time in the nation's history. In the first three quarters of 1978, home mortgages, consumer installment and noninstallment credit outstanding rose by about $100 billion to almost $1 trillion.

As a result, according to both the Federal Reserve and Data Resources, the proportion of total outstanding debt to disposable income is estimated to have hit a record 67.9 percent in the third quarter of 1978, PP from 66.9 percent in the previous quarter.

"We might think the consumer has run out his string on debt, but this is not the case even now," said Jay Schmiedeskamp, research director of the Gallup Economic Service. "In an October consumer survey, for example, 47 percent of those interviewed said they were reluctant to buy on credit. But this was no greater than the 48 percent who said that in a January 1977 survey."

Consumer watchers say that real income gains increased slightly more than inflation in 1978, and, while they expect a moderation of these gains in 1979, they maintain consumers will be able to handle their debt burden.

A slower economy, as is sought by the Administration in its anti-inflation program, could mean slower retail sales and less production for the factories. But if the Administration's program triggered a recession, a real problem could ensue with consumer debt if many consumers were forced out of work and left unable to repay their debts.

However, analysts say, the consumer is in fairly good shape to weather a slowdown — providing employment and income do not experience drastic downturns, a factor they do not foresee.

"Inflation, the eroding purchasing power of the dollar and a lackluster stock market have encouraged people to hold a larger shareof their net worth in the form of tangible assets, at the expense of their net financial positions," said Carol Brock Kenney, consumer analyst at Loeb Rhoades, Hornblower & Company.

This is the case for Lorraine Baltera, a 28-year-old employee of a public relations company.

"For the first time in my life, I've got two possessions that need to be insured, one being a fur coat," she said. "I'm thinking much more now in terms of major possessions as investments for the future. I want to acquire several good quality paintings, for example."

Mrs. Kenney predicted that with a 234 per-cent real economic growth-rate in 1979, real consumer spending would grow by 2 percent to 2½ percent, compared with 3½ percent for most of 1978.

Also evident last year was the continuing trend of more consumer dollars being spent for services — anything from restaurant expenditures, dry cleaning, rent, college tuition and health club membership to child care and adult education courses. The Conference Board estimated that $600 billion was spent in this category in 1978.

"Back two-and-a-half decades ago, about a third of the average family's budget was spent on services. But in 1978 the proportion exceeded 45 percent substantially," said Fabian Linden, director of the consumer research department of the Conference Board, in a recent report on consumer expenditures for services.

"Even after adjusting for inflation, consumer outlays for services have been growing at an annual rate of almost 4.2 percent over the past decade and a half, or faster than total consumer outlays," he said.

In an interview in December, Mr. Linden said, "As we grow increasingly affluent, necessities take a smaller share and non-necessities a larger one."

Many economists expect consumer spending to decelerate slightly in 1979. Moreover, they expect buying patterns to change slightly. The consumer still will spend at a brisk pace for household items, for example, primarily as a result of last year's boom in housing starts.

However, durable goods might experience some slowdown in 1979, after three years of consumer "catch-up" from the 1975 recession, Mr. Schmiedeskamp said.

Edward A. Treichel, a financial economist for the Continental Bank in Chicago, modified this view of the trend in durable goods sales.

"In the short term, there will be a tendency to slow growth in durables. But in the long term, such items as appliances will show some gains," he said.

"In 1979 I don't see declines in real spending," he continued. "I feel the consumer will be supportive of the business climate, not a drag on it."

TAX REVOLT: AN IDEA WHOSE TIME HAS COME?

(By Adam Clymer)

WASHINGTON.— When California voters decided June 6 to slash their property taxes, Proposition 13 spread fear through some groups that depend on government spending, such as public employee unions. John E. Petersen of the Municipal Finance Officers Association gave the gravest comment: "If the states are to be the test tubes of democracy, Jarvis-Gann is the Frankenstein."

Now, seven months later, despite much publicity for Howard Jarvis, the antitax antispending movement he fomented appears less a meteor than a rather slow comet — something that is going to be around, but less dramatically, for some time in American politics.

The tax revolt is really a three-pronged siege. At its most spectacular, it involves an attack on a particular tax. Idaho, for example, followed California in voting to cut property taxes. But Michigan and Oregon rejected such plans.

Less dramatically, the movement seeks to limit the growth in government spending by imposing formulas on budget increases that are tied to inflation, economic growth or population.

That part of the effort actually succeeded before Proposition 13 took form, when a constitutional convention vote in Tennessee in March led to legislative action immediately after the convention that rejected such ordinarily sacred themes as more state aid for teachers' salaries.

States as diverse as Arizona and Michigan will be learning how to live with that sort of restriction, for their voters, among others, adopted similar state spending limits in November.

The third part of the antitax movement involves state attacks on Federal spending. In the last couple of years, 22 states have voted to ask Congress to call a constitutional convention to consider an amendment pushed by the National Taxpayers Union that would require a balanced Federal budget. If 12 more states join them and if Congress finds their requests more or less identical — a big if — then Congress will be obliged to call such a convention,

North Carolina Governor James Hunt warns fellow Democrats wherever he finds them that the move is coming, saying if Congress does not balance the Federal budget first, "the people themselves will do it" through an amendment.

But this amendment scheme may run into competition from another group, the National Tax Limitation Committee, which is coordinating the various drives to limit state spending. It wants to push for a constitutional amendment requiring limited growth in Federal spending.

The phenomenon is still viewed with horror by public employees' organizations — teachers in Michigan came close to defeating their state's limitation amendment — and by some economists and public officials. They fear that limitations, especially at the Federal level, would make it hard or impossible to cope with a slowdown in the economy.

In fact, except for Tennessee's short experience with a limit, and even more tenuous data from New Jersey and Colorado, where legislatures have passed laws (which they could repeal or disobey without constitutional sanction) setting similar ceilings, the only evidence of effect thus far is from California.

There, thanks to the state's steeply progressive income tax and a healthy economy, most independent observers think Proposition 13 has had very little effect on public services, despite its opponents' preelection fears. But if a recession comes, and California's economy tends to be volatile, public services may be cut deeply.

Politically, the results have been less than dramatic. Most of these moves have been sponsored by conservative Republicans, but they have carefully stayed clear of the rhetoric of the far right. And Democrats running last fall managed to make themselves into watchdogs of government spending at least as convincingly as Republicans did.

John Connally, the former Governor of Texas now weighing a Republican presidential bid, argued that the tax cut issue hurt the Republicans with voters in November.

"We were proposing a larger tax cut than they thought was credible,"he said, adding that his party's candidates should have emphasized reductions in spending instead.

But other Republicans enthusiastically endorsed the tax cuts. Senator S. I. Hayakawa of California, for example, said, "Proposition 13 limited only local government spending, but symbolically it challenged government spending at all levels. I welcome this kind of revolution.

It may be the only way to save the American middle class from extinction."

He pointed out that "in 1965, 19 percent of the taxpayers were in the 20 percent or higher bracket. In 1975, 53 percent of the working people paid 20 percent or more."

The phenomenon of Democrats stealing Republican budget issues was accomplished long before California's Governor, Edmund G. Brown, Jr., switched sides and identified himself with the proposition he had fought hard to defeat. As a candidate, Jimmy Carter talked long and hard about balancing the budget, and the deficit of $30 billion or less that he has promised to propose this month will mark a major step toward that goal.

President Carter plainly sees a reduction in Federal spending — which pluralities, and in some cases majorities, of poll respondents call the prime cause of inflation — as an idea whose time has come.

He is laboring to bring his party in line with this thinking. He warned at the Memphis meeting that budget cutting was essential to halt inflation, and that inflation "breeds a politics of fear," that makes it impossible to "preserve a commitment to compassionate and progressive government."

And for now at least the Democratic majorities in Congress seem ready to go along, according to such diverse Democrats as House Speaker Thomas P. O'Neill, Jr., and Representative Abner J. Mikva of Illinois, who noted, after the first flurry of 2 percent budget cuts passed last summer, that "tax revolt is nowhere near as traumatic as people said."

As a 1980 issue, this is likely to be heard first among Democrats. Senator Edward M. Kennedy of Massachusetts, warning that it would divide the party and the nation if Democrats cut social programs, is already challenging the Presidential lead.

If Mr. Carter can bring off budget cuts without causing a recession and manage to cut inflation too, that liberal challenge will be diminished, and Republican hopes should dissipate. But if unemployment goes up sharply this year, as the Congressional Budget Office fears, he may face a tough fight for renomination before anyone gets around to considering whether the Republicans

could do better.

"FlTZ," TOUGH NEGOTIATOR FOR TEAMSTERS

Frank E. Fitzsimmons, 70 years old and thefifth president of the International Brotherhood of Teamsters, may be a pariah to GeorgeMeany who heads the A.F.L.-C.I.O. and a perennial target of Federal investigators who have yet to charge him with anything, but he is still a darling to Presidents who need a favor — and the Carter Administration needs one if its wage guidelines are to be effective. One of the toughest tests will occur when the Teamsters' master freight agreement expires on March 31.

The craggy-faced, heavy-set Teamster is often underrated outside the union: He is less than articulate and is even reduced to sputtering over allegations of Teamster corruption. Once an over-the-road driver, he rose to power as Jimmy Hoffa's aide and took over union leadership when Hoffa was jailed. He has been elected ever since, and remains unchallenged in a union of tough guys. He maneuvered cleverly to build alliances among the Teamster powers and won enormous pay and benefit increases for his members — over-the-road drivers now earn $25,000 a year.

Now the Government is seeking his help. President Carter's wage-price guidelines suggest a 7 percent limit to total wage-benefit increases. "Fitz" said 7 percent was not enough and that fringes, such as added pension costs and welfare benefits, shouldn't be counted. Quick as a bunny, Secretary of Labor Ray Marshall made it clear that the guideline "was not etched in stone."

But unlike the guideline, Fitz doesn't bend. When he heard that the Government might interfere in his bargaining, he said: "The first time the Government intervenes in our negotiations, we will negotiate from a strike position."

THE PRESIDENT VS. THE ECONOMY: WHO'S AHEAD?

(By David E. Rosenbaum)

WASHINGT0N.— Sometime between the timehe made those two statements — between the time he proposed a $50 tax rebate to all Americans and the time he took a series of extraordinary steps to bolster the dollar, between the time he endorsed ambitious plans for revamping the nation's welfare, health and other social systems and the time he decided to limit the budget deficit to a parsimonious $30 billion — sometime, in other words, in his first two years in office, President Carter realized that he had lost control of the nation's economy.

No longer is there hope for new initiatives to help the underprivileged. No longer is there a chance to reduce the unemployment rate to 5 percent or lower. No longer is an annual growth rate of 5 percent a realistic target. No longer, in short, can Jimmy Carter pursue traditional Democratic goals and the platform on which he was elected.

His goal now is a single-minded one: He must somehow limit inflation — "our most serious domestic problem," he now concedes — without plunging the nation into a recession. Outside the Administration, not one economist in 10 gives him much chance of succeeding.

Publicly, the President's closest advisers say that fighting inflation is good politics, that a conservative tide is sweeping the country and that the people are willing to settle for less rather than more from government. Privately, these same advisers are deeply concerned that Mr. Carter will lose the war against inflation, lose his natural Democratic constituency in the process and lose the 1980 election as a result.

It ought not have come as a surprise that the economy seems to have gotten the better of Mr. Carter's plans. His three most recent predecessors similarly changed economic course in mid-stream.

Lyndon B. Johnson was forced to abandon the notion that the country could afford both guns and butter, and he pushed through Congress a surtax to pay for the war in Vietnam. Richard M. Nixon discarded the laissez faire approach to the economy on which he had been elected and instituted mandatory wage and price controls. Gerald R. Ford stopped trying to whip inflation within months after he took office in the face of a staggering slide in the economy.

But that is no solace to Mr. Carter. It came, his advisers say, as a rude shock to Mr. Carter that the success of his presidency would hinge on so many factors outside his control.

First, there is Congress, where many of the major battles in the war against inflation will be fought and where the President has few committed allies. The "real-wage insurance"proposal, which has become the cornerstone of his anti-inflation program, has been attacked by many of the Congressional leaders whose support is necessary if it is to be enacted. Even if it becomes law, there will probably be so much Congressional nit-picking that passage will come too late to affect wage settlements in 1979.

Congress will also decide in the end whether the budget deficit can be held below the magic $30 billion figure. Senator Edmund S. Muskie, Democrat of Maine, and others in Congress who are responsible for setting spending and revenue levels doubt now that it can. Liberals, led by Senator Edward M. Kennedy, Democrat of Massachusetts; have pledged to continue to strive for more outlays for social welfare programs. And the influential analysts at the Congressional Budget Office are predicting a recession in the last half of 1979 if Congress sticks to the President's plan. The second factor, over which Mr. Carter has little control is labor negotiations. Neither businesses nor unions have much confidence in the anti-inflation program.

Many in labor, including George Meany, president of the A.F.L.-C.I.O., view the President virtually as a traitor. The business sector sees the President as ineffectual. Both sides have told him to keep out of their bargaining.

A third force is the international money markets. The international bankers thumbed their collective noses initially at the anti-inflation program. The steps taken in November to stabilize the dollar were successful in the short term, but no one knows about the long haul. If the dollar remains weak, inflation cannot be conquered; conversely, if inflation does not abate, the dollar will not strengthen.

In the final analysis, Mr. Carter cannot be expected in the year ahead to control the economy. He can only try to cope with it — and hope that next year, when he begins his race for reelection, the economy is no longer controlling him.

GUIDELINES TODAY — CONTROLS TOMORROW?

(By Steven Rattner)

WASHINGTON.— President Carter's voluntary wage and price guidelines, while just a few months old, have already caused confusion and considerable speculation. that mandatory controls are likely to follow within a year.

The Administration has maintained insistently that there will be no mandatory controls, but whether the voluntary program will be successful in curbing inflation is far from clear.

The reason for concern, however, is crystal clear: After the disastrous post-Vietnam oil price experience of 1973-74, inflation by 1976 had slowed to 4.8 percent. In 1977, it crept up to a still tolerable 6.8 percent. But in 1978, the rate exploded. In some months, the increases in the Consumer Price Index were nearly a full percentage point, and by yearend, the total was frighteningly near double-digit territory.

Reacting to a disastrous first quarter, the President in April announced Phase I of his inflation program — a voluntary system of guidelines designed to decelerate wage and price increases under the direction of the energetic Robert S. Strauss, who was already holding down one job as the nation's chief trade negotiator.

But even Mr. Strauss's energy could not overcome the widespread evidence that the program was largely window dressing. On Oct. 24, a less voluntary, but still not mandatory, Phase II was announced. The actors changed as well, with Alfred E. Kahn, the highly acclaimed chairman of the Civil Aeronautics Board, assuming the role of chief inflation fighter with the principal title of chairman of the Council on Wage and Price Stability.

The anti-inflation program was the product of an interagency group, which, enjoined not to propose anything that required new legislation and constrained by the President's lack of authority, developed a series of guidelines similar in concept to the mandatory controls of the Nixon era.

The Nixon wage and price controls, which began in August 1971 with a total freeze on wages and prices, had similarly come in response to a mounting inflation rate. But the program then was mandatory and included complex requirements for computing and posting permitted prices for thousands of items. Yet, some of the Nixonian precedents were used — sometimes almost verbatim — in drawing up President Carter's program.

Basically, under the current program, labor contracts were to include the wage and benefit increases totaling no more than 7 percent, and price increases were generally to be kept below a 5½ percent ceiling, but could be as much as 9.5 percent depending on whether the company had had unusual cost increases or whether the company historically had increased prices substantially.

The Government's principal weapon of enforcement was to be the threat of denial of the right to bid on Government contracts. Lesser threats were to include the power of regulatory agencies over certain industries and the ability of the Administration to control such things as import quotas.

The plan has been under continued attack from labor as favoring business. Union leaders have charged that while the wage standards is almost completely inflexible, companies are offered several alternative ways to formulate their price structure.

To most observers, the charges had some validity, but the bias was seen as stemming not so much from a pro-business slant as from a conviction within the Administration that business's prices are basically competitive and rise when the underlying costs — represented principally by labor — also rise. Monitoring of business is necessary, but the real key to curing inflation is to deflect the rate at which wages are rising, Administration economists believe.

But the wage standard proved so tough that in early December, the Administration moved to loosen it (and made some other changes as well). As tough as it would be to win support from unions accustomed to 10 percent annual increases, Administration economists reasoned, getting them to include the mounting cost of fringe benefits plus salary increases within a 7 percent standard would prove virtually impossible. Corporations, worried that the Administration would denounce them, agreed, so the costs of maintaining existing fringe benefits were removed from the guideline for wage increases.

The changes notwithstanding, trying to comply with the guidelines remained a difficult task for business, which was faced with often-confusing regulations. The task was also tough for the Administration, which at year's end was trying to add 100 economists, lawyers and accountants to the enforcement staff of the Council on Wage and Price Stability.

Nonetheless, the Administration maintained that it would present a Phase III to Congress this month. That package of legislative proposals was to include not only the innovative real-wage insurance plan, designed to provide tax credits to reimburse workers for inflation, but also the long-standing proposal to control rising hospital costs and perhaps other ideas such as deferring minimum wage increases.

The real Phase III, in the minds of the public, is the question of mandatory controls. The position of the Administration has been unequivocal: no mandatory controls under any circumstances presently imaginable. To the skeptical public, that was reminiscent of similar promises made by former President Nixon before he imposed mandatory controls.

That conviction was reinforced by the fact that also at year's end, the Administration's voluntary program seemed to be having no effect. Nor was there any sign of promise that the two big contracts of early 1979 — involving oil workers and truckers — would represent a victory for the guidelines.

MILLER'S MONETARY POLICY — HOW TIGHT?

(By Clyde H. Farnsworth)

WASHINGTON.— Not since the days of Franklin D. Roosevelt has a President had so great an opportunity to shape the independent central bank as President Carter will soon have. Some time early this year the White House will nominate two new members of the board — an action that will be watched closely both domestically and internationally for an indication of Government intentions on the course of the dollar, the flows of credit and much of the economic future of this country.

Together with G. William Miller, a socially conscious businessman from New England whom the President named chairman of the board, and Nancy Hays Teeters, an eclectic Keynesian fiscal specialist whom he named to the board, the new members will form a majority of the seven member board. And within a year there may be another vacancy when the term of Philip E. Coldwell, a career Fed economist from Dallas, expires. Thus, the board’s direction will give a clear signal of whether the Administration is determined to back up its official rhetoric with tough policies to beat inflation.

The shared responsibility of the selection process (between the White House and Mr. Miller) makes it also, as Wall Street Fed-watcher, Henry Kaufman, general partner of Salomon Brothers, puts it, "a key test for Mr. Miller."

After early accommodations to the President's populist inclination for easier money and credit, Mr. Miller, with Treasury Secretary W. Michael Blumenthal as a powerful ally, persuaded the Administration to shift its priorities 180 degrees to fight inflation and stem the dollar's plunge.

When chaos broke out in the financial markets following the President's Oct. 24 anti-inflation speech, Mr. Miller and Mr. Blumenthal drew up the celebrated dollar defense package. One of the main elements was the one-percentage point rise in the discount rate announced by the White House.

Mr. Miller also led the Administration to trim the size and defer the timing of the tax cut to reduce the fiscal deficit. Finally the Administration, at his prodding, again weighed balancing the budget.

But not everyone gives Mr. Miller high marks after almost a year in office. The chairman of the Senate Banking Committee, William Proxmire, publishes his report card. The grade was "F" — "clear failure," said the Wisconsin Democrat. Both inflation and interest rates have continued to rise despite Chairman Miller's statements that he wants to reduce them.. And now to make matters worse, interest rates have reached levels that many economists believe will lead to a recession next year."

That's a bit unfair, says another Wall Street Fed-watcher, David Jones, vice president of Aubrey Lanston and Company, who gives Mr. Miller a "B" against "A–" for Arthur F. Burns, his predecessor.

Mr. Miller has taken to giving his own report card: "I give Senator Proxmire a B+ as chairman of the Banking Committee, but a "Z" on analysis of who or what causes inflation and interest rates to rise."

The new chairman, who as chairman of Textron had a reputation as one of the quickest and smartest business executives in the country, found he could not move rapidly to meet the demands of domestic and foreign money centers for an interest rate jolt to control the rapid expansion of the money supply and inflation. Mr. Carter and most of his advisers abhorred high interest rates; and despite the Fed's independence, Mr. Miller would not risk a showdown with the President who had just appointed him.

Independence may be the ideal, but accommodation is the political reality, according to such Fed watchers as former governor Sherman Maizel and Congressional economist Robert Weintraub.

Thus, Mr. Miller moved cautiously even as the onslaught upon the dollar intensified. He talked anti-inflation to the Administration, but sided with the doves in the policy-setting Federal Reserve Open Market Committee.

He made a mistake, and later recanted it, when he became publicly identified with a vote against raising the discount rate last July. It was a mistake because it raised questions about anti-inflation credibility and triggered heavy dollar selling.

He also spoke, perhaps prematurely, of interest rates "peaking" by the end of the year. In a December interview a little before the Organization of Petroleum Exporting Countries raised the price of oil, he called the present degree of credit restraint adequate. But after the oil price rise rates edged up.

Finally, at year end, as he had predicted, the high interest rage policies seemed to be biting. Growth of the money supply was finally slowing after the Federal Funds rate, the short term money rate that is the barometer of Fed intentions, had climbed above 10 percent from 6½ percent last spring.

Another Wall Street Fed-watcher, James Sinclair, commented: "If the detractors of the Fed action got what they purportedly want, I assure you they would not want what they would get. Interest rates would shoot up to 14 percent, and the stock market would stumble into a deep, dark hole."

Mr. Miller, is a brisk, practical man. His style is to avoid confrontations and get things done. The pipe-smoking Mr. Burns was an unusually strong personality who dominated the board and the Open Market Committee. Mr. Miller is less charismatic, more of a consensus man. The emphasis is on action, brevity (no one is allowed to talk too long), less smoking (he's a non-smoker) perhaps less wit.

In a recent interview, he said he had been enjoying himself at the Fed, even though he makes only a fraction of what he earned in private industry. He said that working with other parts of the Government and the Administration, had been "much easier and more harmonious" than he expected.

TAR CREDITS: CARTER'S PLOY TO RESTRAIN WAGE GAINS

(By Edward Cowan)

WASHINGTON.— With the emphasis here on fighting inflation and trimming the budget deficit, Congress will probably skip the issue of tax cuts this year unless consumer spending collapses and the national unemployment rate soars above 7 percent.

Government economists are hoping that the Revenue Act of 1978 will help prevent that. They say that the $19 billion of income and capital gains tax cuts for individuals and corporations — showing up this week in the form of reduced income-tax withholding in the first pay checks of 1979 — will help sustain consumer spending and corporate investment and prevent the economy from sliding into a recession.

But at the same time higher Social Security taxes, which went into effect on Jan. 1, will, in many cases, offset the gains of lower withholding rates.

To give wage earners relief if consumer prices rise by more than 7 percent, President Carter has proposed a new tax credit he calls "real-wage insurance." To be eligible, a taxpayer would have to be part of an employee group within his company whose compensation — salary plus benefits — rose by no more than 7 percent during the year.

The real-wage insurance bill is likely to become a partisan battleground in Congress. The President proposed it to encourage labor to accept his wage guideline. A vote for it will be construed as support of his price-wage stabilization program and that means most Republicans will oppose it.

Organized labor also opposes the voluntary guidelines, and if the unions seek to shoot down the insurance legislation, Mr. Carter will have great difficulty moving it from Capitol Hill to his desk for signing. Indeed, Congress could well reject the proposal outright.

Other issues facing Congressional tax writers include revision of three sections of the Internal Revenue Service regulations that deal with:

An issue called "carryover" which has to do with capital gains and estate taxes; it is very complicated and by most accounts it is the most emotional tax issue to vex Congress in quite a long time. Congress changed the carryover rule concerning capital gains on inherited assets in 1976 to close what tax reform advocates said had been a loophole. The 1976 act required that an heir take as his cost basis not the value of the asset at inheritance — which the law had permitted until 1976 — but the basis that would have been used had the benefactor sold the asset in his lifetime. Probate lawyers have contended that the 1976 changes created impossibly complex problems of tax and estate administration. The Treasury asserted that this was a false claim whose real purpose was repeal of the 1976 act. But last year Congress temporized by extending the effective date of the new rules to the end of 1979.

Withholding of taxes for payments to so-called independent contractors. The question of who is an independent contractor and who is an employee has embroiled the I.R.S. in some close calls.

By listing someone who does work for a company as a contractor, the employer avoids paying Social Security and unemployment insurance taxes and the contractor's wages are not recorded with the I.R.S. in the same manner as that of regular workers. The Treasury says that, as expected, independent contractors seem to omit more income from their returns than do employees whose pay is recorded on a W-2 form.

Fringe benefits. The I.R.S. has been trying for several years to collect taxes on certain kinds of non-cash benefits it regards a taxable income, such as free tuition for the children of a university's employees, free plane rides for airline employees and free use of company cars for nonbusiness driving.

There also will be a good deal of talk — but probably little legislative action — about Social Security payroll taxes and something called VAT, an acronym for value added tax, which is a European-style sales tax levied on manufacturers and sometimes services. At each stage of production and distribution the tax is imposed on the value added by the fabricator or processor or packager. Ultimately, the tax is added to the price the consumer pays for the item.

 

The chairmen of the tax-writing committees — Russell B. Long, the Louisiana Democrat of the Senate Finance Committee and Al Ullman, the Oregon Democrat of the House Ways and Means Committee — see VAT as an alternative to the Social Security payroll tax. That tax rose on Jan. 1 to 6.13 per-cent on the first $22,900 of earnings. By 1981 it will reach 6.65 percent of earnings of up to $29,700. Mr: Ullman and the executive branch think that's too high.

Hearings on VAT and on Social Security financing in 1979 could pave the way to legislation later. The value added approach is probably two years, perhaps a half-dozen, away from enactment — if it makes it at all. Mr. Ullman's Social Security timetable calls for action in 1980 to scale back the 6.65 rate.

The tax writing committees have stopped the I.R.S. from acting administratively because of the heavy mail members of Congress get whenever the issue warms up. However, the tax writers have found it easier to procrastinate than to write a bill.

DEREGULATION: PANACEA OR PANDORA'S Box?

(By Ernest Holsendolph)

WASHINGTON.— This city, known for its susceptibility to fevers, has come down with a major one called deregulation virus.

Its beginning can be traced to the pledge made by President Carter during his campaign that he would seek to cut out regulatory red tape and governmental interference with business. From that germ, an epidemic of regulatory reform has spread.

Actually the idea of deregulation has been alive here for several years, revived now and then by academicians and encouraged by Senator Edward M. Kennedy of Massachusetts.

But the predisposition of President Carter, with his opposition to the "wastefulness" of compliance with regulations and the dramatic success of airline deregulation last year, truly brought deregulation to its current feverish stage.

Actually there were three main developments in 1978 on the regulatory front: the President's announced intention last fall of reducing the inflationary impact of regulation; the implementation of Charles L. Schultze's idea of forming a regulatory review council to measure and grade the economic impact of specific regulations as well as to introduce a calendar of coming regulatory events; and the move among independent regulatory agencies to assess their impact and to loosen their grip on their rules.

Also, the Administration is preparing legislation to change the regulatory framework governing railroads and trucking, in both cases generally aimed at reducing its control of the two industries.

While chances appear good that some legislation will come out of Congress on railroads, transportation specialists say that it is doubtful that the committees can get to trucking in 1979. Senator Howard Cannon, the Nevada Democrat who now heeds the Commerce Committee, says flatly that he does not intend to tackle trucking. Late last month, however, the Interstate Commerce Commission said it would continue its attempts to deregulate trucking.

Regulation is big business. In a respected analysis, Murray L. Weidenbaum and Robert DeFina, economists at Washington University in St. Louis, found that in 1978 the total annual cost of Federal regulation, including administrative costs and compliance costs, was $86 billion. The compliance costs formed the greatest share of the overall cost, amounting to some $63 billion. And the paperwork involved in compliance was the biggest single segment of cost — $25 billion — for all of the industries put together.

If the $66 billion in 1976 appears large, it will be dwarfed by the costs in 1979, Dr. Weidenbaum predicted, citing estimates of more than $103 billion.

While the Washington University analysis is the most highly regarded effort in what all economists acknowledge is a slippery task, Secretary of Commerce Juanita Kreps and her staff are working on a framework for a "regulatory budget." It would require each agency to project, along with its traditional costs, the costs of complying with each regulation that it promulgates in order to keep officials cognizant of the consequences of their policies.

But, while they are diminishing in number, there are still strong advocates of regulation. Bennett C. Whitlock Jr., president of the American Trucking Associations, asserts that "the orderly protection of the regulatory umbrella has been enjoyed most significantly by the shipper, who has been able to take advantage of reasonable rates, good service and get value for his dollar."

And in a presentation in December to the Senate Commerce Committee, Wayne G. Granquist, a specialist in regulatory policy for the Office of Management and Budget, put it this way:

"We recognize that we must pay more attention to incremental costs and benefits. For example, in determining the level of stringency of a regulatory standard, we need to know whether the extra benefits are worth the extra costs. We must also try to assure that these dollars are being allocated where they will do the most good."

Conservationists and environmentalists, of course, are wary of the abundant talk about reducing the impact of regulation, fearing that such concerns will provide an excuse for taking the pressure off industries that spoil the environment. But Carolyn Shaw Bell, an economist at Wellesley College, suggests that while in addition to toting up the costs of regulation, reformers must also take into account such "benefits" of regulations as higher productivity resulting from reduced illness and increased longevity of workers thanks to improved working conditions mandated by the regulatory agencies.

A number of regulatory agencies that deal with specific industries are making moves on their own. Some of their actions are:

The Civil Aeronautics Board, even before Congress passed a sweeping law to provide freer entry and give carriers latitude to change prices, promoted competition by extending wider operating authority to airlines that offered low fares.

The Interstate Commerce Commission, whose surface transportation industries shelled out $11 billion for compliance in 1976, is moving steadily to relax regulations in the huge trucking industry. It plans to provide easier access to the business by truckers in hopes that added capacity will serve to pressure prices downward.

The Federal Communications Commission, partly under pressure from Rep. Lionel Van Deerlin, the California Democrat who heads the Communications subcommittee, is proposing to deregulate radio broadcasters in selected markets in 1979 as a test.

Consumer and safety regulatory agencies have not signaled broad relaxation of their politically sensitive rules, but they have indicated growing consciousness of the impact of the rules on industry. Douglas Costle, head of the Environmental Protection Agency, has been named by the White House to head the Regulatory Analysis Review group which will measure the impact of specific regulations.

With the Administration continuing to press its concerns about Inflation, it is clear that the pressure will grow on individual agencies to justify regulations and exhaust all other alternatives before promulgating additions to Washington's voluminous list of controls over the way industry works.

FARM AID: LEGISLATING HIGHER, FOOD PRICES

(By H. J. Maidenberg)

("The harvest is past; the summer is ended, and we are not saved."— Jeremiah 8:20.)

The prophet might just as well have been assessing the current state of the nation's biggest industry, agriculture. After three record harvests of basic foodstuffs — corn, wheat and soybeans — food prices are again expected to climb 10 percent this year. And food is the biggest factor in the cost of living.

And while President Carter has showered more benefits upon farmers in the last year than during most of the New Deal Era, farmers are now convening once again at Washington's Quality Motor Inn to demand still more help from the Administration.

To further confuse the agribusiness situation, the agricultural sector of the economy remains outside the President's anti-inflation wage-price guidelines; so do foreign commodities. But food processors are expected to live with these price parameters.

Above all, the prices all Americans, indeed, everyone on the planet, will pay for food this year not only depends on a fourth consecutive record crop year in the Northern Hemisphere, which is considered extremely chancy, but also on how much food China's 900 million people will require.

These questions were raised by John Schnittker, a leading agribusiness consultant to the food industry and a former Assistant Secretary of Agriculture in the Johnson Administration, during a recent interview at his Washington offices.

"We have still to see the full impact of the farm decisions made by the Executive Branch and the Congress in 1978," he said. "Thus far only four cases stand out as inflationary factors. One is the extension of the reserve and set-aside programs. The second is the 9 percent rise in dairy support prices that have been passed on to consumers.

"Thirdly, sugar prices are 40 percent higher than they would have been if these support prices had not been increased. Finally, all the three factors just mentioned have built-in mechanisms that are bound to generate higher prices, even if nothing else is added."

A former professor of agriculture in his native Kansas, Mr. Schnittker noted that the odds against a fourth straight record harvest this season were enormous and that a major crop failure in any major food importing country would cause inflation to accelerate.

China is the second major question mark after the weather. Long before Washington and Peking decided to restore full diplomatic relations last month, the Administration moved to permit China to buy unlimited amounts of American farm products on long term credit.

Despite a normal harvest last year, china bought 8 million tons of American grain, plus an equal amount elsewhere, just to maintain then-current rations for its people. The purchases here were the first in four years. China had to feed 18 million new people in 1978.

Happily for the American consumer, the Soviet Union, another big customer, reported a record harvest last year, which should substantially reduce its requirements in 1979.

But the consumer must also reckon with the increasing sophistication of the American farmer in holding his vast inventory of grain away from the market (soybeans, although vital to the food industry, have never been in significant oversupply).

The farmer can hold his crops off the market because the Administration extended the Federal crop loan period from 11 months to three years. Thus, a farmer can pawn his corn, wheat and other crops at a modest interest cost and still receive Government payments for storage on or off the farm. This is what Mr. Schnittker referred to when he cited the new "reserve" program.

Meanwhile, the set-aside program, formerly known as the soil bank, enables farmers to idle varying portions of their acreage without, in effect, losing any money. Outright subsidies have been increased.

Cargill, Inc., the giant grain-trading house, summed it all up recently when it reported: "The maze of Government lending programs makes it virtually impossible to generalize about borrowing costs and credit availability in the agricultural sector. There are also the added factors today of Federal crop loan and reserve programs."

What, then, do farmers want today? According to Mr. Schnittker, the farmers gathering in Washington want full, 100 percent parity, meaning that they want the Government to guarantee them their cost of production as well as a "reasonable" profit.

These angry farmers are comprised mostly of younger people who often have to rent or lease land because they cannot afford to buy farms at today's prices. Most are deeply in debt, squeezed by climbing overhead costs and therefore unable to take advantage of another benefit bestowed on farmers by the President last year — the right to borrow up to $400,000, with the Government guaranteeing 90 percent of the loans.

"There are about 2.7 million farmers in the nation," Mr. Schnittker said. "About 700,000 own their own land, are buying up smaller properties all the time to expand output economically, and are generally in fine shape. At the other end we see 300,000 farmers below the poverty line or close to it. In between we find a great many who farm and work in other businesses, so the income figures are distorted because they are part-time farmers and ranchers."

Indeed, the only certainties in agribusiness today is that production, processing and marketing costs will continue to rise; more farmers will be bought out by luckier and wealthier producers; farmers will demand more Federal financial aid because prices aren't high enough; food manufacturers will cite higher farm prices in marking up their goods, and the consumer will pay more at the check-out counter.

PROFIT GAINS EXPECTED FOR MOST INDUSTRIES

(By Phillip H. Wiggins)

Despite rising inflation, a devastating weakness in the dollar in the third quarter and talk of the recession, major industrial sectors of the economy, although remaining cautious, foresee limited gains this year. Analysts are forecasting a 6 percent to 10 percent growth in after-tax corporate profits for 1979, compared with an 11 percent gain estimated for 1978.

"We share the general view that growth will be slow in 1979, but we do not expect the kind of recession that would impact profits and dividends severely," said Arnold Bernhard, research chairman of the Value Line Investment Survey. "We think the dividend level will hold. In fact, it may go up more than profits. The payout ratio is very low."

Mr. Bernhard said he thought airlines would benefit from deregulation of fares, that health services would continue to grow and that the hotel and motel businesses would prosper.

"We expect consumer hard goods — from refrigerators to automobiles — to be down this year because the consumer is stretched thinner today than at any other time in recent memory," said Steven Lewins, research director at Value Line. "The housing industry is poised for a cyclical downturn."

Mr. Lewins said Value Line was "deeply concerned about the prospects of strikes this year in four major areas — trucking, autos, building trades and the tire and rubber industry."

Analysts' views of the outlook for several key industries are:

Airlines: Whether the airline industry will continue to chalk up record profits in 1979 is questioned by Robert S. Krauser, a member of the New York Society of Securities Analysts.

Much to the industry's surprise, he said, lower fares resulted in a dramatic increase in passenger miles and correspondingly higher profits in 1978. However, with deregulation of both routes and prices on the way, new competitors may proliferate. The result could be that gains in passenger miles will not bring higher profits, he said.

At the same time, he added, the airlines will be spending billions of dollars on fleet expansion and any disappointment in revenues could have a sharp effect on this industry. Pan American World Airways and Trans World Airlines showed dramatic improvement last year.

Chemicals: In terms of profits, the chemical industry in 1978 performed better than expected.

There were divergent trends. "Downstream" companies, those involved more with retail sales to the consumer, such as Celanese and the E. I. du Pont, fared better than "upstream" companies, those concerned more closely with production and raw materials, such as Dow Chemical and Union Carbide. Du Pont's profits, for example were expected to be up about 40 percent for 1978, probably one of the highest in the industry, while Dow Chemical's earnings were expected to rise only about 3 percent.

Overall, chemical industry profits for 1978are expected to be 10 percent above 1977. But some analysts believe, with the anticipated slowdown of the economy this year, that chemical profits could be off as much as 10 percent. Analysts expected chemical companies to try to push through price increases early in 1979, beating anticipated price controls.

Computer equipment: A 15 percent rise in revenues has been estimated for the computer industry in 1978. A computer specialist at Value Line said overall capital expenditures would expand by 12 percent, or 4 percent in real terms.

"There is no price inflation in computer revenues because of advancing technology, which gives more performance for the dollar," he said. "We are looking for about a 13 percent rise in revenues in 1979 and a 10 percent rise in earnings."

The 27 computer companies Value Line uses to gauge the industry will have projected revenues of $45 billion in 1979, up from an estimated $40 billion in 1978. Net profits are estimated at $4.8 billion in 1979, up from $4.4 billion estimated for 1978. The International Business Machines Corporation, the NCR Corporation, the Control Data Corporation, Honeywell Inc., the Sperry Rand Corporation and the Burroughs Corporation, leaders in the field, all performed better last year.

Food: About a third of the typical American family's food budget is spent eating away from home. This is expected to rise to 50 percent by the 1980's, a report by Doremus & Company shows.

Consumption of natural foods is increasing in West Germany, the Netherlands, Belgium, Britain and Japan, and American food exports to these countries can be expected to expand substantially in 1979.

The largest and fastest growing segment of the $95 billion food-service industry is commercial, accounting for 67 percent of the total dollar volume. Fast food chains are expected to increase their business by 24 percent over the next two years, recreational food service by 21.5 percent and full service restaurants by 23 percent, the report said.

Insurance: The rapid pace of merger and acquisition activity highlighted the insurance industry in 1978. The year's largest bid was the NLT Corporation's acquisition on Dec. 4 of 5 million shares of the Great Southern Corporation at $58 a share, or a total of $290 million.

"The life insurance industry continues to show excellent growth, with earnings expected to rise 12 percent to 14 percent in 1978 and in the range of 12 percent to 12.5 percent for 1979," said Theodore J. Newton Jr., an insurance industry analyst at Blyth Eastman Dillon & Company.

"Property and casualty insurance is having an excellent year. In terms of profit margins, it will probably be the best year of the current cycle with a profit margin of about 5 percent," he said of 1978.

Machinery: Capital goods orders in the machinery manufacturing industry have continued higher, according to Merrill Lynch, Pierce, Fenner & Smith's third-quarter industry report. The firm expects capital spending for 1979 to increase slightly in real terms from 1978. Therefore, Merrill Lynch says, earnings of most machinery companies should increase next year.

Merrill Lynch says the machinery stocks seem to be discounting any deep recession in 1979. "We believe that until that discounting process is complete, the shares of machinery companies will tend to reflect the prospects for a decline in earnings in 1980, despite the likelihood of higher earnings in 1979."

"Two premier machinery companies in terms of investment quality have been the Caterpillar Tractor Company and Deere & Company," said Alexander M. Blanton, Merrill's senior machinery analyst.

Paper Products: "Last year the paper industry grew faster than generally because the markets that paper services, such as magazines and advertising, have grown faster than general business activity," said Norma Pace, senior vice president and chief economist of the American Paper Institute.

"In 1979, the demand for paper will be paced by economic activity. If we have a 2 percent growth in the gross national product, we will see at least a 2 percent growth in the paper industry," she added.

The institute's annual survey of pulp, paper and paperboard capacity foresees an expansion rate of 2.4 percent a year between 1979 and 1981. Paper and paperboard capacity in 1981 is expected to be 72.6 million tons, with wood pulp totaling 57 million tons. This compares with an estimate for 1978 of 67.5 million tons for paper and paperboard and 53 million tons for wood pulp.

The sales of 40 companies in the paper and paper-related products field for the first three quarters of 1978 reached $25.1 billion, 11.9 percent above 1977.

The Champion International Corporation and the Georgia-Pacific Corporation gained in 1978, while earnings slipped at the Crown Zellerbach Corporation and the International Paper Company.

Pharmaceuticals: "I'm expecting outstanding, unusual earnings progress by the drug industry in 1978, averaging more than 25 percent year-to-year comparisons," said David Saks, drug analyst for Wertheim & Company. "This year I'm looking for another 16 percent average earnings gain."

By comparison, in the years 1975, 1976 and 1977, average earnings expanded only 7 percent.

Factors that would contribute to such gains include an increase in introductions of new drugs, recovery of demand in international markets and attempts by the industry to raise prices. On a short term basis, the industry's earnings reflect a relaxation of efforts by the Food and Drug Administration and Congress to regulate the industry.

Prime beneficiaries of new drug activity have been Merck & Company, with its Clinoral, an anti-inflammatory drug for the treatment of arthritis; the Smith Kline Corporation with its Tagamet, a drug for the treatment of ulcers, and the Upjohn Company with Motrin, another anti-inflammatory drug.

HOUSING — IT SHELTERS MORE THAN THE FAMILY

(By Alan S. Oser)

Despite high prices and tightening credit, demand for housing has remained strong with people increasingly relying on home purchases as a hedge against inflation.

"We finally saved enough for the down payment, and, with the prices rising, we thought it was better to buy now than next year," said Mrs. Karen Lando, of LaGrange, Ill., one such buyer. She and her husband bought a $90,000 house with a 20 percent down payment.

Such reasoning may prove sound because the average price of a single family house rose 14½ percent last year, while the overall inflation rate was about 8 percent — a more rapid appreciation than the usual rise in the resale price of houses of two points ahead of the inflation rate.

The industry has also been bolstered by the long term prospect of high housing demand, accompanied by a growing mobility in American society, creating constant housing needs.

Moreover, at the end of 1978, builders were not experiencing the "overhang" of unsold units that lengthened the previous major downturn, and the California, Florida, Dallas and Phoenix and markets have been particularly active.

"Californians never accepted the conventional 'stay-put' idea," observed Leon Kendall, president of the Milwaukee-based Mortgage Guarantee Insurance Corporation. They expect to move again in a few years, he said, and "all they ask is," "How much down and how much per month?"

In California "in the last 60 days bookings were as strong as they were a year ago," said Michael Tenzer, president of the Leisure Technology Corporation, builders of retirement communities.

Furthermore, the pool of the strongest potential buyers — those in the 25- to 34-year-old age group — is rising. That segment of the population rose from 27 million in 1972 to 33 million last year and is expected to keep rising through 1990.

But as the year drew to a close, the negative impact of rising interest rates on housing starts and purchases had started to take hold. Housing was into what Mark Riedy, executive vice president of the Mortgage Bankers Association, called a "soft landing" as mortgage interest rates reached 9½ percent to 10½ percent. And Mr. Tenzer suggested that the Northeast would not be able to bear the steadily rising costs of labor and materials.

The industry managed to avert an abrupt decline because banks were able to use new tools to retain funds for mortgage loans at a time when rising interest rates elsewhere were competing for their deposits. The savings institutions offered six-month certificates at rates higher than Treasury bills, thus impeding the flight of funds from housing lenders that accompanied the last recession.

Nonetheless, most industry leaders were predicting that there would be about 300,000 fewer homes built in 1979 — a 15 percent downturn from 1978's 2 million starts. Most estimates of new starts in 1979 ranged from 1.6 million to 1.8 million, an aggregate number that masks severe regional differences.

Since housing and related industries account for about 7 percent to 8 percent of gross national product, an overall decline of 10 percent to 15 percent in one year is substantial, said one housing economist, Louis Winnick of the Ford Foundation. In some regions of the country such a national rate "translates into something that could be characterized as recession," he said.

Across the country lenders were already predicting production declines of varying sizes as higher financing costs restricted the public's capacity to "carry" new houses. James Lutes, senior vice president of the Midland Federal Savings and Loan Association in Denver, said the association would cut its budget for mortgage loans by $25 million in the fiscal year. It expects a construction decline of 10 percent in the Denver area where the market is relatively strong.

"There will be more dramatic declines where there are usury laws," he predicted. With interest rates at 10½ percent in that area, "I don't anticipate a nose dive."

In New Jersey, John Atherton, executive vice president of the City Federal Savings and Loan Association, said, "We anticipate an active presence no matter what happens to rates." He and others commented that there had been more housing activity in the recent tight money period than in others past.

In the San Joaquin Valley of California, Donald Dauer, executive vice president of the First Savings and Loan Association in Fresno, said he expected a "slight decrease" in loan activity, coming off what has been a "plateau" for six months.

Large builders stressed the high demand and the fact that building companies are in a stronger position to ride out a downturn than they were in 1973 and 1974, when so many had large inventories of land. Eli Broad, chairman of the board of Kaufman and Broad, Inc., which builds in the Northern California, Southern California, Chicago and New Jersey markets, said that the danger lay in the "supply of funds and the cost of funds." The resale market and the market for second and third homes will be affected most, he suggested. But in general "Americans are acting more like Europeans and accepting 9 percent, 10 percent, 10½ percent interest rates."

The Government's new graduated payment mortgages, lowering initial costs for home purchasers; the increasing availability of private mortgage insurance, which also lowers initial costs, and the insulation of the thrift institutions against deposit outflows all served to slow the housing decline as interest rates rose. It was a different story in states with usury laws, however.

There buyers have already found terms stiffening. In New Jersey some lenders are already reported to require a 30 percent or 40 percent down payment on new housing. In New York State, where unusually restrictive usury laws held housing back for years, the state legislature lifted the legal mortgage rate to 9½ percent last year and allowed the rate to float to two points above a 10-year index of long-term Government securities.

As for multifamily rental housing, it has never recovered strongly from the recession. Prospects for increased construction are considered poor even where there are no rent controls. High costs largely attributable to the growing length of development time tend to put required rents out of the range of many market segments, and operating costs keep rising. This has led to speculation that the trend to condominium conversion will increase and that a rental housing crunch can be expected in 10 or 15 years.

OIL PROBLEMS HOW TO CUT CONSUMPTION AND INFLATION

(By Anthony J. Parisi)

The Carter Administration is committed to raising energy prices. The Carter Administration is committed to reducing inflation. Ergo : The Carter Administration has a problem — one that may prove as frustrating to the President during his next two years in office as were his original energy proposals during the first two.

Economic forecasters say energy prices will climb this year by perhaps 12 percent at the consumer level. In 1978, by contrast, the fuel and power components of the Consumer Price Index rose 4.5 percent.

One reason for the dramatic difference is that the Organization of Petroleum Exporting Countries, after foregoing an increase in 1978, has decided to raise prices an average of 10 percent this year. But economic forecasters say an even bigger factor in the sharply higher fuel and power bills will be price increases mandated by the United States Government. The most painful: An estimated 20 percent increase in the price of natural gas at the well and a similar jump in the price of crude oil.

"It's a cruel dilemma," said Milton Russell, a senior fellow at Resources for the Future, a research institute based in Washington that specializes in energy, resources and environmental studies. "President Carter promised at the summit meeting in Bonn to get United States prices up to the world level by 1980; on the other hand he is pledged to fight inflation. I would not underestimate the difficulty in resolving this conflict."

As the President and his energy advisers have repeatedly explained, they want to raise the price of all regulated fuels to their true replacement values. Market prices, the argument goes, would prompt more conservation, stimulate investment in conventional supplies and encourage exploitation of alternative energy sources, all of which would help slake the nation's thirst for OPEC oil. And the Administration has wide backing on this from economists.

"I think we ought to take our inflation medicine now and get it over with," said Michael K. Evans, president. of Chase Econometric Associates, a subsidiary of the Chase Manhattan Bank.

Added Ronald Whitfield, director of energy services for Data Resources Inc., an economics consulting firm: "By not raising energy prices, we may be able to lessen inflation this year, but only by making it worse later on."

As they see it, holding prices down would eventually lead to unnecessarily high oil imports, and that would add directly to future inflation, as well as tend to weaken the dollar, leading to price increases in other imported goods.

The Petroleum Industry Research Foundation figures that this year the nation will increase its purchases of foreign oil by some 700,000 barrels a day over last year. That would mean the oil trade deficit, which ran about $41 billion last year, might widen this year by more than $5 billion.

Domestic oil production has declined, despite an increase in drilling since the original OPEC price rise. The main reason for the falloff, oilmen say, is that "all the easy oil has already been found."

And this decline in production gives additional impetus for raising prices, for the lower the domestic price, economists point out, the higher the nation's consumption of energy. That means greater demand for OPEC oil — which would give the cartel even more leverage to raise oil prices, making the whole sequence of events more painful.

"It's a vicious spiral," noted Chase's Dr Evans.

But politics often override economics, especially when the short term gains seems to outweigh the long term considerations. The all-too-pressing truth is that higher energy prices in 1979 will mean higher inflation in 1979 — regardless of what they may do in the future — and this fact has not escaped notice in Congress. The President's inflation watch dog, Alfred E. Kahn, has already come under attack for the Administration's apparently contradictory goals of higher energy price and lower inflation. More uproar seems inevitable as regulatory changes already enacted, or currently in the works, show up in the form of higher energy prices.

The energy legislation that Congress passed in the fall kicked off a big round of increases in the price of natural gas at the well. Customers are just now beginning to pay the higher utility bills that those increases will eventually lead to. Data Resources has calculated that, for 1979 as a whole, consumers will pay about 12 percent more for their natural gas than they did in 1978; commercial users around 13 percent more, and industrial users 19 percent more.

Meanwhile, the average price of domestic crude oil, which has been inching up steadily under legislation passed during the Ford Administration, is expected to start taking bigger strides in June, when that law expires. Although no one knows definitely what the new pricing strategy will be, the Administration has indicated that it would like to loosen the regulations, and Data Resources has estimated that faster decontrol will mean a 17.5 percent increase in domestic crude oil prices this year.

This, together with other factors, such as the OPEC increase, will raise the price of gasoline, fuel oil and other petroleum products by about 10 percent at the retail level in 1979, according to most estimates. Electric utility bills are expected to climb apace. Only coal, of all the major forms of energy, is projected to advance at a significantly slower pace than it did in 1978, when the miners' strike sent prices soaring on the open market.

All this, however, assumes no change in the Administration's energy strategy. "So much depends on policy decisions," notes Dr. Russell of Resources for the Future. "If you want to set economic policy for the decade, then you want to get energy prices up. But you don't live by the decade, especially in the White House."

FOR AIRLINES, PROFITS NOW BUT CLOUDY SKIES AHEAD

(By Richard Witkin)

Not since airlines began their pellmell growth four decades ago on the wings of the DC-3 has the industry been in such upheaval. The upheaval is composed of many elements of which the dominant is the Deregulation Act of 1978. That legislation has made formal the swing to a virtually open market for fare reductions and has effected wide freedom in route competition.

Essentially, the situation is this:

The consumer has been happily taking advantage of a cornucopia of bargain ticket prices, and the airlines have been ringing up record profits. Yet the future is so full of uncertainties that many analysts, while moderately optimistic about profits in the short term, are loath to predict the shape and health of the industry a year, much less five, from now.

"I can safely say that it is much too early to assess fully the impact of the new deregulation legislation as well as the changing competitive structure of the industry," said Julius Maldutis, airline expert at Salomon Brothers, in a recent interview. "It is also much too early to assess the depth and duration of the merger trend," he added.

To illustrate the swings that may be in the offing, consider the vital issue of profits: The scheduled United States carriers did such a booming business in 1978 that, despite the downturn in the price of the average ticket, total profits were being estimated at year's end in the neighborhood of $1.2 billion. This would compared with $754 million for 1977.

Industry economists said this figure would amount to a return on revenues of about the same as the return for the nation's overall manufacturing industry.

But 1979, they warned, does not look quite so promising. Alfred H. Norling, airline analyst at Kidder Peabody & Company, predicted airline traffic in 1979 would grow by about 7 percent, compared with 16 percent for 1978. He estimated that total airline profits were likely to decline by 35 percent, but that the final figure would still be a healthy one.

Such forecasts appear typical among industry experts, and they are not attributable simply to the new competitive environment fostered by the deregulation bill. Many other factors are at work: a forecast recession, expected rising costs for labor and fuel and growing air traffic congestion.

The deregulation bill did not become law until late in October. But the airlines, accurately assessing the deregulation trend and dealing with a Civil Aeronautics Board whose leadership was actively promoting the radical turn toward less regulation, had begun their discount fare contest many months before.

The upturn in travel that coincided with the deep discount offers went far beyond the most daring predictions and made a hero of Alfred E. Kahn, the C.A.B. chairman who in October moved on to become President Carter's anti-inflation chief.

The upturn helped to unleash billions of dollars worth of new aircraft orders, giving momentum to Boeing in its impressive campaign to market two new middle-size jets.

What remains to be analyzed is to what extent the surge in travel resulted from fare cutting and to what extent it reflected other economic realities. In any case, the airlines are trying to take advantage of the new climate by moving into new routes and ordering new fleets of planes and to protect themselves from the hazards of the new competition by increasing efficiency and cutting costs.

Most far reaching of the defensive strategies were a series of merger moves last year that could well proliferate in 1979. The move to mergers began with two thoroughly amicable projects that, if the C.A.B. approves, will tie together Continental and Western Airlines in one case, and North Central Airlines and Southern Airways in the other. Much more complicated and not so amicable is the attempt by three airlines so far — Texas International Airlines, Pan American World Airways and Eastern Airlines — to take over National Airlines.

The C.A.B. may make a determination on one or more of these proposed consolidations by spring.

One more factor that must be taken into account in assessing the airlines' economic outlook is what is to be done to cope with the hazard of midair collisions.

In the aftermath of the Sept. 25 San Diego collision of a Pacific Southwest Airlines jet and a small private plane, Federal authorities made clear that sweeping measures would be invoked to minimize chances that the tragedy, whose death toll of 144 was a record for this country, would be repeated.

Whatever steps are finally taken, it is deemed inevitable that they will cost a good deal in the form of slowed traffic, wasted fuel and investments in new radar and other air navigation facilities.

TRUCKERS, BRAKING REFORM?

(By Winston Williams)

If the enraged truckers have their way, Federal regulators will have a much more difficult time rerouting the nation's motor carrier system than they had unshackling the airlines.

Critics of recent efforts by the Interstate Commerce Commission to deregulate the trucking industry argue that changing the rules would eliminate the smaller competitors and that large companies, like Consolidated Freightways, Roadway Express and McLean, would be the ultimate beneficiaries.

"We're being steamrolled," said Pansey H. Beroth, vice president of Pilot Freight Carriers, a $128 million company based in Winston Salem, N.C.

Mrs. Beroth is also a member of a dissident group of small truckers and complains that the group's lobbying efforts have been stymied by Washington's sudden enthusiasm for deregulation. "Everything is moving so fast we just can't act the same way we have in the past," she said.

The larger companies are bit more conciliatory.

"We'll have to look at what the President wants. Then we'll go to our Congressmen and tell them what we want,"said Steve Murphy, senior vice president of Yellow Freight System, the nation's third-largest trucker.

To dramatize that deregulation of trucking will be no simple matter, the American Trucking Association, the industry trade association, likes to brag that the 17,000 regulated truckers, unlike the handful of airlines, have political clout in every Congressional district in the country. The truckers also remember fondly that the implementation of a 1975 I.C.C. decision to expand unregulated local zones, which reduced demand for some haulers, was delayed for nearly three years by court challenges.

But the truckers say they won't rely on muscle alone to keep the $30 billion regulated portion of the industry highly profitable. They are polishing up arguments that sweeping reform would destroy the nation's transportation network — as well as lower the return on equity for trucking companies, which has averaged above 20 percent over the last decade.

Some of the arguments that predict all manner of chaos or that plead concern for small carriers and for the transportation needs of small communities, are obviously self-serving. The more sophisticated cases emphasize the difference between the airline and trucking industries.

The most often heard difference is that cutting prices would not generate one additional pound of freight for haulage, even though reducing airline fares increased the passenger total. Another argument is that the cost of transportation is an "infinitesimal" part of the total cost of a manufactured goods, and saving 5 percent on transportation would do almost nothing to bring down the inflation rate.

To make the latter point, A.T.A.'s president Bennett C. Whitlock uses the example of an electric typewriter selling in Chicago for $249.47. He calculates that the cost of transporting the finished product from New York is only $1.74. However, that cost does not include transportation of raw materials and parts prior to assembly.

Whatever combination of persuasion and force the truckers use, the movement toward easing Federal regulations appears irreversible. The rapid chain of events that followed the President's October anti-inflation speech seems to have insured that. Everybody is getting into the act:

The I.C.C. has reversed more than 40 years of policy by ruling that private fleets owned by non-trucking businesses can hire themselves out to others to haul goods. The commission has also alerted the industry that it will no longer rubberstamp requests for rate increases and will allow more competitors to enter the market as contract carriers, truckers who haul truckloads for one shipper. These actions have effectively destroyed the truckers' unity by pitting different segments of the industry against one another.

Senator Edward M. Kennedy, the Massachusetts Democrat who heads the antitrust

subcommittee, is preparing legislation to rescind immunity of the rate bureaus, the geographically based carrier groups that jointly set rates.

The Transportation Department is preparing its own grandiose deregulation scheme for all modes of transport.

The railroads are asking to be deregulated, and there's some sympathy in the Administration for deregulating all transportation at once to avoid disturbing the competitive balance.

One factor that could slow the pace of deregulation is the ambivalent attitude of shippers. They aren't always satisfied with the rates they pay, but they like those facets of regulation that set minimum levels of service.

"Under complete deregulation no rates would be published. We would have to deal with each carrier individually," said Donald Boyes, a transportation official at the Reynolds Metals Company and president of the Industrial Traffic League, an organization of large shippers.

"We wouldn't know from one day to the next what the prices would be, and with free entry and free exit for carriers, we wouldn't even know whether the trucks would show up," he added.

Thus the stage seems set for compromise, after considerable haggling of course. The truckers are already talking about proposing their own reform legislation. Among other things it would allow rates to go up or down by 7 percent without consent of the commission or the rate bureaus. They say they would consent to the abolition of the ban on corporate fleets hauling for different subsidiaries of the same corporation. At the same time they would like permission to set joint rates with barge and railroad companies, and they want new rules that would streamline the commission's decision making process.

STEEL'S SURPRISE: DEMAND IS HIGH

(By Agis Salpukas)

After a rocky beginning, the steel industry found 1978 a year of surprises — mostly pleasant — that put it back on the road to profitability. And after some initial wariness over whether the recovery could last, the industry began voicing optimism once again as profits of some steel makers neared the record levels of 1974.

Domestic consumption of steel last year stood at 111 million tons, the third-best year ever. And demand has not let up, although there are concerns that sales of rolled products, such as sheet, will fall off because of declines in sales of cars and large appliances.

Nevertheless, top executives predict a good year for 1979. David M. Roderick, the president of the United States Steel Corporation, has forecast that consumption for this year will be 113 million tons, which, he notes, would be only 4 million tons below 1974.

The slack in autos and appliances, he predicted, will be taken up by "the upward movement in business investment." Heavy construction, particularly by utilities and government, he predicted, will keep demand high for heavy steel products.

Just how much the domestic industry will capture of this market could vary from 100 million to 96 million tons, Mr. Roderick estimated. "The imports control that," he said.

Under trigger prices, which the Treasury Department put into effect in May, steel cannot be imported at prices below certain levels without risking an investigation by the Treasury

Department of whether it is being dumped — sold at prices lower than it cost to produce. Although the system has not cut imports, it has protected the domestic industry from price cutting by the importers and thus allowed the domestic producers to raise prices.

Prices went up 5.5 percent in the spring, 1.1 percent in March and 3 percent in June Another price increase of 3.2 percent is due in January, the maximum allowed then under the Administration's wage-price guide-lines.

The imports situation in 1978 was one of the unpleasant surprises for the domestic industry last year. When the Treasury Department put in the trigger price system, imports were expected to drop below the level of 1977. Instead, while the Japanese cut back, countries of the European Community and the third world producers sharply increased their shipments. It is estimated that Imports in 1978 ran well over 20 million tons, or some 16 percent ahead of 1977s record 19.3 million tons.

As a result, top steel-industry executives have become increasingly angry, particularly at the Europeans, and have made threats to revive antidumping suits if imports do not soon drop below 1977 levels.

However there is also evidence that imports have already begun to drop. The increase of the trigger prices by an average of 7 percent for the first quarter, the strengthening of the dollar and the Administration's 3.2 percent ceiling on price increases by the domestic industry will make domestic steel more competitive.

Last year got off to a shaky start. The long coal strike and bitter weather disrupted production just when there were signs of recovery. Then there was the legacy of the year before — one of the worst in the industry's history during which plant closings eliminated 7 million tons of capacity and the jobs of 20,000 workers.

So when orders began to surge in the second quarter top industry executives and analysts were still wary.

"When you've had two bad years," Earl Simanek, group vice president of the manufacturing division of United States Steel noted, "you get gun-shy."

But to the surprise of most executives, the high demand has lasted, enabling most steel plants to reach near full capacity and approach the efficient operating rates of 1974.

But if the situation worsens, having tasted the potency of political action in 1977, when the industry won, in addition to trigger prices, a wide program of aid from the Carter Administration, the steel industry will again look to Washington for relief if it believes imports are still too high.

CAN DETROIT FINANCE THE CAR OF THE 1980's?

(By Reginald Stuart)

New-car sales this year will take their first downturn in four years, if the forecasts of some auto industry executives here and of Wall Street analysts are accurate. Nevertheless, the industry, which normally cuts spending during periods of weak sales, faces its highest spending levels in history — approximately $9 billion.

In what has come to be known as "down sizing" to meet tough Federal standards for improved fuel economy, pollution control, safety and damagability, the industry has been forced to spend substantial amounts for new product designs and development, despite the prospect of lower sales.

"Our ongoing programs will require annual expenditures of more than $5 billion in 1979 and beyond, a rate more than double the amount spent in any year prior to 1977," said Thomas A. Murphy, chairman of the General Motors Corporation, in his annual economic forecast statement.

The Ford Motor Company plans to spend about $3 billion a year and the Chrysler Corporation between $700 million and $1 billion.

Many associated with the industry are anticipating a sales slump of 5 percent to 8 percent as a result of President Carter's efforts to fight inflation and a suspected drop in demand for new cars after a four-year cycle of growing sales. Consequently, this may well turn out to be the first year in which top management in Detroit will be forced to rethink its concept of cost cutting. It will not only have to take into account the traditional needs of remaining competitive, but also the new concern of meeting the Federal standards.

The importance of assuring a solid cash position to finance the new designs has been painfully demonstrated in recent months by the struggling Chrysler Corporation, the nation's No. 3 automaker. It has sold numerous properties, including most of its foreign operations, and created a preferred class of stock in order to raise funds to finance its fleet of the 1980's. The Chrysler move demonstrates; industry and investment analysts say, that projects associated with "down sizing" will be the last to be cut. But with a new president, Lee A. Iacocca, who assumed leadership in November after being fired and replaced by Philip Caldwell as president of Ford, Chrysler's tactics for the future are uncertain.

The three major American automobile manufacturers, General Motors, the industry giant, followed by Ford and Chrysler, are expected to spend some $70 billion by 1985 to build a new generation of cars that, as has been demonstrated in the first few rounds of down sizing, will be smaller, lighter and look considerably different than most cars on the road today, but will meet the Federal standards.

As many visitors to new car showrooms have found, the first round of down sizing (another round begins with the 1982 model year cars) has not only resulted in shrinking cars but also in increasing dramatically the use of plastics, aluminum, glass and high-strength, low-alloy steel in place of much of the iron and steel used extensively before world oil prices quadrupled in 1974.

The use of these materials, the industry has found, has led to considerable savings on parts and components, as well as to reduced weight with resultant improved fuel economy.

"At this point in time our experience has been that it costs about $1 billion to achieve a one-half-mile-per-gallon improvement in our cars," said Elliott M. Estes, president of G.M.

"As we get further into this, it's going to cost even more because then we'll be getting into the more sophisticated technology," he said, such a computerized engine systems that will be standard on most G.M. cars in the early 1980's. "The easy things like weight reduction are behind us," said Mr. Estes.

The yardstick that is emerging here also suggests that because of economies of scale, it will cost G.M.'s smaller competitors from $100 to $700 more per car than G.M. to achieve the same objectives.

Investment analysts tend to support the industry's arguments, and also have some additional views, of why prices continue to rise.

"For smaller cars the rising is clearly in response to the Japanese yen," said David Eisenberg, senior research analyst for the New York investment house of Sanford C. Bernstein & Company.

"The rising price of the yen in comparison to the dollar has given United States automakers a chance to recoup some of their higher costs and still stay competitive" against Toyota, Datsun, Honda and Japanese makes, which have risen in price as the yen has floated upward, he said.

How long Detroit can use the yen's appreciation to its advantage is not clear. Already Volkswagen has opened a plant in the United States and there is conjecture that some Japanese automakers will do likewise, offsetting Detroit's current pricing edge.

So, while the industry intends to abide by the Government's request that businesses limit annual price increases to 6.2 percent, it also appears that its reading of its capital needs and the likelihood of a weak market will mean it will make the maximum permissible price increase this year and next. By 1980, consumers could see the $10,000 car.

IN BANKING, THE STREET IS GETTING CROWDED
(By Deborah Rankin)

A major structural upheaval is underway in the banking industry with the forces for change coming from both outside and in-side. The banking landscape is being trans-formed by the growing presence here of foreign banks.

The foreign banks are competing aggressively for the big commercial credits that have been the bread and butter business of American commercial banks, which are battling to maintain their share of the corporate lending market, and now claim nearly18 percent of these credits nationwide.

Domestically, the gentlemen's agreement between commercial banks and thrift institutions not to encroach on each other's territory has been broken irretrievably. The advent of a new type of service that, in effect, allows the banks to pay interest on checking accounts has set off a free-for-all for the consumer's dollar.

The accelerating foreign invasion is particularly troubling to many observers. The number of foreign banks operating in the United States has more than doubled in the last five years, and their assets have soared nearly 300 percent to more than $95 billion — while American-owned banks have grown by only 64 percent.

Concern has grown because of foreign proposals last year to acquire four major American banks.

The biggest deal is the Hongkong and Shanghai Banking Corporation's proposed takeover of the Marine Midland Banks of New York, 13th largest in the country. In the three other plans the Standard Chartered Bank of London would acquire the Union Bancorp of California, the National Westminster Bank of London would take over the National Bank of North America of New York and the Algemene Bank of the Netherlands would buy the La Salle National Bank of Chicago. Also in the works is the proposal by the Bank of Montreal to acquire most of the Bankers Trust Company's retail offices in the New York metropolitan area.

Although all of these offers are awaiting approval from state and Federal regulators, observers believe they are the harbinger of things to come. Some 20 other big United States banks are reported to be on the auction block.

Eric R. Durant, a bank analyst with Merrill Lynch Pierce Fenner &Smith, noted that the foreign banks' actions were simply a mirror image of those taken by American banks in the 1960's. "They're just doing what American banks have been doing for decades — following their customers to new markets," he said.

C. Edward McConnell, vice president of Keefe, Bruyette & Woods, an investment banking firm, said that one reason for the push was that it gave foreign banks access to an important source of dollar funding. "Clearly what they want is to secure a source of domestic deposits," he observed. "Right now they're even having trouble tapping the New York certificate of deposit market."

One factor that may inhibit the growth of foreign banks is the passage of the International Banking Act of 1978, which removes many of the competitive advantages that foreign banks had over their domestic counterparts. The Fed is now authorized to impose reserve requirements on foreign banks, for example, and for the first time there are restrictions on their ability to take deposits nationwide.

Although the act's most important regulations remain to be written, the consensus is that the law will result in significant change.

Some say that the act's greatest import lies in the section authorizing regulators to undertake a study of the McFadden Act, a 40-year-old statute that prohibits interstate branching. They are buoyed by the current climate in Washington, which is more receptive to consideration of this controversial issue than it has been in years.

"Congress really hasn't addressed the McFadden Act in an objective way until now — it's been sort of holy," said Carter H. Golembe, head of Golembe Associates, a banking consulting firm based in Washington. "I don't think there will be legislation this year," he added, "but it's very encouraging."

Competition is intensifying within the domestic banking industry as well. The already fuzzy distinction between commercial banks and thrift institutions was further blurred in November by the introduction of automatic transfer service accounts. Banks attempted to lure retail customers away from the savings banks and savings and loans by offering the accounts, which essentially permit the payment of interest on checking accounts by allowing consumers to shift funds from their savings to their checking accounts at the last minute. At stake is the savings industry's nearly $640 billion in deposits.

But the thrifts got a new tool to attract consumers with the midyear introduction of the new six-month savings certificates pegged to Treasury bill rates. The certificates proved to be a major factor in preventing a repeat of the 1974 credit crunch, when funds flowed out of the thrifts directly into money market instruments. An estimated $50 to $60 billion of the certificates were sold during the last six months on the scene, but some money market instruments were yielding more than the certificates when the first batch of them began to mature at the end of the year. The question was whether the prescription would continue to cure the old illness.

One pessimist was David A. Levine, a partner of Sanford C. Bernstein & Company, a New York investment research firm. He predicts that cost pressures will become so strong that authorities will ban the certificates by next summer, when "a profit crisis develops in the mutual savings bank industry."

The credit card business also saw intense competition last year. The two big credit card organizations, Visa and Master Charge, fought aggressively for new customers and new merchants. By the year's end, each was claiming it had surpassed the other.

Even the staid, but lucrative world of travelers' checks — was not immune from in-fighting. Both Visa and Master Charge announced plans to invade the once-exclusive turf of American Express.

And the competition in banking is certain to continue and intensify during 1979. One major concern for all banks is the probability of recession and the question of how they can ride it out. Analysts, however, appeared to believe that most would weather an economic downturn in good shape.

"I am fairly sanguine," said Mr. Durant of Merrill Lynch. "Both corporations and banks learned from the last recession and have become more prudent,

Mr. McConnell of Keefe, Bruyette says that another factor that will help the banks is their increased loan-loss reserves and higher provisions for loan losses. "Even if losses increase substantially, they won't have the devastating impact on earnings that they did before," he said.

GRASSROOTS OPTIMISM IS UNDAUNTED THE MIDWEST

(By Douglas E. Kneeland)

CHICAGO.— The attitude of shoppers along Chicago's North Michigan Avenue, or in Kansas City's posh Country Club Plaza, rebuilt after being ravaged by floods slightly more than a year ago, would warm the hearts of tradesmen anywhere.

"People just don't have the same fear of the future,"said George W. Cloos, an economist at the Federal Reserve Bank here. "There's less fear of debt. I'm a child of the Depression, and I still have a fear of debt. There's some slowdown on furniture and appliances, but things like snow blowers, that people don't need, are going like hot cakes."

That strong consumer pulse rate is also being felt by Sears, Roebuck and Company. "We expect, for the year ahead, inflation will continue high, averaging about 7.5 percent, but consumer demand is holding up quite well,"said Jay Levine, an economist at the company's headquarters here. "General merchandise sales in current dollars for 1979 should be up about 6.6 percent."

There is also evidence that shoppers are beginning to learn to live with the realities of inflation.

"Notwithstanding the current inflation, the customer seems to be more understanding today and less inclined to blame the food retailer than she was in the mid-70's," said Walter Y. Elisha, president of Jewel Food Stores, a Midwestern chain. "She has perfected her ability to 'cherry pick' during inflationary time and to trade down in purchases."

For whatever it says of confidence, nine new high-rise office buildings are being added to the dramatic skyline of downtown Chicago, an area developers considered overbuilt only a couple of years ago.

"The Chicago metropolitan area, as a whole, is very healthy," said Richard S. Peterson, an economist at Continental Bank.

While the Zenith Radio Corporation, facing Japanese competition, has phased out a number of its television manufacturing operations in the area, throwing several thousand employees out of work, the region has had few other severe dislocations.

And some insist that the Midwest is holding its own in the Sunbelt-Snowbelt tug of war. Employment has generally been growing, and the jobless rate, while near the national average of 6 percent in Illinois, has been about half that in the less industrialized states of Iowa, Kansas, Minnesota and Nebraska.

"Midwestern farm states have benefitted as much from the moves of manufacturers out of major cities as the Sunbelt has," Mr. Peterson of Continental said. "I'll bet on 75 percent of the farms, the guy has another job." And farming itself has made money.

Despite a record corn crop, prices have held up moderately well because of overseas sales and the farmers' restraint in keeping much of their production in storage. Soy bean prices are still high, despite a record crop, and wheat has been fairly strong. Shortages have kept cattle and hog prices high.

Overall, farm income last year was about 30 percent above the previous year. And while it was considerably short of the 1974 peak, it was enough of a gain to bring back relative prosperity.

"We had a good crop year and we also had a good cattle year for the fellow who got in and got out," said Gerald Clause, president of the Home State Bank in Jefferson, a village amid the fertile fields of west-central Iowa. "The hog boys made a little money. The merchant had a pretty slow time last fall, but they'll feel a whole lot better this year."

NEW ENGLAND

(By Michael Knight)

BOSTON.— The election of Edward J. King as the first Governor of Massachusetts in recent times to abandon an anti-business attitude and openly advocate unrestrained economic growth — positions that had previously been political heresy here — has given the region's business community hope that the New England economy, a wheezing, coughing, staggering affair whose death has often been predicted, may be headed for rejuvenation.

His election comes at a time of crisis for the region's high technology industry — the manufacturers of computers and related equipment whose booming growth throughout the decade has been the only real economic bright spot here.

Those companies, which employ more than 200,000 persons in the "Golden Horseshoe" along Route 128 around Boston, in the southern tier of New Hampshire, in Maine and in northern Vermont, have outstripped the local supply of electrical engineers.

Despite full-page advertisements and recruiting trips across the country, the companies report that they cannot fill 2,400 of an expected 3,200 new engineering jobs a year expected for the next four years because of the region's high cost of living.

As a result, the share of the nation's new high technology jobs held by New England has dropped from 65 percent in 1970 to 45 percent today, according to James Howell, chief economist for the First National Bank of Boston.

"The electrical engineers are the linchpin of these companies, who are supposed to take up the slack and save us all," he said. "The linchpin is what holds the wheel to the axle, and if the engineers want to live somewhere else, the companies are going to build somewhere else. They are very labor dependent."

Mr. Howell said he hoped that Mr. King would be able to prevent that, as well as change the "tax the rich" attitude he saw here.

Still, New England had a good economic year in 1978, with increases in employment that nearly matched the national rate, 4.2 percent to 4.3 percent; personal income gains that slightly topped the national average, 11.6 percent to 11.4 percent, and a 5.8 per-cent unemployment rate, slightly below the nation's 6.1 percent.

To economists here that means that the nation's oldest industrial region, with its aging plants, high cost of labor, energy and transportation and fleeing population, did not, for once, slip still further behind the rest of the nation. And it might mean that the six states north of New York may be able to ride out next year's expected downturn comfortably.

"About the best New England can realistically hope for is to grow about as well as the rest of the nation," explained Richard Syron, a vice president and economist for the Federal Reserve Bank here.

In New Hampshire, whose explosive growth has been fueled by refugees from Massachusetts in recent years, the boom continued despite increasing local opposition to the changes being wrought in once-rural communities. In 1978, the state added 28,000 new jobs, an increase of 8.3 percent; unemployment dropped from 3.8 percent to 3.3 percent and personal income rose 13 percent, the same as in 1977. In addition, the influx of companies into the state because of its low tax business climate increased, with 37 move-ins and 55 expansions.

THE SOUTH

(By Wayne King)

ATLANTA — An overheated climate in construction, slowing consumer activity and problems in the manufacturing sector are expected to take some of the glow off the South's usually shining economic performance in the coming year, but the region is still expected to outpace the rest of the country.

"Basically, overall, what we are staring at in 1979, is 2 percent real growth nationally and 3 percent in the South," said Donald Ratajczak, director of the Economic Forecasting Project at Georgia State University here. "That's compared to a growth rate in the 5.5 percent to 6 percent range in 1978, so it's a decided slowdown. But the South will still be outperforming the United States as a whole."

The South's prolonged above-average economic showing over the last decade has resulted in large part from the Northeast to the South and Southwest. This, coupled with the region's relatively close proximity to domestic sources of energy in Texas and Louisiana, has enabled the South to maintain a level of growth consistently higher than that in the rest of the nation.

But a key factor in the predicted slowdown in the South in 1979 is an expected dampening of construction activity as a result of high interest rates and tight credit. This is also true in the rest of the country, but not to the extent it is in the South, where population rises have spurred building.

Construction industry leaders generally have been predicting a slowdown, and Mr. Ratajczak expects the decline to be on the order of 10 percent to 15 percent throughout the region.

"Construction either has to slow down, or there has to be a heck of a lot of industry continuing to move in — and 1979 is just not an industry year," he said.

And because of a multiplier effect by which one job is lost in other sectors of the economy for every one lost in construction, the building slowdown is expected to affect the South's economy significantly.

However, a renewed acceleration in population growth after a dip in 1975 and 1976 when Georgia and Florida actually experienced net out-migration, is expected to offset some of the economic depressants. Florida is expected to pace the growth trend again with 2 percent growth, followed by Tennessee and South Carolina with somewhat lesser rates. Generally, recession slows migration trends, but that is not expected to take effect in the South until late 1979.

Manufacturing activity in the South during 1978 grew by 4.5 percent over 1977, but economists are predicting no growth for 1979, saying they expect shoppers to be cautious buyers this year because the level of consumer debt is rising sharply.

Some problems are expected in the apparel industry, which will feel the impact of imports, while textiles are expected to be somewhat better off.

Trade and services are expected to hold up very well, with growth in the 3 percent area, and government, despite Proposition 13 outcries, is expected to experience modest growth.

MID-ATLANTIC

(By Ben A. Franklin)

NORFOLK, VA.— Following coal and rail strikes that rattled the Middle Atlantic region last year, another cycle of labor-management turmoil seems likely to renew familiar economic vibrations in the old industrial sector sloping eastward from the Appalachians to three major Tidewater seaports.

While the inland economies of Pennsylvania, Maryland and West Virginia recuperate from strikes in 1978 by the United Mine Workers union and clerks of the coal-hauling Norfolk & Western Railway, uncertainty in 1979 is focused on the least unionized of the Middle Atlantic states, Virginia, where a major shipyard walkout is foreseen.

The Newport News Shipbuilding and Dry Dock Company, which, with 19,000 workers, is the state's major industrial employer, has had bitter labor confrontations over the years. Last month the United Steelworkers of America authorized a strike against the company in an attempt to oust a company union.

The strike would "really put a hole in southeast Virginia and in the Virginia economy," said Dr. Lelland H. Trawick, director of the Bureau of Business Research at William and Mary College.

Such fears have been heightened, Dr. Trawick believes, by the fact that $25 million to $30 million was taken out of the southeastern Virginia economy in 1978 during the waterfront paralysis brought on by the coal miners' and Norfolk & Western strikes and because consumers in the state have already lost $15 million in buying power because of shipyard layoffs that began last year. Some 95 percent of the huge bulk cargo tonnage through Norfolk is normally coal shipped in by rail.

Unlike Pennsylvania, where a year-old Volkswagen plant at New Stanton has brought in a rush of other foreign and domestic businessmen looking for plant sites, Virginia's Tidewater area has so far failed to acquire new industry. A Volvo assembly plant was promised, then postponed at Chesapeake — a vast, mostly undeveloped "city" suburb of Norfolk that rivals Los Angeles in size. And a big new oil refinery at Portsmouth, on the drawing boards for years, is still tangled in environmental protests.

"In 1979 what I am looking for is a slowdown or a recession," Dr. Trawick said in an interview. "But it will not be so bad here, even with the shipyard trouble, as in the big industrial states."

Coal and steel are expected to float West Virginia, Maryland and western Pennsylvania over some recessionary bumps, if they come. But it has not been so easy to turn on the "energy-crisis coal boom" that was forecast by the mining industry following the Government's efforts to curb oil consumption.

Clean air regulations may reduce — or erase — the market for millions of tons of high-sulfur coal in the East. The requirements are making it cheaper for some steel mills to import finished coke from Europe than to install costly air pollution controls on smokey coke ovens at home. And that hurts the mining industry's most profitable segment: high-grade metallurgical coal for. coking. Good and stable times in coal may be three years off.

Although the Middle Atlantic states had the smallest increase in total personal income of any region in recent years — as a result of strikes — Maryland, Delaware and the Government- salaried District of Columbia were in the top 10 jurisdictions in per capita income.

However, the old industrial economy of Pennsylvania is regarded by economists as the most vulnerable to an instant bump if there is a national downward trend. Philadelphia is getting up a hedge — an "international city plan" that may include a free port area for the assembly, without United States duty, of imported components. And Philadelphia has netted new local branches of an Israeli and a European bank with the hope of luring foreign business.

THE SOUTHWEST

(By William K. Stevens)

HOUSTON.— For the last three years, the supercharged economy of Texas has roared ahead unchecked and untrammeled, accelerator to the floor like a Porsche or a Ferrari racing past the humid Gulf Coast bayous, or along Houston's freeways, or across the dusty mesquite flats of West Texas, easily outperforming all rivals.

But recently there have been signs that what has become the nation's most robust regional economy is in danger of overheating. Maybe, some Texans have mused, it is time to slow down and cool off.

And that is exactly what many economists expect the state's economy to do in 1979 — and the effects will be felt throughout the huge oil-and-gas domain that stretches into Oklahoma, parts of New Mexico and Louisiana.

"While you wouldn't expect it to be as strong as it has been, we're not expecting a collapse," said Dr. Lorna Monti, an economist at the Bureau of Business Research at the University of Texas.

Signs of a slowdown have already appeared. Fewer new industrial plants were established

in the state during the first three quarters of 1978 than in the comparable period of 1977. Neither industrial production nor construction activity has been growing nearly so fast lately as 18 months ago.

And in Houston, where growth has been most spectacular, inflation has well exceeded the national level. Last August, for example, the Consumer Price Index here stood at 211, while nationwide it was 199.1.

"Houston is seeing a cyclical peak right now," said William W. Garretson, vice president and senior economist of New York's Citibank. "And growth rates are going to decline." He reasoned that Houston's peak — even higher than for the state as a whole — is attributable to the "double thrust" of the energy and construction booms. "You're not going to get that double thrust in the near future," he said.

But there is still room for optimism over the economic future, most agree. The continuing demand for energy, combined with its high price, is what insulates the state's economy in times of recession. Houston, where most of the industry's infrastructure is situated, is perhaps the most insulated of the state's big cities. San Antonio and El Paso, on the other hand, are less tied to oil and usually experience about the same level of recessionary unemployment as the country at large.

For the state as a whole, few analysts believe that the expected recession of 1979 will make more than a small dent in employment. But combined with the rise in interest rates, some say, it will probably blunt the construction surge that has especially affected Houston. .

The roots of the state's economic expansion began to take hold in 1973, when world oil prices rose sharply and triggered a new, latter-day surge in exploration for oil and gas. The 1974-75 recession slowed it only slightly, and since 1975 it has really taken off, benefitting Oklahoma and Louisiana, as well as Texas.

The zenith, perhaps, was the period between August 1976 and August 1978. During that time the Texas industrial production index jumped from 130.2 to 145.9 (the base of100 was established in 1967). More than 450,000 new workers, many of them migrants from the North and East, sought and found jobs in the state during the period.

The economy absorbed them with little strain; statewide unemployment hovered around 5 percent and was even lower in Houston, Dallas, Austin and Amarillo. The number of building permits for new houses increased by an astounding 59 percent. Retail sales jumped by 33 percent, and personal income was about to reach, and perhaps surpass, the national average for the first time ever. But future gains will be harder won, and slower, Southwestern economists believe.

THE WEST COAST

(By Pamela G. Hollie)

Los ANGELES.— The taxpayer revolt in California last year may hold ominous overtones for business. While the state had a $7 billion budget surplus to use to reduce the impact of lost tax revenues resulting from the passage of Proposition 13, it now faces the question of what happens when there is no surplus in fiscal 1978-80.

"If taxpayers do not want to carry some of the burden of growth, the most logical scapegoat becomes business," said James P. Kennedy, director of taxation for the California Chamber of Commerce.

Already as a result of Proposition 13 — which reduced property taxes and put a limit on increases — a $450 million annual inventory tax has been restored in California. There are rumblings that the state's corporate income tax may be increased. The state legislators have proposed a split tax system so that business can be taxed at different rates than homeowners. And another piece of legislation seeks to exempt homeowners from property taxes entirely.

All of this explains why the Bank of America, which reaped $13 million in Proposition 13 savings, and the Southern California Edison Company, which saved $65 million, each spent $25 million opposing Proposition 13.

But despite the fallout from Proposition 13, the state's economy is still stronger than the nation's The median income is expected to rise to $21,425 in 1979 compared with an estimated $18,500 for the rest of the nation. And the state's gross state product has now reached $271 billion according to the United California Bank in Los Angeles. Unemployment is expected to hold at 7.5 percent, about 1.5 percent higher than the 1978 United States average.

Business in the West, which had a record year in 1968, expects more gains in 1979. The aerospace industry has made a comeback with new orders for commercial aircraft after being in the doldrums for years.

 

Agriculture, after two years of drought, is now benefitting from higher prices and strong demand. The electronics industry is as healthy as ever, and the forest products industry is booming as demand for housing in the West remains strong.

"Even an expected turndown in housing starts in 1979 will not greatly impact housing in the West," according to the California Builders Council. Even with interest rates at 11 percent — there is no usury law in California — would-be homeowners draw lots for the privilege of buying new homes.

But the housing boom also brings side effects: rapid in-migration, housing shortages, escalating real estate values, bigger government and a budding anti-growth sentiment.

San Diego Mayor Pete Wilson, a strong advocate of "controlled growth" is only one of many elected officials echoing the concern over a decreasing quality of life in the West.

Still the move westward continues. In Seattle, where the Boeing Company was hiring 15,000 workers, the aerospace concern got 200,000 job applications despite the rapid rise in the cost of living in the Pacific Northwest. The cost of living in Southern California, particularly for housing, has risen so high that corporations must offer low-interest home loans, up-front signing bonuses and home-purchase guarantees to lure executives.

 

"Such growth is the root of the taxpayer revolt," said Gary A. Horton, economist for the Nevada National Bank in Reno.