PAGENO="0001" STATE OF THE ECONOMY AND POLICIES FOR FULL EMPLOYMENT HEARINGS BEFORE THE JOINT ECONOMIC COMMITTEE CONGRESS OF THE UNITED STATES EIGHTY-SEVENTH CONGRESS SECOND SESSION PURSUANT TO Sec. 5(a) of Public Law 304 (79TH CONGRESS) AUGUST 7-10, 13-17, 20, 21, AND 22, 1962 Printed for the use of the Joint Economic Committee U.S. GOVERNMENT PRINTING OFFICE 87869 WASHINGTON 1962 For sale by the Superintendent of Documents, U.S. Government Printing Office Washington 25, D.C. - Price $2.75 C PAGENO="0002" JOINT ECONOMIC COMMITTEE (Created pursuant to sec. 5(a) of Public Law 304, 79th Cong.) WRIGHT PATMAN, Texas, Chairman PAUL H. DOUGLAS, Illinois, Vice Chairman HOUSE OF REPRESENTATIVES SENATE RICHARD BOLLING, Missouri JOHN SPARKMAN, Alabama HALE BOGGS, Louisiana J. W. FULBRIGHT, Arkansas HENRY S. REUSS, Wisconsin WILLIAM PROXMIRE, Wisconsin MARTHA W. GRIFFITHS, Michigan CLAIBORNE PELL, Rhode Island THOMAS B. CURTIS, Missouri PRESCOTT BUSH, Connecticut CLARENCE E. KILBURN, New York JOHN MARSHALL BUTLER, Maryland WILLIAM B. WIDNALL, New Jersey JACOB K. JAVITS, New York Wac. SUMMERS JOHNSON, Executive Director JOHN W. LEHMAN, Deputy Executive Director JOHN R STARK, Clerk II PAGENO="0003" CONTENTS PANEL DISCUSSIONS AND INDIVIDUAL WITNESSES IN ORDER OF APPEARANCE STATE OF THE ECONOMY Tuesday morning, August 7: Page Ira Ellis, economist, E. I. du Pont de Nemours & Co 7 Daniel B. Suits, professor of economics, University of Michigan 23 J. Frederick Weston, professor of economics, University of California, Los Angeles 21 James Wishart, research director, Amalgamated Meat Cutters and Butcher Workmen of North America 16 Wednesday morning, August 8: Douglas Greenwald, director of research, McGraw-Hill Publishing Co - 53 Mona E. Dingle, economist, Board of Governors, Federal Reserve System 59 George Katona, professor of economics, University of Michigan 68 Wednesday afternoon, August 8: Council of Economic Advisers: Walter W. Heller, Chairman 104 Kermit Gordon, member 104 Gardner Ackley, member 104 FISCAL POLICY Thursday morning, August 9: Otto Eckstein, professor of economics, Harvard University 197 Paul W. McCracken, professor of economics, University of Michigan_ 203 Joseph A. Pechman, director of economic studies, the Brookings Institution 215 Thursday afternoon, August 9: Leon H. Keyserling, economic consultant, Washington, D.C 245 Raymond J. Saulnier, professor of economics, School of Business, Columbia University 292 Friday morning, August 10: George G. Hagedorn, director, Research Department, National Asso- ciation of Manufacturers 325 John K. Langum, consulting economist, and president of Business Economics, Inc., Chicago 331 Joseph A. Livingston, financial editor, Philadelphia Bulletin; nation- ally syndicated columnist 339 Stanley H. Ruttenberg, director, Department of Research, AFL-CIO. 343 FISCAL AND MONETARY POLICIES WITH PARTICULAR REFERENCE TO THE EUROPEAN EXPERIENCE Monday morning, August 13: Ettore Lolli, central director, Banca Nazionale del Lavoro, Rome, Italy 381 Jurg Niehans, professor of economics, University of Zurich, Switzer- land 384 Alan Day, professor of economics, London School of Economics, England `II PAGENO="0004" IV CONTENTS MONETARY POLICIES Tuesday morning, August 14: Lawrence S. Ritter, professor of economics, New York University, Page Graduate School of Business 431 Beryl W. Sprinkel, vice president, Harris Trust and Savings Bank, Chicago, Ill 433 J. M. Culbertson, professor of economics and commerce, University of Wisconsin 417 BALANCE OF PAYMENTS AND INTERNATIONAL FUNDS FLOW Tuesday afternoon, August 14: Philip Bell, professor of economics, Haverford College 458 Don Humphrey, professor of economics, Fletcher School of Law and Diplomacy, Tufts University 475 Samuel Pizer, Assistant Chief, Balance of Payments Division, Depart- ment of Commerce 479 Frederick H. Klopstock, manager, Research Department, Federal Reserve Bank of New York 487 MONETARY POLICIES AND METHODS Wednesday morning, August 15: Marriner S. Eccles, former Chairman, Board of Governors, Federal Reserve System, and chairman of the board, First Security Corp., Salt Lake City 519 Malcolm Bryan, president, Federal Reserve Bank, Atlanta 551 Thursday morning, August 16: Alfred Hayes, president, Federal Reserve Bank, New York 571 William McChesney Martin, Jr., Chairman, Board of Governors, Federal Reserve System 601 Friday morning, August 17: C. Douglas Dillon, Secretary of the Treasury 663 CHANGES IN THE SIZE AND COMPOSITION OF THE LABOR FORCE Friday afternoon, August 17: Ewan Clague, Commissioner of the Bureau of Labor Statistics, Depart- ment of Labor 735 COMPETITION POLICIES FOR MAXIMUM EMPLOYMENT, PRODUCTION AND PURCHASING POWER Monday morning, August 20: Lee Loevinger, Assistant Attorney General in Charge of Antitrust Division, Department of Justice 776 Tuesday morning, August 21: Edwin G. Nourse, former Chairman, Council of Economic Advisers, 1946-49 797 Walter Adams, professor of economics, Michigan State University_ - - 817 Alfred E. Kahn, professor of economics, Cornell University 826 Robert F. Lanzillotti, professor of economics, Michigan State Univer- sity 838 Richard J. Barber, professor of law, Southern Methodist University~. 854 IDENTICAL BIDDING IN PUBLIC PROCUREMENT Wednesday morning, August 22: Lee Loevinger, Assistant Attorney General in Charge of Antitrust Division, Department of Justice 910 PAGENO="0005" CONTENTS V WITNESSES AND EXHIBITS Page Adams, Walter, professor of economics, Michigan State University 817 Barber, Richard J., professor of law, Southern Methodist University 854 Bell, Philip W., professor of economics, Haverford College 458 Bryan, Malcolm, president, Federal Reserve Bank of Atlanta 545 Comments on chart on Treasury bill rate and yield on long-term Government bonds 551 Consumer prices and per capita money supply (demand deposits and currency) Equilibrium rate established by the decisions of borrowers and investors 569 Free reserve concept 564 Reserve figure and correctness of trend 552 Clague, Ewan, Commissioner of Labor Statistics, U.S. Department of Labor: Accompanied by Miss Gertrude Bancroft, Assistant Chief, Man- power and Employment Statistics Division; and Robert L. Stein, Chief of Branch of Employment and Unemployment Analysis 735 Civilian labor force participation rates, first quarter, 1948-second quarter 1962 740 Civilian labor force participation rates for women in selected age groups, first quarter 1948-second quarter 1962 741 Civilian labor force rates for men and women in selected age groups, first quarter 1948-second quarter 1962 742 Current seasonal adjustment factors for unemployment (used in 1961) - 754 Employment in goods-producing industries, monthly 1953 to date - - 752 Employment in service-producing industries, monthly 1953 to date - 753 Index of gross national product in constant 1954 dollars and of the civilian labor force, first quarter 1948-second quarter 1962 739 Letter to chairman 744 Selected labor force participation rates for men and women in selected age groups, first quarter 1948-second quarter 1962 742 Culbertson, J. M., professor of economics and commerce, University of Wisconsin 417 Day, Alan, professor of economics, London School of Economics 374 Dillon, Hon. C. Douglas, Secretary of the Treasury 663 Cash flow to corporations 688 Comparison of depreciation deductions, initial and investment allow- ances for industrial equipment in leading industrial countries, with similar deductions and allowances in the United States 670 Countries permitting depreciation and related deductions of more than the total cost of assets 697 Depreciation practices in certain foreign countries 698 Explanations of allowances shown in summary comparison of depreci- ation deductions and initial and incentive allowances on industrial equipment in leading industrial countries and the United States~ - 694 GNPandpublic debt 721 Percentages of family incomes saved in the different income classes.. - 672 Dingle, Mona, Chief, Consumer Credit and Finance Section, Division of Research and Statistics, Board of Governors of the Federal Reserve System Autos and houses, plans to buy 66 Buying plan level, July 64 Buying plans for houses, automobiles, and household durable goods - 65 Household durable goods-plans to buy 66 Past and expected changes in income, selected periods, 1960-62 68 Plans to buy houses and durable goods, selected periods, 1960-62~ 67 Plans to buy specified durable goods within 6 months, selected periods, 1960-62 67 Eccles, Marriner S., former Chairman of the Board of Governors, Federal Reserve System, and chairman of the board, First Security Corp., Salt Lake City, Utah 519 PAGENO="0006" VI CONTENTS rage Eckstein, Otto, professor of economics, Harvard University 197 Ellis, Ira, economist, E. I. du Pont de Nemours Co 7 F.R.B. index of industrial production, 1909-61 15 Gross national product, 1909-61 14 Information re the more rapid growth rate of economic activity in Western Europe than in the United States over the past decade~. - 45 Greenwald, Douglas, manager, department of economics, McGraw-Hill Publishing Co., New York, N.Y 53 Business plans for capital spending in 1962 54 Hagedorn, George G., director, research department, National Association of Manufacturers 325 Gross national product and related totals 330 Various economic magnitudes as a percent of gross national product - 330 Hayes, Alfred, president, Federal Reserve Bank of New York: accom- panied by Charles A. Coombs, vice president and special manager, Fed- eral Open Market Committee; George Garvy, adviser, research depart- ment; and Peter Sternlight, manager, securities department, Federal Reserve Bank of New York 571 Changes in total business financing including bank loans, January- June 588 Moody's AAA-rated corporate bond yields 590 Moody's AAA-rated State and local government bond yields 589 Nonbank liquid assets as a percent of GNP 585, 598 Short-term liquid assets ratio, New York City 586 Short-term liquid assets ratio, outside New York City 587 U.S. Government long-term bond yields 591 Heller, Walter W., Chairman, Council of Economic Advisers; accompanied by Gardner Ackley and Kermit Gordon, members 104 Data on consumption expenditures or saving by income bracket 133 Increase in Federal expenditures 119 Summary of 1961-62 economic expansion and policies 104 Tax liabilities under alternative tax schedules (revised: July 23, 1962) 179 Humphrey, Don, professor of international economics, Fletcher School of Law and Diplomacy, Tufts University 475 Katona, George, survey research center, Institute for Social Research, University of Michigan 68 Business conditions expected in the next 12 months 78 Consumer attitudes and inclinations to buy, May 1962 74 Consumers' expectations regarding their financial situation a year hence 77 Index of consumer attitudes and inclinations to buy 76 Opinions about buying conditions for large household goods, cars, and houses 79 Opinions on the advisability of a tax reduction, spring and fall, 196L - 73 Percentage of families expressing intentions to buy a car 76 Quartile ranking of savings bond holders, early 1959 93 Supplementary material regarding Mr. Patman's inquiry about con- centration of holdings in U.S. Government savings bonds 93 Type and size of liquid asset holdings 94 Kahn, Alfred E., professor of economics, Cornell University 826 Keyserling, Leon H., former Chairman, Council of Economic Advisers, economic consultant and president, Conference on Economic Progress, Washington, D.C 245 Charts: 1. Recessions, booms, stagnations, 1953-62: Rates of change in GNP 259 2. Chronic rise of unemployment, 1953-62 260. 3. The high volume of idle plant and machines, 1954-62 261 4. Chronic rise of our unused productive powers (GNP), 1953-62 262 PAGENO="0007" CONTENTS VII Keyserling, Leon H.-Continued Charts-Continued 5. Deficient rate of growth in private consumer spending, 1953- Page mid-1962 264 6. Low growth in private consumption reflects low growth in incomes 265 7. Federal budget has shrunk relative to total output and needs, 1954-62 267 8. The Federal budget reflects national economic deficiencies~_ 268 9. A balanced Federal budget depends upon a maximum pros- perity economy 269 10. Gross private domestic investment was deficient during 1953- mid-1962 as a whole 272 11. Rising prices, profits, and investment before the 1957-58 recession 273 12. Investment boom occurred again before the 1960-61 recession despite reduced prices and profits 274 13. Price, profit, and investment trends during current economic upturn 275 14. Before the 1957-58 recession, profits and investment outran wages-basic to consumption 277 15. Before the 1960-61 recession investment again outrun wages-basic to consumption 278 16. Profits and investment during current economic upturn outrun wages-basic to consumption 279 17. Deficient rate of growth in wages and salaries, 1953-Mid- 1962 280 18. Rates of change in nonfarm output, and in nonfarm wages and salaries, per employee-hour, 1947-62 281 19. Rates of change in manufacturing output, and in wages and salaries, per man-hour, 1947-62 282 20. Trends in output per man-hour-or productivity-1910-62~. 283 21. Key profits after taxes are high despite large unused capac- ities 285 22. Profits-sales ratios indicate still higher profits will result when capacities are more fully used 286 23. Total funds used by corporations have increased 287 24. Goals for 1963 and 1964, consistent with long-range goals through 1966 288 25. Differences in results of high and low economic growth rates, 1963-66 289 26. Toward a Federal budget consistent with maximum employ- ment and the priorities of national public needs 290 27. A Federal budget geared to jobs for all and adequate public services 291 Klopstock, Frederick H., manager, research department, Federal Reserve Bank of New York 487 Short-term capital movements and the U.S. balance of payments - - - 494 The market for dollar deposits in Europe 509 Langum, John K., president, Business Economics, Inc., Chicago, Ill 331 Corporate profits and cash flow, tables 331 Lanzillotti, Robert F., professor and chairman, department of economics, Michigan State University 838 Frequency of identical bids by companies as published by the Joint Economic Committee of the U.S. Congress 852 Identity of bids on 73 chemical transactions, 1955-60 848 Livingston, Joseph A., financial editor of the Philadelphia Bulletin, and nationally syndicated columnist 339 Loevinger, Lee, Assistant Attorney General in charge of Antitrust Division, Department of Justice 776, 910 Acquisitions of General Motors Corp. since 1908 781 Examples of identical bids 923 PAGENO="0008" VIII CONTENTS Page Lolli, Ettore, executive vice president, Banca Nazionale del Lavoro of Italy.~. 381 Martin, Hon. William McChesney, Jr., Chairman, Board of Governors of the Federal Reserve System 601 A system of fluctuating exchange rates: Pro and con 648 Correspondence with Chairman re flow of funds 609 McCracken, Paul W., professor of economics, University of Michigan~ - - 203 Niehans, Jurg, professor of economics, University of Zurich, Switzerland.. 384 Nourse, Edwin G., former chairman, Council of Economic Advisers, 1946-49 797 Some questions emerging under the Employment Act 808 Pechman, Joseph A., director of economic studies, the Brooking's Institu- tion 215 Comparison of original budget estimates with actual results, fiscal years 1958-62 217 Responses by Mr. Pechman to thequestions raised by the Chairman~. 226 Pizer, Samuel, Assistant Chief, Balance of Payments Division, Office of Business Economics, U.S. Department of Commerce 479 Ritter, Lawrence S., professor of finance, Graduate School of Business Administration, New York University 431 Ruttenberg, Stanley H., director, department of research, AFL-CIO 343 Saulnier, Raymond J., professor of economics, Barnard College, Columbia University, New York City 292 Sprinkel, Beryl W., vice president and economist, Harris Trust & Savings Bank, Chicago 433 Monetary growth, velocity, and business fluctuations 437 Suits, Dr. Daniel B., professor of economics, University of Michigan 23 Changes in economic factors, 1960, 1961, and 1962 24 Economic forecasts, 1960, 1961, and 1962 24 Information re the more rapid growth rate of economic activity in Western Europe than in the United States over the past decade.~. - 47 Weston, Dr. J. Frederick, professor of economics, University of California at Los Angeles 21 Wishart, James, director, research department, Amalgamated Meat Cutters and Butcher Workmen (AFL-CIO) 16 Employment and unemployment 16 months after trough, seasonably adjusted data 20 Growth in West Europe 45 Percentage gains in real gross national product (seasonally adjusted) - - 16 Projections of total labor force compared with actual labor force. - - - 20 Summary, employment and unemployment estimates 21 ADDITIONAL INFORMATION Acquisitions of General Motors Corp. since 1908 781 Average tax savings per individual under various methods of making a $6 billion reduction in individual income taxes 223 Businessmen's expectations, fourth quarter, 1962, Dun & Bradstreet survey 627 Clark, John M., statement on Relation of Industrial Concentration to the Purposes of the Employment Act 905 Corporate cash flow-actual and calculated, 1929-61 687 Excerpts from testimony of William McChesney Martin, Jr., Chairman of the Board of Governors of the Federal Reserve System, before the Com- mittee on Banking and Currency, House of Representatives, July 17, 1962 348 How to choke off a recovery, the Federal Reserve does it again, speech of Hon. Henry S. Reuss on the floor of the House, April 9, 1962 617 Interest arbitrage for German commercial banks 185 Interest arbitrage, New York/London 183 Interest arbitrage, United States/Canada 184 Letter and enclosures of Ewan Clague, Commissioner of Labor Statistics, U.S. Department of Labor to chairman 135 PAGENO="0009" CONTENTS Ix Page Letter of Hon. Paul H. Douglas to chairman re hearings 4 Letter of the minority members of the committee addressed to the chairman requesting hearings 2 Letter of Hon. William Proxmire to chairman re hearings 5 Reply Neild, R. R., Deputy Director, the National Institute of Economic and Social Research, London, England. Statement and transmittal letter - 412 Percentage increase in taxable incomes, after taxes, of the different income classes under various methods of making a $6 billion reduction in indi- vidual income taxes 224 Reservation of powers of the Secretary of the Treasury 570 Short-term interest rates 186 Treasury bill rate and yield on long-term Government bonds-market rates, short-term and long-term 550, 551 Yields on U.S. Government securities 182 APPENDIX Correspondence between Chairman Wright Patman and William McChesney Martin, Jr., Chairman, Board of Governors, Federal Reserve System, re publication of condensation of 1960 minutes of Federal Open Market Committee 954 Federal Reserve System exchanges in Treasury refundings 973 Interest rates and foreign dollar balances, by Robert F. Gemmell, Board of Governors of the Federal Reserve System 975 Letter and enclosure of Ettori Lolli, executive vice president Banca Nazionale del Lavoro of Italy 947 Letter of Lee Loevinger, Assistant Attorney General, Antitrust Division, Department of Justice, to chairman 952 Memorandum from Wm. Summers Johnson, executive director, to chair- man 956 Alternative methods of reducing taxes 957 Analysis of cash flow to corporations 965 Monetary and international statistics 958 Open market transactions of the Federal Reserve System during 1962_ -- - 974 Ratio of corporate profits after tax plus corporate capital consumption to gross national product and to national income originating in corporations plus their capital consumption 971 Ratio of corporate profits after tax to gross national product and to national income originating in corporations 971 Ritter, Lawrence S., reprint from the Journal of Political Economy, February 1962, entitled "Official Central Banking Theory in the U.S., 1939-61" 982 Total Federal Reserve credit and net free reserves by class of bank 973 U.S. Government securities, dealer sales and purchases (combined) (to- gether with transmittal letter from Chairman Martin) 972 PAGENO="0010" PAGENO="0011" STATE OF THE ECONOMY AND POLICIES FOR FULL EMPLOYMENT TUESDAY, AUGUST 7, 1962 CONGRESS OF THE UNITED STATES, JOINT EcoNoMIc CoMMrr'iiE, Washington, D.C. The committee met at 10 a.m., pursuant to call, in room AE-1, the Capitol, Hon. Wright Patman (chairman) presiding. Present: Representative Patman; Senators Douglas, Proxmire, Bush, and Javits; Representatives Reuss and Widnall. Also present: William Summers Johnson, executive director; John R. Stark, clerk; Hamilton D. Gewehr, research assistant. Chairman PATMAN. The committee will please come to order. This morning we begin hearings on the state of the economy and on the question of how the policy of the Federal Government might be appropriately amended to help achieve maximum employment, production, and purchasing power. The purpose of the panel this morning is to present the facts on the state of the economy, and for this purpose we have a distinguished panel of experts: Mr. Ira Ellis, economist for E. I. du Pont de Nemours & Co. Mr. James Wishart, research director, the Amalgamated Meat Cut- ters & Butchers of North America. And we have two others, who are evidently late, Dr. Daniel B. Suits, professor of economics, University of Michigan, and Dr. J. Frederick Weston, professor of economics, University of California at Los Angeles. Senator DOUGLAS. May I say these gentlemen are not necessarily late. They may be lost in the effort to find this room. I have heard of the difficulties white rats have in a maze. I have been trying to find this room for 15 minutes, and so I think these gentlemen should be given our condolences. Senator BUSH. Mr. Chairman, I move that the usual fines be waived for these late or tardy gentlemen. Chairman PATMAN. Senator Bush desires to make a statement, and he will be recognized for that purpose. Senator BUSH. Mr. Chairman, I want to take this opportunity to commend you and thank you for the promptness and efficiency with which you and the committee staff responded to the request of the minority members for hearings on the current state of the economy. The public has a vital interest in the subject of these hearings, and can benefit greatly from an open, objective, and dispassionate dis- cussion of the issues and the policy alternatives available to us. 1 PAGENO="0012" 2 POLICIES FOR FULL EMPLOYMENT Closed hearings, while benefiting those few fortunate enough to hear the testimony, do not serve to inform either the public or the Congress at large about the problems we face and what we must do to solve them. The Joint Economic Committee has a continuing responsibility in this area, and we are glad to see that it is discharging that responsibility. The minority believes that the most important objective of these hearings should be the examination of our basic economic situation. We should try to determine whether the Nation is undergoing deep- seated and fundamental economic adjustments. The near-term economic outlook and the question of whether or not there should be an immediate reduction in taxes is important, and will enter these hearings; but compared to the long-run and basic economic problems before the country, these more immediate questions are but ripples on the stream. We should not permit them to turn our attention too long from the basic economic problems with which we must grapple if the country is to get moving again. I request that the July 27 letter of the minority members of the committee, addressed to the chairman, asking for these hearings, be made a part of the record at this point. I thank the chairman and the cOmmittee for their courtesy. Chairman PATMAN. Without objection; the letter will be made a part of the record at this point. (Letter referred to follows:) JOINT ECONOMIC COMMITTEE, Washington, D.C., July 27, 1962. Hon. WRIGHT PATMAN, Chairman, Joint Economic Committee, New senate Office Building, Washington, D.C. DEAR MR. CHAIRMAN: Concern over the state of the economy has mounted in recent months as the recovery from the 1960-61 recession has begun to level off. Some economists believe that we face another recession late this year or early in 1963. In addition to fears of another recession following close on the heels of the last one, there is some opinion that our economy is not growing at a sufficiently rapid rate and that we may be in a period of what has been called high-level stagnation. One prescription being offered as a cure for our economic ills is an immediate tax cut. The House Ways and Means Committee even now is holding private hearings to study the state of our economy and the need, if any, for an immediate tax cut. While we recognize and respect the legislative jurisdiction of the Ways and Means Committee over taxation, we believe nevertheless, that the basic issues involved are broadly economic in nature since they involve the proper role of fiscal and monetary policy in the present economic environment. The Joint Eco- nomic Committee, through open hearings, could make an important contribution to the clarification and public understanding of these issues. Therefore, we strongly urge that you schedule hearings by the full Joint Economic Committee on the state of the economy as soon as possible. Such hearings must be open. Not only does the public have the right to know about the health of the economy, but, equally important, it has a need to know. Only a full and frank open discussion of the issues will lead to that broad public understanding and support on which sound economic policies depend. Very truly yours, THOMAS B. CuRTIS. CLARENCE E. KILBuEN. WILLIAM B. WIDNALL. PRESCOTT BusH. JOHN MARSHALL BUTLER. JACOB K. JAVITS. PAGENO="0013" POLICIES FOR FULL EMPLOYMENT 3 Chairman PATMAN. Senator Proxmire desires to make a statement. He is recognized for that purpose. Senator PROXMIRE. I appreciate that. I have a short statement. Mr. Chairman, on July 9 I wrote you suggesting that this com- mittee hold hearings on the economy because I was deeply disturbed by the increasingly restrictive actions of the Federal Reserve Board at a time when our economy is standing still. I challenge any witness to appear before this committee to justify the high interest rate economy-slowdown policies of the Federal Re- serve Board. For the Federal Reserve Board to force up interest rates and re- duce available bank reserves under present economic circumstances is sure to create further unemployment, especially in the homebuild- ing and construction industries, which are highly responsive to changes in interest rates. Unemployment in construction has been seriously high for a long time. Americans ranging from the U.S. Chamber of Commerce to the AFL-CIO have become so alarmed by economic stagnation that they have advocated a tax cut that would pile a huge deficit this year on top of last year's unbalanced budget. Virtually every economist and business leader who has spoken out on the economy has expressed dissatisfaction with our present rate of growth, and concern that we may be about to drift into a recession. Unemployment has continued at a seriously high level for more than 2 years, and has failed to improve significantly during the past 7 months. For the Federal Reserve Board to deliberately force up interest rates as it has been doing is to throw sand in the engine, when what we need is more fuel. In 1929, we cut taxes at the same time interest rates were rising to high levels. This contributed to the worst economic crash in U.S. history. Two significant effects occurred last week which have very pro- found implications for the problem into which this committee is in- quiring. On Friday it was reported that the Federal Reserve System had again tightened credit last week. This recent reduction in free reserves to $300 million is significant in that it confirms the suspicion of most analysts that the Fed is now committed to a tight money policy. The indications of such a policy seemed to be clear in June, when for several weeks in a row the Fed reduced free reserves and maintained them at levels lower than had been reached since the tight money policy prior to the last recession. This indication was confused by the temporary easing of credit that occurred in July. But now it is clear that the policy, revealed by their actions in June, does in fact reflect their basic outlook toward the need for credit restraint at this time. It is thus particularly timely that this committee exercise its re- sponsibility to provide the needed legislative oversight in this vital area. Monetary policy is too important to be left to the bankers. If there ever was a time for Congress to insure that the monetary policy is formulated and executed in the context of the public inter- est, it is now. The chronically high levels of unemployment prevailing in this country and the chronic slowdown in our growth rates make it over- PAGENO="0014" 4 POLICIES FOR FULL EMPLOYMENT whelmingly clear that no monetary constraints whatsoever should be placed on economic activity. Federal Reserve monetary policies could easily frustrate any at- tempt to stimulate the economy through a tax cut, in the same man- ner that proper monetary policies might possibly preclude the need for significant fiscal action at this time. The second event that occurred last week which gives special mean- ing and timeliness to these hearings was the failure of the Treasury's attempt to float a new issue of long-term bonds. The Treasury was willing to sell up to $750 million worth of 30-year bonds which were priced to yield 4.19 percent. It is significant that subscriptions amounted to only $316 million. This fell far short not only of the $750 million that the Treasury was willing to sell, but it fell far short of the $500 million that the Treasury expected to sell. This is a very strong indication that there is not the available liquidity at the long end of the market that many have talked about. If investors are not willing or able to take advantage of such attrac- tive rates, they certain must lack significant loanable funds which are seeking a place for profitable investment. The only other reason for the dismal failure of this recent attempt of the Treasury to attract long-term funds is that the investors feel that the rate of interest is about to go higher. Either of these two possible explanations is very distressing in its implications. The deficiency of the availability of loanable long-term funds suggests that the restrictive policies of the Fed have already had an effect. In any case, it suggests that the Fed is in error if it feels that it must soak up a significant amount of excess liquidity at the long end of the market. These recent events suggest why it is necessary for Congress to act quickly to prevent the misguided policies of the Fed from continuing to slow down the economy. It is my hope that these hearings, and further report, will help to remedy this situation. I thank you very much for indulging me in this statement. As you know, I did write you on this matter, and I feel very, very strongly, and I am sure that you share at least some of my sentiments. Senator DotroLAs. Mr. Chairman, I wonder if the Senator from Wisconsin would obtain unanimous consent that the letter which he addressed to the chairman on July 6 should be made a part of the record; and if he does so, I will ask unanimous consent that the sub- sequent letter, which I wrote, addressed to the chairman, some days after that, also be made a part of the record. Senator PROxMIRE. Yes, indeed, Mr. Chairman. Chairman PATMAN. I would like to add that the chairman's reply also be inserted. Senator PRoxMnm. I make that request, Mr. Chairman. Chairman PATMAN. Without objection, it is so ordered. (Letters referred to follow:) Juix 10, 1962. Hon. WRIGHT PATMAN, Chairman, Joint Economic Committee, Washington, D.C. DEAR WRIGHT: I think we should have a few days hearings of the full com- mittee about the state of the economy, and especially we should get Mr. Martin to come before us to explain why he has been tightening credit for legitimate bus'- ness loans and investments but loosening credit for stock market speculation. PAGENO="0015" POLICIES FOR FULL EMPLOYMENT 5 All this has been done at a time where there is some doubt about the econ- omy, and I think we should properly go into it. With best wishes. Faithfully yours, PAlm H. DOUGLAS. U.S. SENATE, Washington, D.C., July 6, 1962. Hon. WRIGHT PATMAN, Chairman, Joint Economic Committee, Congress of the United States, Washington, D.C. DEAR Mn. CHAIRMAN: Present monetary policies are drastically reducing the free reserves of our banking system and sharply increasing interest rates. The restrictive effect on the economy is sure to diminish business opportuni- ties, increase unemployment, and slow economic growth. Monetary policies are having these adverse effects at a time when unemployment remains steadily high and the economy is operating well below capacity. Thus the consequencies of present monetary policies directly contradict the objectives of our Government as expressed by Congress in the Employment Act of 1946. For these reasons I am writing to suggest for your consideration that the Joint Economic Committee hold hearings on~ monetary policies to hear Chair- man Martin of the Federal Reserve Board, Secretary of the Treasury Dillon, Chairman Heller of the Council of Economic Advisers and others. In view of the great significance of these hearings I hope that they can be set as soon as possible, preferably within the next week or two. During the month of June while unemployment continued at the same high level of 5I~~ percent (seasonally adjusted) that has prevailed since February, the FED followed a restrictive policy of selling FED obligations that con- tributed directly to a reduction of free reserves in the banking system from roughly $500 million down to about $300 million. Meanwhile, interest rates on Federal, State, local, and private obligations of all maturities rose sharply. Ninety-day Treasury bills rose to a 2-year high. At the very time these restrictive monetary policies were being followed, the U.S. Chamber of Commerce, the AFL-CIO, and the National Conference of Gov- ernors have all endorsed proposals for a substantial tax cut to get the economy moving. At his press conference this week President Kennedy also indicated the possibility that he might favor a big tax reduction. It appears therefore that the Congress may be on the verge of a tax cut to stimulate the economy. If a tax cut were enacted and monetary authorities reftsed to change their present restrictive policies, this would perhaps be the first time in the Nation's history when the two great instruments of economic policy in our Nation were deliberately and simultaneously set off in opposite directions. The results might be an expansion of the economy if the tax cut proves a more potent instrument than contracting credit policies, but any expansion would be dragging an anchor of credit restraint. Or it might very well be that the aggre- gate effect of these two Government policies might be to shove the economy downhill if the credit restraint proved more potent than a tax cut. In any event the adoption of both a restrictive credit policy and an expansionary fiscal policy at the same time would seem to be the height of absurdity with the only sure consequences higher interest rates, a bigger national debt, and a greater eventual burden on the taxpayer. In the event taxes are not cut it is of course even more important that the present restrictive monetary policies be reconsidered so that the economy can move off dead center and start moving ahead. Sincerely, WILLIAM PRoxMInE, U.S. Senator. JULY 10, 1962. Hon. WILLIAM PROxMIRE, Chairman, Sulcommittee on Economic Statistics, U.S. Senate, Washington, D.C. DEAR SENATOR PEOXMIRE: Thank you for your letter of July 6 concerning the current direction of monetary policy. I know of your deep concern over this matter from having read your speeches in the Senate on the subject. PAGENO="0016" 6 POLICIES FOR FULL EMPLOYMENT Needless to say, I agree with the observations you make concerning the adverse effects of restrictive monetary policy on business activity and employ- ment. I, too, am deeply concerned, as I have been over the 15 years the Federal Reserve has been progressively reducing the Nation's supply of money and credit relative to the volume of business transactions requiring money and credit. There have been a few interruptions to the steady reduction in our effective money supply during the past 15 years, but the general trend has been unvarying. Similarly, the Federal Reserve has made numerous changes in margin requirements for purchasing and carrying stocks on the organized stock exchanges, but of course these changes in margin requirements are in no way related to the supply of money, or the supply of other liquid assets, available for carrying on the business of the Nation. While the United States, among all the principal industrial nations, has made the largest reductions in its effective money supply in the postwar years, and has enjoyed one of the slowest rates of economic growth, those Nations which have maintained or increased their effective money supplies have made the greatest economic gains. To illustrate, Japan's GNP increased 129 percent be- tween 1952 and 1961, and its effective money supply was increased by 13 percent. Germany's GNP increased 104 percent, and its effective money supply increased 6 percent. France's GNP increased 98 percent and its effective money supply increased 17 percent. The U.S. GNP increased by 45 percent, and its effective money supply was reduced by 24 percent. As to the suggestion that the full committee hold hearings on the recent fur- ther tightening of credit, however, it has long seemed to me that the constructive hearings on this subject must necessarily have some relevance to the balance-of- payments problem. This is, of course, the problem which justifies the tight- money high-interest policy, at least in the minds of those responsible for the policy, and our balance-of-payments subcommittee is digging deeply into this problem. I am hopeful, furthermore, that the subcommittee will soon have some constructive suggestions, either as to possible improvements in the money system, or as to a reappraisal of the policies which are leading to a continuous net out- flow of dollars. To me, it would seem to be preferable to find some improvement in the money system which would permit the creation of money claims to wealth in a volume more nearly related to our capacity for wealth production, rather than in a volume limited by our supply of gold. Frankly, I have difficulty seeing the relevance of the "discipline" imposed by a limited supply of gold. True, some of our prices are undoubtedly noncompetitive in world markets, but the fact that we are able to export $4 worth of goods and services for each $3 imported seems to suggest that the gold "discipline" is misplaced. Assuming that the subcommittee finds no improvements iii the international money system to be feasible, however, it would then seem to me that a careful evaluation of the sources of the dollar outflow would be most constructive. Re- strictions have, of course, been imposed on our military personnel stationed abroad, and reductions have been made in the duty-free goods which American tourists may bring in. I know of no steps yet taken to discourage American banks and other financial institutions from freely making loans abroad, to discourage U.S. investors from purchasing foreign stocks and bonds, or to discourage American industrial firms from purchasing foreign competitors and building plants in highly developed nations needing no U.S. assistance. Thus, it would seem that the possibility of some disincentive on these activities-perhaps a tax to equalize differences in interest rates-should not be ruled out. A restrictive monetary policy to equalize interest rates and check the flow of funds seems to me to impose a most unequal sacrifice, namely, one falling on the more than 4 million wage earners who are squeezed out of employment by this kind of policy. With reference to your expressions of concern over the current proposals for tax reductions, I, too, have serious doubts about these proposals. Indeed, I have serious doubts about some of the assumptions concerning the flow of funds in our econOmy which underlie the kind of proposals being made, and I have been wondering if one of our subcommittees-perhaps the Subcommittee on Economic Statistics-might wish to develop some proposal for an inquiry into the facts of these matters. PAGENO="0017" POLICIES FOR FULL EMPLOYMENT 7 The assumption that the volume of savings-corporate and personal-is inadequate to support a high level of investment is, of course, of quite recent origin, and an assumption which seems to me deserving of the most critical examination. If it is still true, as many experts have believed in the past, that our basic problem is one of excess savings relative to consumption expenditures, then the administration's suggestions for cutting corporate taxes and cutting individual income taxes in ways to give disproportionately large tax relief to the high-income families, who can be expected to save much of their added income, then the proposed tax reductions may prove ill-advised. Indeed, a tax cut which stimulates savings without also stimulating a very large expansion in consumption could worsen unemployment and worsen the other conditions which the tax cut is intended to remedy, once the period of a larger Federal deficit is ended. I also wonder about the assumption that corporate profit margins are inade- quate to draw a high volume of savings into investment. On the face of the data now available, the so-called profit squeeze appears to be a bookkeeping fiction, reflecting the fact that the postwar trend has been to count relatively more of corporate net income as "depreciation" and relatively less as "profits." These changes in bookkeeping practices have been made possible, first, by the certificates of necessity granted in the earlier postwar years to permit "speed- up" writeoffs of new plant and equipment, and, later, by changes in the Internal Revenue Code of 1954 which tended to extend speedup writeoffs to all invest- ment in new plant and equipment. Considering also that the rate of return on corporate investment is closely related to the rate at which capital equipment is utilized, it appears that corporate margins have actually been widening over the past decade rather than being squeezed. Of course the foregoing does not suggest all of the important questions which need answers. In years past our Subcommittee on Economic Statistics has helped to initiate and bring about improvements in the Federal Reserve's flow- of-funds data, but while these data are intended to provide information that is central to the working of our economy, some of the experts tell me that the reporting system is only in the formative stage and needs much clarification and improvement. If you feel that there is any merit to the above suggestions, I would appreciate it if you would give consideration to the possibility of a thoroughgoing investi- gation and hearings on the flow-of-funds data by your subcommittee, and, if such an investigation seems feasible, let me know what the staff and budget requirements of such an investigation would be. I am, Sincerely, WRIGHT PATMAN. Cc: Hon. Henry S. Reuss, Chairman, Subcommittee on International Ex- change and Payments. Chairman PATMAN. Are you ready to proceed? Senator BUSH. I might say there was a letter which we all signed, in which we asked for open hearings. Chairman PATMAN. You may proceed in your own way, Mr. Ellis. I notice you have a prepared statement. You may proceed. STATEMENT 0]? IRA ELLIS, ECONOMIST, B. I. DU PONT DE NEMOURS & CO. Mr. ELLIS. Mr. Chairman and members of the Joint Economic Committee, it is a pleasure to discuss with this group the current state of the economy and the outlook. I like the statements that have been presented so far, which set up a very good basis for discussion. I have prepared a background state- ment of the current business situation, which I would like to read to the committee and to use as the basis for my subsequent discussion. 87869~-62----2 PAGENO="0018" 8 POLICIES FOR FULL EMPLOYMENT The economic activity rate in the United States is at an alitime high level, but it is rising only slowly. The total value of goods and services produced in the country in the second quarter of 1962 was at an annual rate of $552 billion, compared with $519 billion for the year 1961. In terms of constant prices, that is, the physical volume of goods and services, the second-quarter level of output of the econ- omy was up 0.7 percent from the first quarter-and, gentlemen, that is almost 3 percent per year-and up 5.1 percent from the 1961 aver- age. And, gentlemen, the 1961 average was the previous ailtime high. The principal gains are occurring in the rate of consumer spending for goods and services, and in construction. Government purchases of goods and services also rose in the latest quarter, and at a rate some- what higher than the rise in consumer spending. You gentlemen know that Government purchases include State and local purchases as well as those of the Federal Government. The business inventory accumulation rate in the latest quarter was down significantly from the first quarter rate, but it was at a reason- able level, after being relatively high in the last quarter last year and the first quarter of 1962. And I call your attention to the fact that that decline in the rate of inventory accumulation had a significant effect on the total change in the gross national product. In other words, final consumption went up even more from the first to the second quarter than the gross national product indicated, because the rate of accumulation of inven- tories went down. While we all would like to see the operating rate of our economy at a higher level, the fact still remains that the rate in the latest quarter was at a record high level. The rate of industrial production in the country in the second quar- ter of 1962 was also at a record high level, up 2 percent from the first quarter, and up 7 percent from the 1961 average. The 1961 average was the alltime record high annual average. Principal gains in production over the past year have occurred in durable goods, where the mild recession of 1961 was largely concen- trated. The principal output gains from the low point last year to the latest quarter occurred in primary metals: that is, steel, aluminum, and other metals; machinery; and transportation equipment. And of course in transportation equipment, the big item is automobiles, having an unusually good year. There were also significant output gains over this period in several industries producing nondurable goods, particularly textiles and apparel, paper and products, chemicals and products, and rubber and plastics products. The production rate of the American economy in 1962 will approxi- mate closely the value indicated by the trend of its growth over the past 11 years; that is, starting in 1951, as may be noted from the attached charts. Whether we look at the gross national product in terms of constant prices, that is, the physical volume of goods and services, or at the PAGENO="0019" POLICIES FOR FULL EMPLOYMENT 9 Federal Reserve Board Index of Industrial Production, which also, of course, is expressed in ternis of physical volume, we find the above statement to be correct. We are maintaining our growth rate of the past 11 years. I would agree with anybody who would desire to see it higher, but I call your attention to the fact that we are maintaining that growth rate. Wholesale prices are showing very little movement. The index of wholesales prices of commodities other than farm products and foods, that is, largely industrial products, has shown very little net change since January 1959, although there have been significant increases and decreases among the subgroups. The Consumer Price Index, the prices of goods and services pur- chased by urban moderate income people, has risen about 1.25 percent per year over this period, and prices of goods and services in the gross national product have risen about 1.5 percent per year in the same time. While the rise in prices in our economy has been slowing down in recent years, it has not yet been stopped-importantly because costs are still rising. Employment in the country continues to rise, especially employ- ment in nonfarm activities. Total employment in July was recently estimated by the U.S. Department of Labor at 69.6 million, a record high for July, up 1.1 million from July 1961, in spite of a decline of almost 400,000 in reported farm employment over this period. Nonfarm employment in July 1962, therefore, was up 1.5 million, or 2.4 percent, from a year ago-with the principal gains in durable goods manufacturing, wholesale and retail trade, finance and service industries, and government. The government increase was primarily at the State and local level. Employment in construction and in min- ing declined over the past year. Unemployment was down 1.1 million from a year ago, to about 4 million, the reported total in July 1962. While the reported rate of unemployment is still relatively high, the Labor Department figures show that much of this unemployment is concentrated among boys and girls 14 to 19 years of age, many of whom are single and living at home, or among those out of work for less than 5 weeks. The unemployment rate in June (July data in detail are not yet available) among boys 14 to 19 years of age was 17.5 percent. That is, among all the boys, 14 to 19 years of age, who said they were in the labor force, 171/2 percent reported themselves as unemployed but look- ing for work. That figure, of course, is relatively high, importantly because many students were looking for summer work early in June. That 171/2 percent for boys 14 to 19 years of age, compared with a rate of only 3.8 percent for men 25 to 34 years of age, 3.6 percent for men 35 to 44 years of age, and 3.4 percent for men 45 to 54 years of age. In other words, if you are talking about unemployment among the adult male labor force of the country, it is under 4 percent. It was in June. Similar low rates of unemployment were reported for adult women in the labor force. PAGENO="0020" 10 POLICIES FOR FULL EMPLOYMENT It seems to me that when we talk about unemployment, we ought to talk about the adult labor force, not boys and girls 14 to 19 years of age. Furthermore, 57 percent of the unemployed potential workers in June 1962 had been out of work for less than 5 weeks. Again, when we talk unemployment, let us talk about serious unemployment, and not about workers who are changing jobs or who have just begun to look for their first job. Unemployment rates are relatively low among skilled workers, that is, professionals, technical, and kindred workers, managers in farm and nonf arm activities, et cetera. Unemployment rates rise as the skill level declines. In fact, un- employment rates are relatively high principally among the very young, the unskilled, and the nonwhite potential workers. As a result of high economic activity, high employment, and high wage and salary rates, the rate of receipt of personal income in the country in June 1962 was also at a record high level-$440 billion per year, up 1.2 percent from the March rate; that is, up 1.2 percent in the second quarter and up 5.8 percent from June 1961. The principal gains in personal income over the past year have occurred in employee income, up 6.2 percent. There have also been significant gains in income of nonf arm proprietors, in the rental in- come of persons, and in interest and dividends. The rise in income has been widely distributed, and the rising level of income is being spent freely for goods and services. The rate of personal savings from income after taxes in the latest quarter showed very little change from the level of a year ago. Consumers have money, and they are spending it. They may not spend it for just what each individual would desire. Some people are not selling at the rate they would like to sell. But the total volume of personal spending, personal consumption expeditures, is very much in line with the current rate of personal income. The level of corporate profits recovered rapidly with the rise in busines activity after the recent low point in the first quarter of 1961 until the fourth quarter of last year. There was apparently little change in the level of corporate profits over the past two quarters. The first quarter has been estimated, but the second quarter is not yet available. We are estimating that it may show a slight decline from the first quarter and from the fourth quarter of last year. But earn- ings in the first half of 1962 virtually assure that the amount of cor~ porate profits this year will make a new high record. While the amount of profit earned by manufacturing corporations- and here I am concentrating just on the segment of manufacturing industry because that is where we happen to be-the amount of profit earned by manufacturing corporations this year will be significantly higher than it was last year. (It will be a new high annual record, I believe. The rate of profit on stockholders' equity among manufactur- ing corporations this year will be the lowest since 1945, with the ex- ception of the years 1958, a recession year, 1960, and 1961.) Senator Biisii. How do you define that rate of profit ~ Is that re- turn on investment? Or what does it mean? PAGENO="0021" POLICIES FOR FULL EMPLOYMENT 11 Mr. ELLIS. Yes; return on the stockholders' investment, using the stockholders' total equity. Senator DOUGLAS. Just a moment. You mean the market value of stocks? Mr. ELLIS. No. What the stockholders have put in. The common stock, the preferred stock, and the surplus of a corporation. Senator DOUGLAS. Excluding bonds? Mr. ELLIS. It would make very little difference if you did include bonds and took the rate on total investment. It is not readily avail- able. Senator DOUGLAS. You mean the amount realized from the sale of stock? Mr. Er1ras. No. I mean corporate profits after taxes, divided by stockholders' equity. Senator DOUGLAS. That is what I am trying to get at, the definition of the denominator. Mr. ELLIS. The stockholders' equity is the sum of the book value of common stock, preferred stock, and surplus. Senator DOUGLAS. Book value? Mr. ELLIS. Book value. What the stockholders have put in and what has been retained for them, of course, by the corporation in the form of surplus. Senator DOUGLAS. Does this include capital and surplus? Mr. EI~IS. Yes; capital and surplus. Common stock, preferred stock, and surplus. That figure divided into the reported corporate profit after taxes. Senator DOUGLAS. Do you think the denominator might be inflated? Mr. ELLIS. In what way? Senator DOUGLAS. Well, I just ask you whether you would accept the denominator as a true mirror of investment. Mr. ELLIS. Yes; I do. I do not think it would be inflated in the sense that some of this money might have been put in 20, 30, or 40 years ago. That certainly would not be inflated now. That is not changed from the amount put in at that time. It is not the market value of the common stock. It would not be inflated that way. It is the original amount put in. Senator BUSH. This equity is also the depreciated value of these investments, as reflected in the capital and surplus figures? Mr. ELLIS. No; depreciation does not affect this. This is the amount put in. It does not change. Once it is put in, it is there, and it is not- affected by depreciation. Senator BUSH. Does it not affect the surplus figure? Mr. ELLIS. No. Depreciation would not affect the surplus figure. Depreciation would affect the net value of the physical assets, the difference between the cost of a plant and its current depreciated value; but that would not affect the common stock and surplus. Senator BUSH. But if you charged depreciation in a given year, that comes out of your earnings, and your earnings over what you pay out would go into surplus? Mr. ELLIS. That is right. PAGENO="0022" 12 POLICIES FOR FULL EMPLOYMENT Senator BUSH. So it would seem to me that the depreciated value is reflected in the surplus. Mr. ELLIS. Not in that sense, any more than any other cost. The payroll cost in that sense would also be reflected. Starting with the net profit of the corporation: now, whatever has been taken out before you arrive at that, of course, would affect the net profit; but depreciation would have no unusual effect or special effect. Senator DOUGLAS. Mr. Ellis, I do not want to interfere with your argument, but I just want to mention one qualification that I think should be made. Some of us have felt for a long time that with the management control of corporations there was a tendency to reinvest a larger proportion of the surplus in companies than was economically justi- fiable, and hence to diminish the cash distribution to stockholders. Now, to the degree that this is done, this does give a high figure, some of us believe an uneconomic figure, in the denominator, and consequently decreases the ratio. Mr. ELLIS. That is right. Senator DOUGLAS. And the point that Senator Bush made I think is also true, that to the degree that the allowances or depreciation have been increased, and they certainly have been under the double de- clining balance method of 1954, this operates to reduce earnings as stated in the numerator of your fraction, and consequently the two together would naturally serve to have a redoubled effect in diminish- ing the ratio of earnings to equity. Mr. ELLIS. That is right; diminishing below what it otherwise might be. But should you not also take into account whether the depreciation amount is adequate? If the depreciation is insufficient, as it obviously was before 1954, then to raise it, while it does raise the cost, does not necessarily make the depreciation excessive. You have a good point. It has changed and does affect the ratio. Senator PROXMIRE. May I just ask one other question, Mr. Ellis? Is it not also true to say that the profits this year are the highest since 1957, with the exception of 1959? Mr. ELLIS. Profits? Oh, I think the corporate profits will be at an all-time high this year. Senator PRoxMIun. I am talking about the profit on stockholders' equity. Mr. ELLIS. Oh, the rate, the rate of profit? Senator PROXMIRE. Yes, the rate of profit is the highest in the past 5 years, with the single exception of 1959, according to your own figures, here. Mr. ELLIS. That is true. That is right, because this is a pretty good business year in total. PAGENO="0023" POLICIES FOR FULL EMPLOYMENT 13 Senator JAVITS. Mr. Chairman, could I make one suggestion-that whatever may be in their written statements, each of the witnesses might try, even in their presentations, to answer for us what seems to me at least to be a very worrisome question in the country? Why, if all of our indexes are up, are we very worried? And why is there, in my opinion, such a demonstrable lack of confidence in the future of the economy? Representative REtrss. Would the gentleman yield at that point? I believe that the state of confidence reflects the facts of the eco- nomic situation. Let me refer the gentleman to the July 1962 issue of Business Cycle Developments, published by the U.S. Department of Commerce. It shows that many of the principal leading indicators are now pointing downward. Senator JAVITS. I was merely addressing myself to the witness's general point. I run through these statements, and everybody says, "We have more gross national product. We have more people actually employed. We have more corporate profits," as Senator Proxmire properly brought out. And yet there seems to be something gnawing at the vitals of the American economy, certainly in terms of the minds of the people who make up that economy, whether it is workers, management, investors, or academicians. Mr. Chairman, I thank you for allowing me to make that observation. Chairman PATMAN. You may proceed. Mr. ELLIs. I believe the current relatively low level of corporate profit on investment is a significant factor in the failure of employ- ment to rise more rapidly than it has in recent years. My reason for that statement, of course, is that managements, faced with what they consider an unsatisfactory rate of profit, have been aggressively reducing costs this year, and cost reduction usually means employment reduction. In summary, economic activity in the country is growing at about the average rate of the past 11 years. Business inventories seem reasonably adjusted to the current and immediately expected rate of sale. Industrial prices are stable, on the average, but there are sig- nificant increases and decreases in some areas. Employment of the adult labor force of the country is relatively high, and personal income is still rising. While the amount of corporate profits may reach a new high level this year, the rate of profit on investment is still relatively low. Chairman PATMAN. Thank you, sir. Without objection, the charts will be inserted in connection with your testimony. (Charts referred to follow:) PAGENO="0024" 0 a w 0 L~J GROSS NATIONAL PRODUCT: 1909- 1961 IN 1957 PRICES PAGENO="0025" INDEX F.R.B. INDEX OF INDUSTRIAL PRODUCTION :1909-1961 (1957=100) I~U RATIO SCALE I I I -` `- bc - 90- . 1950-1960 ~ GROWTH R~~j [3.3%_PER Y~ ~ ~9O9~196O~1 RATE 3.5 % PER YEAR] ,. i-., ~ ~ 70 - 60 - 8C-______/~~)____ 5C - 45 - 40 - 25-~~~______ III - 30 - 20~CV" 5 ~ `-VI - III III rN COMPUTING TREND, PRODUCTION FOR THE YEARS 1942 - 945 WAS .~ WAR PRODUCTION. ADJUSTED TO ELIMINATE ESTIMATED 0 a L~i 02 0 1910 1915 1920 925 930 935 940 19q5 1950 955 960 1965 9(0 PAGENO="0026" 16 POLICIES FOR FULL EMPLOYMENT Chairman PATMAN. Our next witness will be Mr. James Wishart, research director of the Amalgamated Meat Cutters and Butchers of North America. STATEMENT OP TAMES WISHART, DIRECTOR, RESEARCH DEPART- MENT, AMALGAMATED MEAT CUTTERS AND BUTCHER WORK- MEN (AFL-CIO) Mr. WI5TIART. I hope that my statement itself may be addressed to the question which the Senator from New York raised here, concern- ing the negative elements within the economy, which do give some cause for concern. Conflicting trends mark both the state of the economy generally and of the industries in which the 370,000 members of the Amalga- mated Meat Cutters and Butcher Workmen are employed. In both the National economy and in our own industries, output recently has reached alitime high levels. Seasonally adjusted gross national product running at a $552 billion annual rate, industrial production now 17.8 percent above its 1957 base, and civilian employment peaking out in July at more than 69.5 million-all establish new high records of national achievement. At the same time, cause for grave concern exists over the future. Even the record breaking $552 billion of gross national product reported for the second quarter of this year falls far short of the $570 billion level for 1962 and the $600 billion rate for the first months of 1963 predicted by the Council of Economic Advisers. The basic facts show that in the first half of 1962, the pace of recovery slowed down to a tempo substantially below any desired normal rate of national growth. This is indicated by the table below showing quarterly gains in $easonally adjusted gross national product expressed in constant 1961 dollars. Percent gain 1st quarter to 2d quarter, 1961 2. 1 2d to 3d quarter, 1961 1.3 3d to 4th quarter, 1961 2. 9 4th quarter to 1st, 1962 . 9 1st to 2d quarter, 1962 . 7 This suggests a growth rate for the full year 1962 which could be even less than a 3-percent increase. The pace of recovery from the troughof the recent recession com- pares with increases over similar time spans in two previous recessions as follows: Percentage gains in real gross national product (seasonally adjusted) GNP increase Period: (percent) 1961: 1st to 1962 2d quarter 8. 5 1958: 2d to 1959 3d quarter 10. 1 1954: 3d to 1955 4th quarter 10. 7 The wave of recovery seems to be cresting out and breaking even sooner than in these previous periods of recession. The present phase of recovery could be only an interlude between the recession of 1961 and the recession of 1963. PAGENO="0027" POLICIES FOR FULL EMPLOYMENT 17 THE EMPLOYMENT SITUATION Recently released labor-force data, showing a seasonally adjusted unemployment rate of 5.3 percent for July, have been greeted as a reassuring high of continued recovery. The June figure had been 5.5 percent. Officially counted unemployment in July totaled 4,018,000 as com- pared with 5,140,000 in July of 1961, and 4,968,000 in February 1961. It is difficult to say how much these figures may be credited as straws in the economic winds. However, to certify them as indicative of any basic solution to the national problem of unemployment goes beyond credence. The character of that basic problem is suggested by the Bureau of Labor Statistics' labor force projections for 1962. On the basis of such projections, an increase in the Nation's labor force of 1,134,000 could have been predicted between 1961 and 1962. In fact, by June of 1962, the total increase in the Nation's workers (including the Armed Forces) over June of 1961 amounted to 63,000. The civilian labor force, calculated with and without seasonal adjust- ment, actually dropped by more than 285,000 in this 12-month period. This means that, after counting those who went into the Armed Forces, more than a million workers who had been expected to join 1962's labor force were not, by the middle of the year, seeking any employ- ment. They are not, according to the official definitions, of course, included among the unemployed. Of that million or more workers who dis- appeared from labor markets, some were undoubtedly students who decided on more schooling, some were older workers who took advan- tage of social security retirement set at the age of 62, and some were housewives who had worked only on a marginal basis. A sizable fraction of this group were certainly involuntary withdrawals from the labor force. The key fact, however, is that the Nation had no work to offer a million or more workers who, under normal economic conditions, would have been seeking jobs. The key fact is that no employment opportunity existed for them, or seems likely to develop for the additional 1.3 million new workers who are expected to come into the Nation's labor force by 1963. The cushions which operated in 1962 may not soon be available again. Students who continued schooling will presumably seek jobs some day. No expansion in Armed Forces manpower is now planned. No further reduction in the retirement age levels appears to have any serious congressional contempaltion. New workers, for whom there are no jobs, may again be among the unemployed in statistics as well as fact. Assuming a continuation of the present trends-a 3-percent growth rate and a 3-percent annual gain in labor productivity-in the year 1963, there will be no jobs for at least 2 million people who desire work, but are not now numbered among the unemployed. This would be, of course, in addition to those officially numbered, a total of roughly 4 million at the present time. Representative REUSS. If I may interrupt, what would that work out in percentages of the work force unemployed? PAGENO="0028" 18 POLICIES FOR FULL EMPLOYMENT Mr. WISHART. Just calculating very roughly, in the neighborhood of 7 percent. All of this, as has been indicated, assumes continued recordbreaking progress in line with recent trends, and no economic downturn what- soever. This is calculated on the most optimistic basis. I might say also that the assumption of a 3-percent annual gain in productivity is a very conservative assumption, too, on the basis of present experience. Recession, to which some indicators now point, would bitterly aug- ment the totals of next year's unemployment. THE KEY PROBLEM The economy seems headed at vastly higher levels, toward an im- passe of a type it has not faced in more than 20 years. Four million workers ai~e unemployed. At least an~ additional million would be available for work, were work available for them at the present time. At least 15 percent of productive capacity is now idle. And, I might say, this represents a minimum estimate. In my opin- ion, idle capacity runs to a far greater level than is suggested here. Growth rates everywhere have tended to sag. Recent declines in common-stock prices suggest sharp doubt over the future and perhaps too firm a faith in the prospects for deflation. Gains in plant and equipment investment have been under expecta- tion. Private construction appears to be continuing at a vigorous pace, though observation in major cities suggests a soon-to-come sur- plus in high-rise, high-priced apartment units and luxury office space. I might say that in the city of Chicago, one very eminent real estate man 10 days ago, withdrew from a major construction venture in the downtown Chicago area. He withdrew on the basis that this type of luxury office space construction was already a drug on the market, and there were some indications that the construction of high-rise, high-rental apartments had gone beyond any realizable market potential. Certainly, recent declines in resale home values suggest a softening in the basic markets for housing. In some areas, the proliferation of supermarkets and discount centers has gone beyond the needs even of an expanding population for some years to come. All of this suggests one thing all too clearly-that the onetime enormous pressures of postwar consumer demand have been sharply deflated. The total of consumer buying power-representing some- where between 65 and 70 percent of the Nation's market-is now sub- stantially less than the Nation's immediate power to produce. Buy- ing power is even more dramatically dwarfed by the Nation's poten- tial for giant expansion. This is the root cause for the relative stagnation which has marked the course of the economy in recent years. The sweep of pent-up post- war demand, the imperatives of the Korean war period, the expansion of consumer credit, the impact of an enormous defense program-all these things have served, in the past 15 years, to accelerate the econ- omy. None of these things can now promise any renewed impetus for vital new expansion. The key problem of 1962 is the shortage of buy- PAGENO="0029" POLICIES FOR FULL EMPLOYMENT 19 ing power in relation to the vast potential for production of goods and services. In view of this, tax concessions to corporations and more generous depreciation allowances seem doubtful tonics for the economy. Industry faces no shortage of cash for expanding its power to pro- duce, were it assured the markets to make such expansion profitable. AFL-CIO estimates that such cash flow for American corporations (after tax profits plus depreciation allowances) will come this year to a total of $51.5 billion. This compares with $30.1 billion in 1953, and $48 billion in 1961, as reported by the U.S. Department of Com- merce. Cash flow was 8.2 percent of the GNP in 1953, and 9.3 per- cent in 1962. Such a sum has been augmented by the Bureau of Internal Reve- nue's recent changes in depreciation rates for industrial equipment. Even before such sweetening, the rates were more than sufficient to meet the full dollar costs of industry plant and equipment investment at first quarter 1962 rates and provide for stockholders' unimpaired dividend levels. Industry has the cash flow, in other words, to main- tain its full dividend rate and its full rate of plant investment without seeking a single new dollar of capial on stock or bond markets. As of June 1961, Forbes magazine reported that- Currently, General Motors treasury is all but overflowing with cash and Gov- ernment bonds to the tune of $1.6 billion. Of this, a probable $1 billion is surplus cash by any ordinary standards. Clearly, if General Motors made no major expansion in 1961, it was not for lack of available cash. Nor, considering its income ac- counts, was it for lack of profitability in its operations. The inhibitor to General Motors investment initiative could have been nothing other than the conviction that no expanding markets existed to justify, profitably, expansion of basic capacity. GOVERNMENT INITIATIVE The conditions of 1962 indicate that without massive and prompt Government initiative, economic stagnation may easily become our way of life. The conditions of 1962 suggest that Government has, in fact, been fighting a rapidly evaporating menace of inflation and at the same time giving tacit welcome to the currently live and deadly foe of deflation. This is a major misallocation of strategic economic resources. The current economic situation calls for a speedy revision before our cur- rent momentum drops fully away. Current practice is to fight for price stabilization, and to hope some- how that the problem of national growth will care for itself. Sound practice demands that the first and primary battle be for national growth-and that all else be subordinated to this purpose. Sound practice demands that the disaster of renewed recession, that the specter of mounting unemployment, that the spectacle of a great Nation unable to bend its full economic muscle into production be avoided above all. The problem is difficult, requiring clear and perhaps "sophisticated" thinking. But above everything else, it is the responsibility of Gov- PAGENO="0030" 20 POLICIES FOR FULL EMPLOYMENT ernment now to use every device at its command to create the precon- ditions of renewed economic progress. In relation to this, the fetish of a quickly balanced budget, the fraction of a percent of GNP repre- sented by unfavorable international balances, and the canons of eco- nomic orthodoxy cannot be allowed to exercise a veto. I might include in that group also the bankers of middle Europe. Chairman PATMAN. Thank you, sir. Without objection, the tables acompanying your testimony will be inserted in connection with your remarks. (Tables referred to follow:) Employment and unemployment 16 months after trough (seasonally adjusted data) [In thousands] February 1961 June 1962 1 Change, number Change, percent Employ- ment Nonfarm employment Unemploy- ment Unemploy- ment rate 66,723 67, 911 60,922 62,847 4,968 3,917 6.9 5.5 +1, 188 +1.8 +1,925 +3. 2 -1,051 -21.2 April 1958 August 1959 63, 542 65, 794 57,753 60, 103 5,070 3,696 ~ 374 -27. 1 7.4 5.3 Change, number Change, percent August 1954 December 1955 Change, number Change, percent October 1949 February 1951 Change, number Change, percent . +2,252 +3.5 +2,350 +4. 1 60,589 64,516 54,242 57,539 3,858 2,824 8.0 4.2 +3,927 +6.5 58,057 60,494 +3,297 +6.1 50,844 53,402 -1,034 -26.8 4,825 2, 166 7.7 3.5 +2,437 +4.2 +2,558 +5.0 -2,659 -55. 1 1 Adjusted to 1950 census population base. Projections of total labor force compared with actual labor force [In thousands] Total labor force (in- eluding Armed Forces) Projected Actual Deviation of actual from projected labor force Period Year-to-year increase in labor force Projected Actual 1955 68,896 68,896 1956 69,692 70,387 +695 1955-56 +796 +1,491 1957 70,681 70,746 +65 1956-57 +989 +359 1958 71,538 71,284 -254 1957-58 +857 +538 1959 72, 505 71,946 -559 1958-59 +967 +662 1960 73,381 72,820 -561 1959-60 +876 +874 19601 73,687 73,126 -561 - 1961 74,889 74,176 -713 1960-61 +1, 202 +1 050 1962 I 76,023 74,532 -1,491 1961-62 +1, 134 +356 1 Includes Alaska and Hawaii. Source: U.S. Department of Labor. Projections from 1960 forward differ from those published in "Population and Labor Force for the United States, 1960 to 1975" (Bull. 1242) to take account of (1) revised population figure shown by 1960 census and (2) to include Alaska and Hawaii; 1962 actual figures are 2d quarter civilian employment seasonally adjusted plus Armed Forces. PAGENO="0031" POLICIES FOR FULL EMPLOYMENT 21 summary employment and unemployment estimates [Thousands of persons 14 years of age and over] Employment status July 1962 June 1962 July 1961 Total labor force, including Armed Forces Civilian labor force - Employed Agriculture Nonagricultural industries Unemployed Seasonally adjusted unemployment rate, percent Unemployed 15 weeks or longer Unemployed 27 weeks or longer Nonfarm workers or part time for economic reasons, total Usually work full time Usually work part time 76, 437 73, 582 76, 857 74,001 76, 153 73, 629 69, 564 69, 539 68, 499 6, 064 63, 500 6, 290 63, 249 6,453 62, 046 4, 018 4, 463 5, 140 5.3 921 576 5. 5 1,033 584 6. 9 1,634 1,026 2, 674 2, 630 3,011 962 1, 712 1, 041 1, 589 1,119 1,892 Chairman PATMAN. Our next witness will be Dr. J. Frederick Wes- ton, professor of economics, University of California, Los Angeles. STATEMENT OP DR. J. FREDERICK WESTON, PROFESSOR OP ECO- NOMICS, UNIVERSITY OP CALIFORNIA AT LOS ANGELES Dr. WESTON. Economic data give strong indications that the busi- ness upswing which began in February of 1961 is now tapering off. While the effects of the steel settlement and the stock market gyra- tions make interpretation difficult, there is no question that the rate of increase in business activity has slowed. Since significant segments of spending are tied to the rate of in- crease in general business, rather than to its absolute level, volatile segments of spending are subject to sharp declines. Thus we approach the upper levels of a business recovery substantially short of the econ- omy's full employment potential. The repetition of an abortive business recovery calls for immediate action to alter the impact of what I would call the fiscal choke on the economy. The strong evidence that at full employment the Federal Government would run a surplus of over $10 billion in its adminis- trative budget calls for counteraction. I therefore recommend a cut in the normal corporate income tax rate by 5 percentage points, and a decrease in personal income taxes by splitting the first bracket taxable income and halving the rate. This proposal is not made to counter an incipient recession. It is made to change the fiscal structure to remove some of the barriers to full employment growth. While some may oppose tax reductions until unmistakable evidence of a decline appears, I offer three arguments against the policy of waiting: (1) Substantial professional judgment sees a basis for im- mediate action. (2) Waiting would require stronger action to coun- ter movements of greater momentum. (3) And on this point I place the greatest weight: monetary policy is relatively tight because of in- ternational balance-of-payments considerations. Therefore relative fiscal ease is required to offset relative stringency in monetary policy. If subsequent events indicated that too much fiscal ease had been pro- PAGENO="0032" 22 POLICIES FOR FULL EMPLOYMENT vided, monetary policy could be tightened further. This further tightening in monetary policy would be consistent with international balance-of-payments considerations. This point I would like to emphasize very strongly, because you do not have to answer all of the horribly difficult questions in order to formulate policy. You simply have to develop the strategy that makes sense; and the strategy that makes sense under current conditions, if you have tight money policy, is certainly to move in the direction of greater ease in fiscal policy. The major opposition to tax reduction is based on the fear that the prospective deficit would be increased; but this was the same argu- ment used against a tax cut in the fall of 1957, and as a consequence, a deficit of $12.4 billion in fiscal 1958-59 occurred. This was the largest peacetime deficit in U.S. history, and under an administration that put budgetary balance as a No. 1 economic objective. It is ironical that a major responsibility for the large deficit must be charged to Senator Byrd. Because of his insistence on the rigid debt ceiling in the fall of 1957, the Air Force did not pay its bills for a period. These actions aggravated the weak economic conditions in the summer of 1957, and precipitated the decline. The resulting fall in Federal Government revenues produced the $12.4 billion deficit. We have the paradox that apparent fiscal responsibility had the effect of grievous fiscal irresponsibility. Let us not repeat the same mistake under the same arguments. Recasting the fiscal structure in favor of higher economic growth will diminish deficits, not increase them. The central reason why a tax cut is called for stems from an his- torical accident. During the Korean war both the corporate and per- sonal income tax rates were increased substantially to deal with the tendencies toward inflation that developed during the Korean hostili- ties. Those tax rates have never been reduced. As a consequence, since the inflationary pressures have subsided in the economy during the last several years, the fiscal structure that was developed to deal with the Korean inflation actually now inhibits the normal growth of the economy. The current upswing is beginning to taper off with the economy significantly short of its full-employment potential. This is not a recommendation that the Government use its policies to prevent the economy from ever turning down. The factor that calls for action now is the realization that for the last several upswings the fiscal struc- ture has been a brake on normal recoveries. As a consequence, reduc- tions in taxes are called for, not simply to prevent a downturn, but to alter the fundamental fiscal structure. A reduction in taxes is particularly called for because monetary policy has been stringent for the past several years in part because of balance-of-payments considerations. The Federal Reserve author- ities argue for high interest rates so that money does not flow abroad in quest of higher earnings on deposits in foreign countries. Given that monetary policy is relatively tight and given that the fiscal struc- ture has been inhibiting growth because it has been geared to a strong wartime inflationary economy, a reduction in taxes is essential. We have the paradox that because our economy does not approach its full employment potential our Federal Government has been run- PAGENO="0033" POLICIES FOR FULL EMPLOYMENT 23 fling deficits. Deficits occur because revenues depend upon a high- level economy, with corporate profits and personal incomes growing at vigorous rates. Therefore, the experience of the 1957-58 recession particularly emphasizes that a reduction in taxes, by taking the brake off economic recovery will bring in more revenues. Tax cuts will result in no deficits or smaller deficits than would be the case if tax cuts were not made and the economy did not achieve its normal recovery. The central idea is that the economy suffers from a harsh fiscal policy growing out of the Korean war economy. The Federal Reserve System, concerned with the international balance of payments, has been pursuing a relatively tight money policy course. In order to offset this tight money policy as well as to release the harsh fiscal choke, a cut in taxes is necessary. There is another element of the strategy. Because of this situa- tion a rather substantial cut in taxes could be made, on the order of magnitude of $10 to $15 billion, to help avoid the repressive effects of fiscal policy on the economy. We have the additional strategic advantage in this situation that if at any point it appeared that fiscal policy were too easy (which is extremely unlikely), the Federal Reserve authorities could tighten monetary policy even further. Also, the realm where monetary policy is particularly effective is in stopping a too vigorous rise in economic recovery. It is said that. monetary policy is like a string-you can pull with it but you cannot push. Hence we are in the position where fiscal policy is so tight that the only thing monetary policy could be expected to do would be to push with the string, and it cannot. Whereas what we need to do is to change the fiscal relationship so that once again we are in a position to use monetary policy effectively in the way that it should be used. But what we have had for several years is both a tight fiscal policy and a restrictive monetary policy. Since the monetary au- thorities are likely to continue the tight money policy, fiscal policy must be eased in the direction of substantial tax reductions. Chairman PATMAN. Thank you, sir. Our next witness will be Dr. Daniel B. Suits, professor of economics, University of Michigan. Dr. Suits. Do you have a prepared statement, sir? STATEMENT OF DR. DANIEL B. SUITS, PROFESSOR OF ECONOMICS, UNIVERSITY OF MICHIGAN Dr. SuITs. I have only a manuscript statement. Chairman PATMAN. That is all right, sir. You may proceed in your own way. Dr. SUITS. My analysis and economic forecasts are based on the use of an econometric model of the U.S. economy. Essentially, this consists of a system of mathematical equations statistically derived from the interplay of the important factors in our economic life. This system of equations has been generally described in earlier tes- timony before this committee, and a complete discussion of it, to- gether with its past forecasting experience, will be found in an article entitled "Forecasting and Analysis With an Econometric Model," 87869-62-3 PAGENO="0034" 24 POLICIES FOR FULL EMPLOYMENT that I published in the March issue of the American Econometric Review. I have copies of these for the committee. The forecast levels of economic activity for 1960, 1961, and 1962 are shown in table I. (Table~s I and II follow:) T.&isi~ 1.-Economic forecasts 1960,1961,1962 [Figures, except as noted, are billions of 1954 dollars] 1960 1961 1962 Forecast Actual Forecast Actual Forecast Gross national product . 432.0 439.2 450. 1 447.9 474.3 Consumption expenditure . 287. 1 296.8 304.3 304.3 318.6 Automobiles . Other durables Nondurables Services . 16. 7 25.2 138. 9 106. 3 15. 6 25.2 141.9 113.7 14.6 25.1 144.7 119.9 15. 5 26. 1 143.3 119. 4 18.8 26. 7 148.0 125. 1 Private gross capital expenditure Plant and equipment . Residential construction . 62.4 60.5 61.3 57. 8 61. 1 40. 5 19. 7 2 2 S * 39.3 18.0 3 2 ~ 39.0 19. 9 2 4 ~ 37.7 18.2 2 0 ~ 84.0 1.8 38. 6 17.8 f 2.6 2.1 Inventory: Durable goods Nondurable goods . Government purchase of goods and services Net exports . 83. 7 -1.3 80.3 1. 6 84. 7 . 2 92.3 2. 3 Civilian employment (millions) Unemployment (millions) Percent of labor force 65. 5 4. 4 6.3 66.7 3. 9 5. 6 67.0 4.3 6.0 66. 8 4. 8 6. 7 68.9 3.6 5.0 TABLE 11.-Changes in basic economic factors, 1960, 1961, and 1962 [Figures except as noted are billions of 1954 dollars] 1960 1961 1962 1. Government expenditures for goods and services: Federal State and local . 2. Plant and equipment (producer durables plus other construction) 3. Nonfarm residential construction 4. Automobile demand 5. CIvilian labor force (millions) -$0 5 3.6 3.4 -1. 2 .7 1.3 $4.4 4.4 -L 2 .1 -1.6 1.0 $7. 5 3.9 +2.1 +. 4 +3.0 .9 Senator BUSH. This forecast is your forecast? Dr. SUITs. This is my forecast; yes, sir. Each of these forecasts covers the average for a calendar year and was prepared and presented in the preceding November, before the Conference on the Economic Outlook at the University of Michigan. Moreover, many of these forecasts had additional publicity. For ex- ample, the forecast of 1960 was placed in the record of this committe in the fall of 1959. The general agreement between the forecast values and the sub- sequent economic events speaks for itself, but the important point shown in the table is the fact that there is nothing unusual or extraor- dinary about the present state of our economy. It is the result of the same underlying factors that generated the recession of 1960, and the recovery of 1961. PAGENO="0035" POLICIES FOR FULL EMPLOYMENT 25 The most important of these factors are the level of government expenditure for goods and services, the expenditure of business firms for new plant and equipment, the volume of residential construction, and the behavior of the market for consumer durables, particularly automobiles, and finally, the growth in the labor force. The behavior of these factors is shown in table II. The recession of 1960 can largely be traced to the slackening of Federal expenditure for goods and services. During calendar 1960, the Federal Government expenditure for goods and services declined by one-half billion dollars, and the State and local expenditures in- creased by a relatively small amount, $3.6 billion. These were combined with a decline in residential construction of about $1.2 billion, and were somewhat offset by a rise in plant and equipment expenditure. Despite the decline in activity in the fall, the average level of activ- ity in 1960 stood somewhat higher than 1959, and indeed was almost adequate on the average to absorb the normal growth of the labor force; we experienced only a slight growth in unemployment. The rapid recovery following the first quarter of 1961 was almost entirely the result of the sudden acceleration of U.S. defense activity. This is reflected in the enlarged rate of expenditure by the Federal Government. In contrast to the decline of one-half billion dollars in cailendar 1960, the expenditure of the Federal Government for goods and services during 1961 increased by very nearly $4.5 billion over the 1960 average. State and local expenditures were also somewhat higher. Despite the rapid rate of recovery during this year, the average was insufficient to absorb the growth in the labor forces and the rate o k unemployment rose to the level of over 6.7 percent. For 1962 Federal expenditures are projected to rise by $7.5 billion. This, coupled with a very substantial rise in automobile sales, has brought us to our current position. The average level of GNP for 1962 in current dollars will be somewhat short of $560 billion. But, combined with the low rate of growth in the civilian labor force, this will bring unemployment down to about 5 percent of the labor force. The present state of the economy is the best it has been in many years. We are experiencing a record level of output and sales, and the proportion of unemployment this year will average less than in any year since 1957. Yet we are uncertain, uncomfortable, and even somewhat fearful. There is good reason for this. The defense buildup is rapidly approaching its new steady level, and under present programs we can expect little further expansion from the Government sector beyond the continued growth of State and local services required by our growing population. The modest showing of profits, coupled with substantial existing unused capacity, promises no marked expansion of new plant and equipment expendi- ture. The present level of rental vacancy rates casts a shadow over the residential construction picture, and no one expects the automobile market to hold its own in face of the present rapid buildup in the number and quality of cars on the road. PAGENO="0036" 26 POLICIES FOR FULL EMPLOYMENT In view of these considerations, the apparent sluggishness of the recovery hardly comes as a surprise, and there is every chance of a downturn within the next 6 months. But while the prospect of a downturn occupies the center of atten- tion at the present time, it seems to me to be a secondary matter. The real problem is not so much the prospect of a downturn as the obvious fact that at the peak of a year of great prosperity we did not reduce unemployment below 5 percent of the labor force. This fact is underscored by the current abnormally low growth in the civilian labor force itself. Had the labor force grown by what I would consider a more normal annual rate of 1.2 million, instead of the projected 0.9 million, the rate of unemployment would be another half percent higher. Even at its best, the growth of produc- tion and employment has barely kept pace with the growth in the labor force. In the absence of action to the contrary, we may expect the level of unemployment in the next four quarters to again rise to Over 7 percent of the labor force. What accounts for this current sugglishness in the midst of pros- perity? The answer is esentially this: The tremendous heritage of inflationary pressure from World War II made it essential to operate this economy with a tight tax brake, applied to control inflation. The defense buildup of the Korean period required the continuation of this tight tax brake. But the inflationary forces are now abating, and the brake is bearing directly on the level of production and em- ployment. In my opinion, it is now time to release this brake and cut taxes. The amount of tax cut required may be substantial. My calcula- tions suggest that with the continuation of the existing level of Gov- ernment expenditure, a cut in the personal income tax of $10 billion would be expected to raise the level of employment by about 1 million jobs. Of course this means that in the traditional accounting defini- tion, the Government will operate at a deficit, but the deficit will be substantially less than the $10 billion of the tax cut. The expansion- ary effect of the cut itself will operate to recoup something in the neighborhood of 40 percent of the tax cut, and the so-called deficit amounts to only about $6 billion. I do not propose that a cut of this magnitude be made at once. So long as we are aware that larger tax reductions are probably necessary, we can ease off the brake little by little and find that point which is consistent with the maximum growth of the economy. In this way, we can use the fiscal power of the tax brake, together with the Govern- ment expenditure accelerator, for their proper purpose, to balance the growth of a prosperous American economy. Chairman PATMAN. Thank you, sir. Senator Douglas, we will start with you, and we will observe the customary 10-minute rule, if that is satisfactory with the committee. Senator Douglas? Senator DouGlAs. I would like to start with a proximate issue, and not with basic issues. The Issue I want to ask about is the high incidence of unemploy- ment among juveniles, to which Mr. Ellis referred, and which Mr. Wishart touched upon. PAGENO="0037" POLICIES FOR FULL E~LOYMENT 27 Mr. Ellis pointed out the percentage listed as unemployed among the age group of 14 to 19 years of age. I suppose it is true if you narrow the age grouping to from 16 to 19, this percentage would be even higher, would it not, Mr. Ellis Mr. ELLIs. Yes. The lower levels would be higher. I do not have them cut that fine, but the lowest levels are highest. Senator DOUGLAS. Mr. Wishart made the point that there is a great deal of suppressed unemployment, or unemployment not shown, of people who would like to get work if work were available, but who, because they do not have employment records, as I understand it, are not included as part of the labor force. Mr. WISHART. Because they are not actively seeking work. I am sure there are hundreds of thousands of individuals who are out of the labor market because their experience, their knowledge, has indi- cated to them that there is no work for them in the labor market. Senator DOUGLAS. Do you not think that these are concentrated among the juveniles who have dropped out of school, and have not been able to find work, and are more or less drifting ~? Mr. WISIJART. That could be one large element. Of course, another and more favorable side of the picture would be those juveniles who have continued in school, rather than going on to the labor market. But a substantial factor of this could be repre- sented by the kids who are hanging around street corners. This is the sociological economic basis for juvenile delinquency, of which we have heard a great deal. Senator DOUGLAS. Last year, of course, Dr. Conant made his study of slums and schools and, as I remember it, he estimated that there were a million boys and girls of high school age who were dropped out of school and were not at work. And I think every large city in the country knows what is happening as a result of this. The warfare which broke out on West 94th Street in New York City just a few days ago is connected with this. Mr. WISHART. I should say this is a symptom of the unemployment picture. Senator DOUGLAS. I understand. And, therefore, while the unem- ployment is concentrated, as Mr. Ellis says, in the juveniles, its in- cidence is extremely high among them. Now, I think Conant's estimate of last year was on the whole a con- servative one. Now, if you take the changes since last year-I have the economic indicators before me, and comparing June 1961 with June 1962, the increase in the labor force was only something like 70,000. Mr. WISHART. That is correct. Senator DOUGLAS. And that was the figure you gave. I was some- what startled when Mr. Suits estimated the change in the labor force had been 900,000. Mr. WISHART. This may have been on an annual basis. Dr. SUITS. This was on an annual basis, yes. Mr. ELLIS. Would you not still question that it will rise that much this year? It has not risen that much in the first 7 months. Senator DOUGLAS. That is exactly right. I think it is fairly clear that the economy has not absorbed these youngsters, the new entrants, who normally would have been absorbed, PAGENO="0038" 28 POLICIES FOR FTJLL EMPLOYMENT during this last year, and therefore that the amount of nonstated un- employment is greater than when Conant made his estimate of last year. Mr. WISHART. I should say also that the fact that this unemploy- ment has hit more heavily the younger groups by no means mitigates its social seriousness or its gravity. Senator DotrGrh~&s. Not at all. That is the next point I wanted to pass to: that, to my mind, this calls for a frontal attack on the prob- lem of juvenile employment. It calls for the necessity of a revival of CCC, a. beginning of job training on the job. It calls for the other features of the youth employment opportunities bill on a much larger scale than contained in that bill. This, it seems to me, is the basic necessity. And I find it somewhat difficult to see how people are thinking of certain forms of communi- cation at 3,000 miles distance with other portions of the earth, and neglecting the need for giving employment to the kids here in the United States of America. Mr. WISHART. I might add this, Senator, that our studies of automa- tion in the meatpacking industry have indicated that the primary im- pact of automation does not come on employed workers, except where a plant may be closed down. The impact is felt by the young people who are not hired in the first place, because their potential jobs have been taken over by new technology and new machines. And in farm communities this has been a very serious thing. Senator DOUGLAS. In other words, the avenues of entrance are be- ing closed? Mr. WISHART. That is correct. Senator DOUGLAS. Now, Mr. Ellis properly says that this incidence falls with greatest weight upon the young, the unskilled, the minority groups. Now, if you have all three of these combined in one set, a youngster who is unskilled, and who is also a member of a minority group-this means that it is intensified among them. I think this accounts in large part for the wolf packs which are organizing in the cities of the country, that it is really the most serious social problem that we have in the country, and it is an economic problem. That is all I want to say, Mr. Chairman. That is the point I wanted to bring out. Chairman PATMAN. Senator Bush? Senator BUSH. Mr. Wishart, in your statement, you say: But above everything else it is the responsibility of Government now to use every device at its command to create the preconditions of renewed economic progress. What devices do you have, there? Mr. WISHART. My understanding had been that we were not to present organizational programs, or specific listings of legislative pro- posals. However, I would include first of all a tax cut, lifting the burden of taxes, particularly on the lower income brackets, where a tax cut becomes immediate purchasing power, with volatility and circulation, to multiply its economic impact. Senator BUSH. You would suggest that irrespective of any reduction in Government expenditures. Is that so? Mr. WISHART. I would suggest that without reduction in Govern.. ment expenditures. PAGENO="0039" POLICIES FOR FTJLL EMPLOYMENT 29 Senator BUSH. Without any reduction in Government expencli- tures? Mr. WISHART. That is correct, sir. I would suggest it as a means of shoring up essential purchasing power. Senator BUSH. I did not quite understand this. Is there some inhibition about witnesses recommending relief, here, in the situa- tion that we are talking about? Was there any advice? Mr. WISHART. There was no absolute prohibition. I should go on to say that basic urban renewal, a more substantial investment in education, a more substantial investment, if I may use the contro- versial term, in medical care, all of these are essential. Senator BUSH. Would you increase Government expenditure and at the same time reduce taxes, especially in the lower brackets? Mr. WISHART. Yes, especially on the short-term basis. The question of the long-term balance of the budget I would say is perhaps another issue. But in terms of the immediate impasse, it seems to me that the Government responsibility here is to provide the lacking purchasing power, which Mr. Suits and others have indicated, along with my own testimony, is at the root of the present loss of acceleration in the economy. Senator BUSH. So in your judgment it calls for increased Govern- ment expenditures along the lines that you said, and at the same time a reduction in taxes. What order of magnitude do you have in mind, there? Mr. WISHART. This is a question which I have not studied.. I am not in a position to give an authoritative answer. Senator BUSH. Mr. Ellis, toward the end of your statement, there, you say: I believe the current relatively low level of corporate profit rate on invest- ment is a significant factor in the failure of employment to rise more rapidly than it has in recent years. Would you care to expand on that a little bit, there? Mr. ELLIs. Yes, Senator. I would be glad to. \Ve have to keep in mind that in this country most of the employ- inent is private employment. It is not Government employment. And private employment depends on the outlook for profit. If the outlook for profit is good, the employer will make additional invest- ment and hire additional people. At the moment, and in recent years, in the last 5 years, as was men- tioned by the gentleman over here, there has been a definite profit squeeze in this country, in the sense that it is becoming more and more difficult to get the profit rate up to a satisfactory figure or to find new things which, with today's costs and today's taxes, can be produced at a satisfactory profit. Therefore, the effort to find additional employees has been some- what blunted. If the profit level were higher, if the opportunity to earn a profit were one of the objectives of the present administration, the stimula- tion of profit, I think you would find the level of employment rising. We talk about the level of unemployment being 5.3 percent, but if you look, as I mentioned, at the level of the adult labor force, it is under 4 percent, and it would not take much of an increase in em- ployment to reduce that to perhaps 3 percent. PAGENO="0040" 30 POLICIES FOR FULL EMPLOYMENT We are not talking about very large magnitudes. Senator BUSH. Why is the rate of profit declining? Why is it so disagreeably low, in your estimate? What are the principal factors that bring about that condition, which is so serious in your mind? Mr. ELLIS. Importantly because costs have risen and are still ris- ing, and foreign competitive prices are lower than prices in the United States. The steel industry is an outstanding example. It is difficult to sell steel abroad at the prices that apparently are necessary in this coun- try to make a profit on the steel investment. It is difficult to sell American automobiles abroad, with our costs. Senator BUSH. What do you think we can do about that? Mr. ELLIS. We must do what has been mentioned here at the table: Increase the productivity per man, and per man-hour, so that we can get our costs down and therefore our prices down to a competitive level. That is the ideal. At least we ought to hold costs in this country, so that if other countries, as in Western Europe, for example, do inflate their prices, it would be to our advantage. Senator BUSH. Do you think American industry is doing a pretty good job of holding costs in line now? Mr. ELLIS. Steel wage rates recently went up. Other wage and salary rates are rising. Social security taxes are going up the first of the year. State arid local tax rates are rising. Transportation costs are rising. Postal rates may be raised. A lot of costs are still rising. In construction, for example, it `may be that one of the difficulties with construction is the very high level of cost of construction. I think this committee has heard frequently about the difficulties caused by rising residential construction costs. `Senator BUSH. Principally in high costs of labor. Is that right? Mr. ELLIS. Well, basically labor, because most costs are labor costs. Senator BUSH. In construction? Mr. ELLIS. In everything. Most costs of production are labor costs. By' labor I do not mean wages only. It includes salaries. It includes the research people. It includes the sales people, the clerical people, everybody. Payroll is the primary cost item in anything. Senator BUSH. What do you think is needed to sort of bring the realization of `this thing home to those in authority? What do you think can `be done about it to help us stabilize this cost situation? Mr. ELLIS. We need to recognize the function of profit in the Ameri- can economy. Profit is the `stimulator in the American economy. If we had the acceptance of that fact, rather than the attitude that fre- quently prevails-that profit is a nasty word-the American economy would grow faster. To put it bluntly, if the administration would come out for a satisfactory rate of profit, I thing businessmen would increase the purchases of capital equipment and their employment. It could not be done overnight. It is not something sudden. But I think that is the direction in which we have to go. We have to recognize that the American economy is a profit-stimulated economy; not a Governrnent-stimulated economy. Senator BUSH. You do not feel that the business authorities have a sense ~of real security in the attitude of their Government toward this important point. Is that right? PAGENO="0041" POLICIES FOR FULL EMPLOYMENT 31. Mr. ELLIS. That generally is correct; yes. I do not get the impres- sion that the administration is in favor of seeing profits rise. They seem to apologize for them, when profit rates go up. Certainly there is no outstanding program that would stimulate a profit rise. `When businessmen come to Washington to talk about profit, the reception is not very favorable. Senator BUSH. I would like to ask the gentleman from Michigan one question if I still have the time. You spoke about the gradual release of the tax brake. Would you amplify that a little bit? Dr. SUITS. By this I mean, sir, that I am not certainly sure myself how large a tax reduction would be needed to stimulate the demand that I think is needed for the growth that we ought to get from our economy. I would recommend, therefore, that we proceed with rea- sonable caution, but with all due dispatch. I would suggest, therefore, a tax reduction in the neighborhood of $5 billion. I do not believe that this is adequate for the purpose but I proposed reducing a little at a time. If this $5 billion proves to be inadequate, we should follow with another $5 billion. Senator BUSH. With the prospects of a tax reform bill, a general sweeping reform of our whole tax structure, being fairly good, I think, for next year, do you think we ought to release the tax brake, as you say, right now, rather than wait until we can do a comprehen- sive overhaul job on our tax structure in the light of extensive studies by the Treasury and by the House Ways and Means Committee? Dr. SUITS. This is, of course, a problem of political procedure in which I am by no means competent. Surely, if we could, tomorrow, bring in a completely reformed tax structure, with generally reduced tax rates, this would be something that everyone would be in favor of. But we must probably wait a year for a tax reform bill to get through hearings and through the Congress. I would think it would be better to proceed at once to reduce taxes within the context of the existing tax structure and then make the reform later within the new level of rates. Senator BUSH. My time is up. Chairman PATMAN. Mr. Reuss? Representative REuss. Mr. Chairman, all the witnesses appear to agree that this country's rate of national growth has continued at the unsatisfactory 3-percent rate which it achieved during the 8 years of the Eisenhower administration. I commend our Republican col- leagues for being alarmed about this, and I join with them in think- ing that this merits consideration by the Joint Economic Committee. I would like to call the attention of the panel to the July 1962 issue of the U.S. Department of Commerce publication, Business Cycle Developments. I think you all have a copy in front of you. The leading indicators shown on page 5 have turned downward in the last month or two. The average workweek has gone down. The rate of new hirings in manufacturing has gone down. In all indus- try, it has gone down. The layoff rate is higher. The average weekly unemployment compensation claims have increased. I notice that these changes also preceded the 1949, 1953, 1957, and 1960 recessions. I am disturbed at the similarity in the movements PAGENO="0042" 32 POLICIES FOR FULL EMPLOYMENT of the leading indicators to those which occurred before previous cyclical downturns. I'd like your opinions. Mr. Ellis? Mr. ELLIS. Gentlemen, I think you have to accept the fact that our economy fluctuates. Sometimes it is rising. Sometimes it is falling. When it has risen to a peak, it is likely to go down rather than up. I think there is entirely too much discussion of the fact that we have business fluctuations in this country. Do you expect to eliminate business fluctuations? Is that the ideal? Dr. WESTON. I think the fact that causes concern, however, is that as we approach this business cycle peak, we still have very high excess capacity in the industry. Now, one can argue about the unemployment rate, but there is no question about the high excess capacity, high unused capacity. And I think the thing that causes alarm is that we have reached our turn- ing point far short of using our national potential. And this particular point suggests that probably an increase in the rate of the economic growth would do more for corporate profits than any single Government action. There is clear evidence that corporate profits are a function primarily of rate of capacity utiliza- tion, and the greatest increases in productivity you obtain when you are utilizing capacity to a high extent and spreading relatively fixed costs over a much larger rate of output. Representative RETJSS. I am sure you would not disagree with this last point, Mr. Ellis. Mr. ELLIS. I would not disagree. But I would point out that busi- nessmen spend a great deal of money on developing new products, on sales forces, and on advertising to do just what the gentleman men- tioned. If someone has a plan to increase sales volume, I certainly would like to hear about it. Dr. WESTON. Well, I think the answer there is the difference be- tween a microeconomic approach and a macroeconomic approach. When the general level of business activity is declining, all the efforth on the part of individual businessmen are likely to come to naught. Income elasticities of demand are going to be pretty substantial, and particularly in a producer goods industry, such as Mr. Ellis' industry. Certainly the individual businessman would like to do everything in his power to help contribute to economic recovery, and I think he can make some contribution. I do not say this is a job entirely for Government. But it seems to me that the central fact here is that you have a fiscal system now that does put a brake on recoveries, as Professor Suits described it. And in that total environment, par- ticular efforts come to naught. You have to get at the fundamental cause. Mr WISIIART The individual businessman by investing in adver- tising does not create any new purchasing power. He may succeed in taking a share of the consumer dollar from another manufacturer. But in terms of the total economic system, he creates nothing new in terms of expanded capacity. Mr. ELLIS. I would question that statement. But let us look first at this matter of capacity, which receives a great deal of attention. The Du Pont Co. has some excess capacity. In the case, for example, of viscose rayon yarn, we built it 30 years ago. It was very good PAGENO="0043" POLICIES FOR FULL EMPLOYMENT 33 capacity at that time. The world has moved on. We have developed some new synthetic fibers that do a better job than viscose rayon did. But we still have maintained some of that viscose rayon capacity in operating condition. Now, gentlemen, where did we make a mistake? We have excess capacity here, but only because the world is moving on. We have developed something new, something better. Dr. WESTON. Would you say that the largest proportion of existing excess capacity is represented by technological obsolescence, or even a significant portion? Mr. ELLIS. Yes, a significant proportion is. But, gentlemen, do not use the 100 percent of capacity as your ideal operating rate. Do not assume that we always should be operating at 100 percent of capacity. We are operating at about 85. Ninety would be a good figure. If we get much above 90, we start to build more capacity. It takes 2 years to build a large plant. Suppose we decide this year that demand for our products in 1964 will be enough to absorb more than 90 percent of our present capacity. Then we had better get started building more capacity. Our excess capacity in this country is not very large in total. Even in the steel industry, is not some of that excess in steel in a sense a defense reserve? Suppose we got into a shooting war. Would we not need that apparent excess capacity in steel? Is not some of the other excess capacity in a sense a defense reserve? We ought to have a little leeway in capacity, even in normal com- mercial operations. We do not shift easily from one item to another. We may overestimate the demand here. We may underestimate it in anOther product. Representative REUSS. Would you carry this argument to the point of saying that the 17 or 20 percent of our young people around 20 years of age who are now unemployed are a necessary soil bank? Mr. ELLIS. No. But a lot of that 17 percent are boys and girls liv. ing at home looking for summer jobs. They are not looking for full- time work. Should we reorganize the economy so that every boy who wants a job cutting grass can find it or every boy who wants a high-income job can find it before he goes back to college? Representative REUSS. Let me say that this committee takes seri- ously its mandate under the Employment Act of 1946, which says that it is the goal of the United States to have maximum employment, production, and purchasing power. And this means that, to the maximum extent possible, we do try to iron out extremes in business cycle movements. This view is shared by Republicans and Democrats alike. That is why the Republicans asked for this hearing. Mr. ELLIS. I would question that statement, gentlemen. I think you are getting on very dangerous ground if you put as your idea a smooth, steady growth with no fluctuations. Representative REUSS. I did not say "no fluctuations." Mr. ELLIS. That is the business cycle. Remember, gentlemen, the business decline in the spring of 1961 was the mildest we have had in this country since 1926. That was not a very serious fluctuatiOn. Now, if you mean to eliminate things like that by pouring in massive Government spending which is financed by selling securities to the PAGENO="0044" 34 POLICIES FOR FULL EMPLOYMENT commercial banking system, I think you are presenting a dangerous ideal. If you can sell securities to savers, that is something else. But I am not in favor of massive Government spending to iron out that kind of fluctuation. Representative REUSS. I believe we must remember that we are~ not talking of fluctuations around a rapidly rising upward trend in the economy but those which have occurred at a time of inadequate long- term growth. Chairman PATMAN. Senator ,Javits? Senator JAVITS. Gentlemen, I see a full debate shaping up right here, and I would like to state it. Mr. Wishart, who represents one point of view, says the key problem of 1962 is the shortage of buying power in relation to the vast potential for production of goods and services. Mr. Ellis, at the other pole, says the rate of profit on investment is still relatively low. And being in management, he naturally under- states, whereas Mr. Wishart says it right out. But I think we get the point. Now, what I would like to ask you gentlemen: Are these two ideas, which do represent the debate this fall, perhaps even the political debate between the parties-are they mutually exclusive? If I may just finish my question: In other words, is the only thing we can do, according to Mr. Wishart, to get more urban renewal, pass aid to education, win for medical care, pass, as my distinguished colleague Senator Douglas says, the Youth Opportunities Act? And that will do it? Or must we go with Mr. Ellis in a mutually exclusive way, and say, "Let's put a roof, not in law but in national climate, on wage increases and price increases, and let's give a real boost to automation, and let's go to town with giving business the expectation of more profit"? Are these mutually exclusive? Mr. WIsHA~nT. Might I say this: The increase of purchasing power which would expand industry's markets is by no means inconsistent with a certain profit return to industry. In fact, in my opinion the profit squeeze, about which we have heard so much, reflects primarily the underutilization of equipment. The cost of equipment, the cost of research and development, the cost of the sales force, the cost of the salaried personnel, does not decline with the drop in production. That cost remains relatively fixed. The wage cost does go down in relation to production cutbacks. So that the way out of the cost squeeze does not lie along the avenue of a wage freeze. The way out lies along the lines on which we have been talking here, the increase in purchasing power, to make it possible for industry to operate at something close to a desired level of capacity utilization. I think industry generally is quoted as saying that 94 percent is roughly the preferred level of operation. I might add also that in my opinion the deterrent in business in- vestment policy-and here, obviously, I am not speaking from the inside-the deterrent on investment policy is not profit as such, but the estimate of the market, the estimate, in other words, of the available buying power. PAGENO="0045" POLICIES FOR FULL EMPLOYMENT 35 Obviously, Du Pont and General Motors are not going to build new plants if, in their opinion, the products of those plants cannot be sold. If the market demand for that output does not exist, the new plants are not going to be built, no matter how profitable current operations may be. And a move simply to jack up industry profits will have no long-range multiplier effects in reviving the economy as such. Senator JAVITS. I would like to have Mr. Ellis's view on that. I would like to add to my question for him, which is the same question as for Mr. Wishart, that he owes us an explanation of why the force- ful administration action on the steel price increase is said to have shaken business confidence more severely than even what he considers an inadequate rate of profit. Mr. ELLIS. Let us take, first, this idea of purchasing power. Gentlemen, it is a myth that there is any source of purchasing power that can be poured into the economy. Where do you get the purchas- ing power? Doe~s it not come from the sales dollar? If you sell a product, some of it goes to pay salaries, some goes to wages, some goes to research. It all gets distributed. Is not income generated by production? I think it is very easy to imply that what we need are massive injec- tions of purchasing power, without saying where it is to come from. Where is this purchasing power to come from? If Europe would give us massive doses of foreign aid, of course we would be prosperous. There is no hope for that. Purchasing power must be generated by production. There is no other place to get it. Temporarily, of course, you can supplement Jt by bank loans, which presumably get repaid later, and the same pur- chasing power then is withdrawn. You cannot rely on bank credit to provide large amounts of purchasing power, nor can you rely on printing dollar bills. Senator JAvITS. Or Government appropriations-is that not right? You would add Government appropriations to that. It is still pro- duction that makes- Mr. ELLIS. I would consider the receipts side rather than the expen- ditures side. You cannot consider selling Federal securities to the commercial banking system as providing purchasing power. I agree with the gentleman on my right, who had a very specific statement. It would be fine if the total growth rate of the country, the total output of industry and finance, insurance, and real estate, wholesale and retail trade, could be expanded. That is why I stress this 3-percent growth rate in the physical volume of the gross national product. We are expanding at that rate. I would like to see it faster, but I do not know of any small changes that would give us a faster growth rate. If you want a faster growth rate, significantly faster, then you have to make some major changes in the economy, improve the educational level of the labor force, particularly these young peo- ple, 14 to 19 years of age. It takes a long period of training to do that. You do not do it suddenly. Also increase the productivity, reduce the cost, so that we could sell a wider volume of goods. But I would also call attention to the fact that while personal con- sumption expenditures do account for two-thirds of the gross national product, there is another third. What about new construction? If PAGENO="0046" 36 POLICIES FOR FULL EMPLOYMENT it is not profitable, it will not be built. What about producers' dur- able equipment, that is, the machinery used in production? If it is not profitable, it will not be bought. What about changes in business iirventories? If it is not profitable to accumulate inventory, business- men will not do it. Let us not confuse the purchasing power of the American economy with the purchasing power of individuals. That is part of it. That is the bulk of it. But that is not all of it. Businessmen also spend large amounts of money in our economy. That is why I like the Joint Economic Committee presentation of the gross national product. It shows immediately the pattern of spending, the relative importance. In that pattern, of course, you have government spending-Fed- eral as well as State and local. State and local spending is rising, has risen every year since 1941, will continue to rise, should continue to rise. That is primarily spending for roads and schools and public welfare, goods and services provided for people. There is no serious problem there. There is not much objection to tax rates there. I also call your attention to the suggestion, with which I strongly disagree, that all we need to do is to make our personal income tax rates more progressive and you improve the outlook for the American economy. I think the current very high progressivity is one difficulty, as the gentleman on my immediate right has suggested. It is pro- viding a tax brake. At some levels, you take 91 percent of a portion of* income. Now gentlemen, reducing the first bracket tax is not go- ing to help that upper income recover very much; it is not going to make him interested in contributing for college construction or in- vesting money in new ventures, for example. 1 think our personal income tax structure is very restrictive, es- pecially because of the nearly confiscatory rates at the top. If you consider permanent tax reduction, I suggest that you do it across the board, for the reason that we ought to loosen restraint on the sources of saving in this country. It is not only purchasing power. We also have very large amounts of spending financed by investment funds, from savings for consumption spending that concerns us. There should also be substantial reductions of corporate income tax rates, and some reductions in Federal spending. Senator JAVITS. Mr. Ellis, thank you very much. My time is up, but I would like to make a statement before I yield my turn. I may not be here later. I think one thing you gentlemen have not dealt with is one of the causes for our dissatisfaction with the 3-percent growth rate. It is not enough to sustain our world obligations, and our world responsi- bilities, as shown by our balance of payments, which is, as it were, the thermometer of our temperature. And that shows that we are fine if we were not giving foreign aid, if we were not maintaining large mili- tary forces abroad, if we did not have the world responsibilities we do. The second thing I would like to lay upon this record is this: You have all agreed pretty much on a tax cut; yet a tax cut itself is nothing but a shot of adrenalin. None of you have told us, in my view, except possibly Mr. Wishart, with his thesis that we need Government pro- grams-none of you have told us how you essentially deal with the American economic problem, which is a problem of automation, a PAGENO="0047" POLICIES FOR FULL EMPLOYMENT 37 problem of foreign trade and investment, as well as a problem of domestic improvement. After all, the growth potentials in our country apparently are now limited, and we have got to look to the world in order to give the American economy the new plateau upon which to stand, in the world and in science. And these are the things I would hope, as we go along in these hearings, may be developed. Thank you. Chairman PATMAN. Senator Proxmire? Senator PROXMIRE. Before I ask Mr. Weston about his very provoca- tive reply to my challenge on monetary policy, I would like to say I am delighted to see so much of this discussion revolving around excess capacity. Our Statistics Subcommittee of this committee held hear- ings, and we have just filed a report. I put the report in the Congres- sional Record only yesterday, the recommendations from the report. I think this would be an extremely useful area for further explora- tion. The data on statistics on industrial capacity is very unsatis- factory, very incomplete. We have some fine people working on it, and they are doing the best they can, but we have a long, long way to go. And this is one of the reasons why I feel that we cannot make de- cisions as confidently or as surely or as effectively as we should because we just do not have the statistics necessary for them. And I would like to ask, Mr. Weston- Dr. WESTON. I was just going to say that although there is quite a bit more work to be done on measuring capacity utilization for pur- poses of comparison all you need for judgment in a situation like this is to compare the measures of capacity utilization in this recovery with previous recoveries. And although as absolute measures the measures may be imperfect, the measures themselves have not fundamentally changed in their con- cept and techniques. And when you compare the degree of capacity utilization in this recovery with previous recoveries, it falls signifi- cantly short. And it does not have to fall very much short to have a significant negative impact on the profits, because with a higher degree of fixed costs, now, as a percentage of total cost, a smaller decline from some norm of full capacity utilization will produce a much more repressive effect on profits. I just wanted to make that point. Senator PRox~IIRE. Yes. Well, I do not want to get sidetracked. We have an excellent chart in the Economic Report on page 55, showing the distinct, direct, constant relationship between capacity utilization and corporate profits. There is just no question about it. At the same time, I think that much of what Mr. Ellis says is true, that 90 percent seems to be the optimum level. There is about the same degree of excess capacity that there is of unemployment. But let me get into this right now, because I think this is so crucial and so important. You seem to share the view that we should not put on fiscal brakes, but you seem to think that we should put on monetary brakes, slowly, gradually, but we ought to put them on. You say that monetary policy is relatively tight because of the international balance-of-pay- PAGENO="0048" 38 POLICIES FOR FULL EMPLOYMENT ments considerations. You go on to say this further tightening in monetary policy would be consistent with international balance-of- payments considerations. Now, the two people in the country who are perhaps most respon- sible for monetary policy, particularly in relation to balance of pay- ments, are Mr. Martin, of the Federal Reserve Board, and perhaps Mr. Roosa of the Treasury Department. Mr. Martin earlier this year, in response to a question from this committee, said this with relation to this very question: Interest rates are necessarily a factor affecting the movement of funds- short term and long term-between the money markets and capital markets of developed countries. There is, however, no invariable relationship between relative interest rates in such markets and capital movements. While interest differentials can be an important factor in movements of capital, other factors also exert a conditioning influence. These other factors include the availability of credit, the supply of credit instruments of ready marketability, the demand for credit for borrowers of good ~tanding, and-of predominant importance at some times-expectational and confidence factors. Capital movements are sometimes viewed in the narrow context of funds seeking liquid investment in prime market paper of short maturity. The differ- ences that existed last year between money rates here and abroad on this kind of paper do not appear to have been a primary determinant of international movements of funds of this type. Mr. Roosa has said almost the same thing. He also indicated that interest was not a highly significant factor in balance-of-payments considerations. Mr. Gemmill, a very distinguished economist with the Federal Re- serve Board, in an article I just put in the Congressional Record re- cently from the Journal of Finance, said exactly the same thing, only with more emphasis, saying that this was not very significant. I notice that the statistics show that our interest rates are already substantially higher than they are in Germany, higher than they are in the Netherlands-and these are short term rates, which are most important-higher than they are in Switzerland. And on the basis of all this data, it seems to me that to rely on inter- national balance of payments as the only alibi for higher interest rates when we know that this does exert a restraining influence on the econ- omy, is inexcusable. And when the economy, as you testified so well, and everybody here has, is not moving fast enough, is not growing, and we have unem- ployment and excess capacity-it just does not make sense. Now, how do you justify it? Dr. WESTON. I think you misunderstood my statement. I was not advocating higher interest rates. What I was saying was this: that I am talking to the Joint Eco- nomic Committee of Congress. And Congress, under our traditions, does not control monetary policy. Senator Pnox~rinn. Oh, bless you for saying that. And we should. The Constitution gives that power, as you know, in article I, section 8. And this is something we ought to stand up and insist on. Dr. WESTON. Why do you not do it, then? Senator PR0xMIRE. I am glad you said that, too. The Federal Re- serve Board is our creature. They are accountable to us. Dr. WESTON. Being a practical person, I look at the facts of life and I say that over recent years you have not exercised this preroga- PAGENO="0049" POLICIES FOR FULL EMPLOYMENT 39 tive of yours. And so I address myself to the realm of powers which you do have, and which you have exercised, and this is in the realm of fiscal policy. Senator PR0xI\IIRE. Do you feel we should exert this influence? Dr. WESTON. Let me take one point at a time. Let me clarify my basic position, which is that the kind of monetary policy that we have had has been relatively tight. When you refer to the circumstances of last year and say that very little of capital movement was due to differentials in interest rates, this would certainly be true for last year. because our short-term interest rates were relatively high. Senator PROXMIRE. They are higher, now. Dr. WESTON. All right. What I am saying is that given this exter- nal factor over which you have chosen up to this point not to exercise control, given relative monetary stringency, then in the area in which you have presumably the power and have historically acted in the area of fiscal policy, certainly you should act here. Senator PROXMIRE. Let me say: Is it not true that historically, speaking now of the Government as an entity, the Government has acted consciously at least more with regard to monetary policy than fiscal policy? Fiscal policy is a relatively new tool of stability. For the last 40 years at least we have had a conscious attempt on the part of the Government to influence the economy through controlling the supply of money. But the fiscal policy, tax-cut notion is a very new notion, and from the Gallup poll and other indications the public does not accept at all that we should use fiscal policy. This is a radical new idea, that you should deliberately create a deficit, and particularly in a time of relative prosperity-lower taxes and increase spending or maintain spending. That is something it seems to me that is quite radical; as compared with the far more conservative notion that when conditions do not look so good you ease up a little bit on credit. And I am not asking for pegging bonds at par. I am simply asking for a little easier credit; not having just $300 million worth of free bank reserves, but $500 or $600 million. Why is this not a more traditional and a more conservative ap- proach? And also from what you are saying-and tell me if this is not true-if we did not have this tight money policy, you would not need as big a tax cut? Is that not what you are telling me? That because we have a tight money policy, you are going to need a bigger tax cut than you would have to have without it? Dr. WESTON. That is correct. Senator PROXMIRE. Therefore a bigger deficit than you would have without it? Dr. WESTON. I would disagree with the bigger deficit. I think it is questionable whether you would have a larger deficit if you had a tax cut. Senator PROXMIRE. No, no. I am not talking about that. You indicated we have about a $6 billion bigger deficit with a $10 billion tax cut. But I am not talking about that. Dr. WESTON. That was Professor Suits. I would feel that the dynamic consequences of a $10 billion tax cut would substantially eliminate the deficit. 87869-62----4 PAGENO="0050" 40 POLICIES FOR FULL EMPLOYMENT Senator PROXMrRE. It was my fault. I should have emphasized: I am saying you will need a bigger tax cut if you have higher interest rates. Dr. WESTON. Yes. That is absolutely true. Senator PROXMIRE. In order to do the same job? Dr. WESTON. Certainly. Senator PROXMIRE. And the higher interest rates do restrain em- ployment? They do restrain expansion? Heaven knows in the construction industry, it is just as clear as the nose on my face that between 1955 and 1957, when we had an in- crease in income, an increase in population, a big increase in family formations, in spite of all this housing starts just nosedived-because the interest rates were climbing. And here is a tremendous area of employment. Dr. WESTON. Yes. But given that we are near the top of an up- swing, the ability of monetary policy to stop a turn is questionable. This is why I argue for moving in the realm where you do have authority, in the realm of fiscal policy. Yes, I would agree to ease up on the monetary side, also. But on this you have exercised no control. Ease up on fiscal policy, because this has the greater power to stop the downturn. Senator PROXMIRE. My time is up. I just want to say that I think we have all the control in the world, far more as a matter of fact, over monetary policy than we have over fiscal policy. All we need is the resolution to exercise it. Chairman PATMAN. I want to interrogate the panel after Mr. Wid- nall, but first I would like to congratulate you, Dr. Weston, on repri- manding Congress for failing to assume its constitutional monetary powers. Mr. Widnall? Representative WIDNALL. Thank you, Mr. Chairman. I will ask this question of the entire panel. If an immediate tax cut is enacted, should it be limited as to length of time? Dr. WESTON. I would say no, because certainly my basis for recom- mending the tax cut is not for the cyclical problem, but for the fiscal structure problem. Structurally, the taxes just levy too large a burden on spending power. And incidentally, with regard to where you provide the tax cuts: While it is true that we have very high rates on high incomes nom- inally, it is questionable as to the extent to which our personal income tax program is de facto progressive. Look at the facts; taxable incomes over $20,000 a year account for only 26 percent of the tota~t revenues, of the revenue system. As Prof. Henry Simons so aptly put it, we dip deeply with a sieve in our personal income tax rate, and it really does not make too much difference. The Harvard Business School studies of effects of the progressive personal income taxes on incentives have very clearly con- cluded they did not have negative effects on incentives. And this is why I argue that if the structural problem is inade- quate spending, you do it at the low end of the scale. You cut taxes there. PAGENO="0051" POLICIES FOR FULL EMPLOYMENT 41 Representative WIDNALL. Am I right in stating that none of you have advocated an increase in exemptions on the income tax? Mr. WISHART. I would certainly argue for an increase in exemp- tions applying with major impact., of course, on the lower brackets. I think it is interesting that if you apply the cost-of-living index to the $600 exemption, you will find that in constant dollars, the $600 exemption is now about a $480 exemption; that even the 1948 exemp- tion, in other words, is no longer effective in terms of the real buying power of the lower bracket family. Representative WIDNALL. Is it your thought that you should not only have an increase in exemptions, but also a decrease in the rates? Mr. WISIIART. Yes. Representative WIDNALL. Particularly in the lower brackets? `Mr. WISIIART. Yes. Dr. SUITS. I think I would differ with that. Our personal income tax as it stands is an immensely complicated thing to administer, and it is a terrible nuisance for a person to fill out. We very `badly need reform in the entire structure of the tax. I should certainly not-and this comes back to Mr. Bush's ques- tion-~want, in connection with an immediate tax cut., to run counter to the longrun need for tax reform. I think this would be a step in the wrong direction. Personally, I think it would be politically expedient and econom- ically efficient to think in terms of some kind of an across-the-board cut that would yield $5 billion reduction in tax revenue at our cur- rent level of employment and income. Representative WIDNALL. You all agree, then, that there should not be any specific length of time. It would be permanently effective? Dr. SUITS. That is correct. Mr. ELLIS. I would support that position. I think the currcnt business level is sufficiently high that we should not stimulate the economy at this level. If at some other time it. is not satisfactory, you might do that. But I think there is extreme danger in the Fed- eral Government taking the position that they will determine the level of income, they will reduce tax rates over short periods and then they will put them back up again. I think the Federal Government should reduce the magnitude of its spending, rather than increase it. I would not be in favor of a quickie or temporary `tax cut. I would be in favor only of basic reform in tax rates. And I think that would take at least until the 1st of January. Secondly, I do not think the economy now needs a quickie tax cut. I think there is danger of implying that we can set the level of growth at anything we want by just changing tax rates a little bit in a mild recession and putting them back at some other time. You gentle- men know how difficult it is to raise tax rates. It would never be appropriate to put them back up. Let us have basic tax rate reform, and not use tax changes as a regulator of the economy. After all, businessmen have to make plans for several years in advance. We would like to know what the conditions are going to be 5 or 10 years from now. What will the tax rate be then? PAGENO="0052" 42 POLICIES FOR FULL EMPLOYMENT Let us not use tax rate changes as a minor adjusting factor. There are too many factors to consider now in business investment. Do not add any. Dr. WESTON. I think it should be pointed out in this connection that not to take any action at all is a policy matter. The fact of life is that the Federal revenue system now accounts for something like 20 percent of gross national product. This means that even if you do not make any change, there is a significant impact, and it is a policy decision in effect to say that what we have is the correct thing. Now, among all of the multitudinous things that can affect business decision making, technological change, and so forth, changing the structure of taxes on the side of easing up on the fiscal brake should pose few problems for business planning. In the first place, it is a favorable change for business. In the second place these changes are so infrequent, so episodic, that compared to the many other uncer- tainties that business faces, you certainly cannot use this as au argu- ment against a tax reduction. Mr. ELLIS. I was using only the argument against a quickie tax reduction which may be for a short time. I am very much in favor of permanent reform. Mr. WISHART. I might add to that the concept of a quickie tax re- duction, even a temporary one, on a countercyclical basis, is one which has great support. For example, in a period of declining employment, or in a period where recession may be threatening, a $100 deduction of Government tax withholding would I think have a strongly stimulating effect. It can be used as a short-term offset. Dr. WESTON. I would add that a permanent tax reduction enacted promptly is not a quickie. Mr. ELLIS. No, I was thinking of a reduction which would be rescinded at some time in the future. That is what I meant by a quickie. Dr. WESTON. We were certainly proposing a permanent reduction. Mr. ELLIS. Yes. One without a time limit, then. Dr. WESTON. Without a time limit, and done promptly. In this connection, it should be pointed out that such a great need for tax reduction exists that a tax cut now does not rule out the need for another tax reduction at the time the tax reform proposals come before Congress. The present proposals for tax cuts would so stimu- late the economy that the revenue loss would be very small. Tax cut measures with initial cuts totaling at least $10 billion could well ac- company the tax reform proposals. Representative WIDNALL. We have heard much recently about budget deficits promoting prosperity. Now, in fiscal 1961 and fiscal 1.962, we have budget deficits, and we are going to have one in fiscal 1963. Why has the economy been so sluggish, then, that we have been incurring deficits? Dr. WESTON. It is the difference between a deficit incurred passively, and one incurred actively. When a deficit is incerred passively, be- cause of lighter economic growth, this has no stimulating economic effect. A deficit that is planned for turns out not to be deficit. Representative WIDNALL. Government spending has incurred the deficit, and you are going to increase the Government spending? I do not see the difference between the two. PAGENO="0053" POLICIES FOR FULL EMPLOYMENT 43 Dr. WESTON. The cause of the deficit is the lag in Government reve- nues as a consequence of the lag in the rate of economic activity. Dr. SUITS. May I answer that question this way: I think we have entirely too much emphasis on the "deficit," which is a number, an accountants' number, associated with particular accounts dealing with selected activities of only one government in our Federal structure, organized as we are. It is elementary that any expenditure by anybody-a business, a State government, a school board, the Federal Government-stimu- lates economic activity and employment. It is elementary that any taxation by anybody, by a school board, by the Federal Government, by the State government, retards and brakes economic activity. The extent to which we get stimulation or braking in our economy depends on the extent to which we manipulate these two controls. The difference between the tax revenues that we take in, and the expendi- tures that we make on certain specified accounts we call our deficit. But neither the magnitude nor the direction of this difference tells us what effect the fiscal activity will have on the economy. With equal deficits we can have either expansion or contraction. In principle, by increasing taxes and by increasing expenditures by more or less, we could have a runway inflation in a situation in which we were accumulating budgetary surpluses at a record rate, or we could have the world's worst depression in a situation where we had the largest budgetary deficits that we have ever had, as we did, indeed in the 1930's. We ought not to think of the deficit itself as doing anything. It is expenditure that promotes, and it is taxes that retard. The deficit is merely an accounting difference. The purchasing power that we have been talking about already exists. The profits that we are talking about already exist. Corpo- rate profits are at a record rate, I believe. Mr. ELLIS. That is right. Dr. SUITS. If we want corporate profits after taxes to be higher, all in the world we have to do is to cut a couple of points off the corporate income tax. If we want consumer purchasing power to expand, it is not a ques- tion of asking where this purchasing power originates, it is already there. All we have to do is take off the tax brake and let it free. Now, there are two sides to this current problem that we are in. And this is, it seems to me, the proper approach to the fiscal side. On the other hand, there is an aspect of this problem whis is not a fiscal matter. This refers to the points that were raised by Senator Douglas a moment ago: The question of the proper preparation of our young people to take their place in a world in which we have an entirely new technology; the proper provision of steps to the employ- ment and training for these people. This is another matter. Nothing we can do with the purely fiscal powers-tax, spend, deficit, or what you will-will attack these underlying problems. There is nothing about the lack of education or preparedness of a 16-year-old young man that we can fix by any kind of Government action except training and education, and related projects. Chairman PATMAN. Thank you, sir. It is about 12 o'clock, but I want to ask one or two questions. PAGENO="0054" 44 POLICIES FOR FULL EMPLOYMENT The question of what kind of a tax cut we should have has been dis- cussed by the panelists. I believe you said, Dr. Suits, that your calcu- lations show that a reduction of $10 billion in taxes would result in 1 million new jobs. I assume that you meant an across-the-board reduction. Dr. SUITS. I meant across the board in the personal income tax. Chairman PATMAN. In the personal income tax? Dr. SUITs. That is right. Chairman PATMAN. Suppose you were to increase the exemption on the lower income groups. Dr. SUITS. I think that the difference in effect would not be very much greater. Chairman PATMAN. It would not be very much? Dr. SUITS. I do not think so. Chairman PATMAN. During the depression in the early 1930's, many of us recognized that it was primarily due to an absence of purchasing power, and the main thing we wanted to do was to increase purchas- ing power. We accused those who differed with us of being members of the trickle-down group. They favored pouring in money at the top, so that it might trickle down, but it never did get down to the masses, where real purchasing power was most needed in our economy. Do you not think that it is better for an economy to have what you might call the percolate-up type? In other words, shouldn't it start at the bottom? If purchasing power is made available at the bottom, it can always percolate up. Isn't that better than pouring it in at the top and expecting it to trickle down? Dr. Surrs. This is certainly correct. I want it clearly understood, however, that my view here is with regard to the immediate situation. I am a great and a long-term advocate of tax reform. And I thiuk we should keep these two problems completely separate. If we become involved in internecine discussion of whether it is Mr. A or Mr. B who is most deserving, or is most conducive to economic expansion, we can get locked in dead center and not have what I believe to be essential; namely, immediate tax relief. So that I would pro- pose, from the standpoint purely of fiscal policy, without regard to justice, or without regard to the longer run problems of tax balance, that we simply cut taxes across the board by enough to yield, let us say, an initial $5 billion reduction. Chairman PATMAN. Thank you, sir. I shall not take more time. If any other member would like to ask questions, of course, we will be glad to listen to you. Tomorrow morning, Wednesday morning, in this room, we will start with a panel-Douglas Greenwald, director of research, McGraw- Hill; Mona E. Dingle, economist, Board of Governors, Federal Re- serve System, and George Katona, professor of economics, University of Michigan. I want to thank you gentlemen very much. You have made a great contribution to the success of our hearings. Representative WIDNALL. Mr. Chairman, I wonder if the members of the panel could submit some answers to us on what they feel have been the primary determinant of the rapid rate of growth in Western PAGENO="0055" POLICIES FOR FULL EMPLOYMENT 45 Europe and Japan, and whether there are any lessons we can learn from that, in fiscal policy and other matters. Chairman PATMAN. That is a good question. When you get your transcripts to correct, if you will extend your remarks and provide an answer to Mr. Widnall's question, it will be appreciated. (The following was later received for the record:) COMMENTS SENT IN ANSWER TO REPRESENTATIVE WIDNALL'S QUESTION, BY IRA T. ELLIS, ECONOMIST, E. I. DU PONT DE NEMOURS & Co. The more rapid growth rate of economic activity in Western Europe than in the United States over the past decade was due to a variety of reasons: 1. It was a period of extensive rebuilding in Europe to repair the damage of World War II. No similar rebuilding was necessary in the United States. Now that the rebuilding phase in Europe is largely completed, stimulation from this source has declined significantly. 2. The growth rate of the American economy since 1939, or 1936, compares very favorably with the growth rate of any other large industrial country over this period. We enjoyed a great stimulation of production during World War II and the early postwar years, when Western Europe was suffering extensive destruction of their productive capacity. Concentrating on growth rates since 1953, for example, ignores the very much larger growth in output in the U.S. economy from 1939 to 1953 than occurred in Western Europe over this period. 3. The burden of defense expenditures in Western Europe was very much less over the past decade than it was in the United States. 4. Western Europe resumed her usual place in the export business of the world over the past decade, while U.S. exports were declining from their abnor- mally high levels immediately after World War II. 5. There was a concerted drive by national political administrations, manage- ment, and labor in Western Europe to hold down production costs and increase output. In this country, on the other hand, much of the political and union effort was directed toward increasing the share of labor in the production pie rather than reducing costs or increasing output. 6. Substantial reduction in U.S. Federal personal and corporate income tax rates, with significant cuts in some low-priority Government spending programs, would stimulate the U.S. economic growth rate-at a time when there is clear evidence of some slowing in the economic growth rate of Western Europe. There should also be a concerted drive in this country to reduce production costs, even at the cost of some shifts in employment, to widen our domestic market, and to improve our competitive position in world markets. GROWTH IN WEST EUROPE Statement by James Wishart, director, research department, Amalgamated Meat Cutters and Butcher Workmen (AFL-CIO) What have been the determinants of growth rates in West Europe and Japan which have, in recent years, substantially exceeded those of our own economy? If a single generalization may be submitted in tentative answer to this ques- tion it would seem that the one unifying principle behind recent European ex- perience has been the acceptance of government responsibility for the creation and growth of markets for industry. Table I compares various measures of growth abroad with our own. Although ~ax policy in West European countries has favored capital investment through depreciation allowance and other stimulants, the government's basic economic role has been that of assuring present and future markets at home and abroad. 1. Government fiscal and monetary policy has not been fettered by orthodox concepts of budget balancing. Table II indicates that all countries of the Euro- pean Economic Community have accepted budget deficits running far above the American level. Such deficits have been recorded through accounting methods, which, in comparison with those in effect here, understate actual deficits in- PAGENO="0056" 46 POLICIES FOR FULL EMPLOYMENT curred. And such deficits were tolerated as matters of national policy, even in years of high level economic activity and growth. Government expenditures have been used as a tool for assuring desired economic growth rates. If this country were to accept deficits equal to the Italian deficit as a pro- portion of gross national product, our budget would fall short of Government income by $15 billion annually. At the French level, our deficit would run substantially over $25 billion. 2. The basic stimulant of the Common Market has been the clear prospect it holds out for expanding continental markets. This has been sufficient to float a boom in capital expansion for the six EEC countries, which, in turn, has shored up the economies and rates of capital investment for other countries of the hemisphere, with the possible exception of Great Britain. In addition, government itself has taken direct responsibility for projecting various sectors of domestic markets. France, for example, using input-output analysis has projected a 5-percent growth in gross national product for 1962. Although this is less rigid than a fixed national plan, it is more substantial than a mere forecast of trends. It becomes a key and goal for the patterns of initia- tive from both private and government sectors of the economy. Although the decisionmaking power remains officially in private hands for the most part, such private decisionmaking is influenced and guided by specific knowledge of national, sector, and industry patterns, and by the more basic assurance that markets to absorb output of newly created capacity will also be created. Government policy in all EEC countries has called for various forms of guidance to private investment. 3. Direct government support and stimulus has gone to the creation of foreign markets, which account for a larger sector of each nation's output. Export subsidies in various forms, import limitations or levies, and other forms of control, have been used substantially by all EEC countries. They are continuing in use, though to a lesser degree in relation to other members of the Common Market, for ~he purpose of maximizing imports and favorable balances of trade. To assume any rigid application of strict free-trade principles among EEC countries is currently unrealistic. 4. Unemployment levels have been kept low (see table III), and, as a con- sequence of relative shortages of labor, wage levels have risen rapidly. As the New York Times reported (Jan. 9, 1962) "For the workingman, despite occasional headlines about strikes, 1961 was the best year ever, particularly in the private sector. "Wages in Europe are not easy to measure, partly because of the large social security element. But in some countries they went up by more than 10 percent in 1961, and in almost all by more than 5 percent~ The major reason, no doubt was the labor shortage and the classic operation of the law of supply and demand. "This huge increase in mass incomes-to the extent it was not taken away again by higher prices-laid the foundation for a big burst of consumer spend- ing. This was already being felt in such countries as Germany and France as the year ended. "This `push' from the consumer side, was one main reason why forecasts for 1962 remained, on the whole, optimistic." No restraints from government so far have been placed on wage gains running far above gains in productivity of European labor. The Wall Street Journal of July 17, 1962, reported some pressures developing in this direction in West Germany: "Mr. Erhard (Economic Minister for the Bonn government) has warned that soaring wages and prices threaten to price German manufactures out of world markets." The Journal account of this declared that West German wages rose 11 percent last year, as compared with a 4-percent productivity gain. Secretary of Labor Goldberg reported, early this month, that wage settle- ments this year in the United States have averaged 3.2 percent. This figure does not, of course, include substantial areas of industry in which no wage changes have been reported. It is beyond question that recent gains made in wage levels and in purchasing power by the mass of West European peoples have been proportionally much greater than those achieved in this country. They have been gains from a lower base than our own. But to fail to see a correlation between such gains and gains in gross national product, also from a base far below our own, is to ignore basic economic fact. PAGENO="0057" 47 POLICIES FOR FULL EMPLOYMENT TABLE I.-Increases in gross national product, industrial production and consumption, selected countries, 1953-60 Percent increase, real GNP Percent increase, real GNP (per capita) Percent Increase, index of industrial production Percent increase, per capita, private consumption Belgium France Germany (Federal Republic) Italy Netherlands Austria Sweden United Kingdom Canada United States 21 36 61 49 42 58 30 22 22 19 16 28 48 44 30 55 24 18 1 6 27 68 80 82 57 69 35 30 30 19 17 24 46 29 26 49 17 21 11 12 Source: Organization for European Economic Cooperation, General Statistics, July 1961, No. 4. TABLE 11.-Government deficits and surpluses as a percent of gross `national product, selected countries, 1952-~59 [Key to symbols: D, deficit; S, surplus] Countries 1952 1953 1954 1955 1956 1957 1958 1959 Number of deficits Average deficit, relative to gross national product 1 (percent) Germany France Italy United Kingdom Sweden Belgium Netherlands United States S D D D S S S S D D D D S S S D D D D D S D S D D D D D D D S D D D D D S S D D D D D D D S D D D D D D D D D D D D D D S D 3 8 8 8 7 6 3 4 1.17 4.61 2.70 1.27 2.20 221 .71 .95 IThe deficit for each year in which a deficit was incurred was converted into a percentage of gross national product. These percentages were then averaged over the total number of years in which deficits occurred. Source: Derived from International Monetary Fund data. TABLE 111.-Average annual rates of unemployment in selected countries, percent of labor force 1 Trade union returns prior to 1956: Registration only of insured workers. Source: National statistics; International Labor Organization, international labor statistics. (Reply to Mr. Widnall's question, by Daniel B. Suits:) This important question could well become the basis of a large, important study by this committee. It is one that deserves careful research by experts in the field of foreign economic development. Unfortunately, I am not one of these, and any serious expression of opinion on such a matter would be presumptuous. Senator PROXMIRE. I would like to ask a couple more questions. I apologize to the panel and to the members, but I think this is such a good panel, and so well balanced, and the statements have been so provocative that I just cannot resist. United States Germany Netherlands Sweden - PAGENO="0058" 48 POLICIES FOR FULL EMPLOYMENT Mr. Ellis, you pointed out, and I think rightly so, that a substan- tive proportion of our unemployment problem is the young people. I am persuaded, as Senator Douglas brought out so well, that this is true. I am wondering if one constructive way of solving this situa- tion and contributing very greatly to the long-term reduction in un- employment is not to do all we can to persuade the States to increase the age at which students leave school from 14 to 16 up to a higher level as they in their best judgment can do it; combine this with a much more vigorous vocational education program and a dovetailing of this in cooperation with management, labor, and others, so that when young people leave the school there is a job for them available. Now, one of the things that President Conant, former president of Harvard, brought out in his book was that in communities where this is done-and there are many communities in America where they do that-there is very little problem of youthful unemployment. Now, if we could somehow use what influence we have, here, the President and Members of Congress, to work on the States to do it, it seems to me we would do two things. No. 1, we would reduce un- employment; No. 2, we would solve a very vital problem of training more skilled people in a technological society. Is that not correct? Mr. ELLIS. I think you are going in exactly the right direction. It takes time, of course, but we have made a start in that direction when we began to put this greater stress on mathematics and science in the schools, and pointed out the shortage of engineers and the high salaries they receive when they finish the training. We are trying to pull them through the school system. And it is all to the good. It would of course also be desirable to increase the level of voca- tional training which would be importantly at the high school level rather than the college level, because unemployment is a very definite function of lack of skill. If you can provide more skill in the jobs where there are shortages of people for the jobs, you can increase employment. And in that connection, I would like to point out that the fact that we have 4 million unemployed does not mean there are no jobs available. Some of those people prefer not to work at the jobs that are available. I think that is another point that we must keep in mind: that there are a lot of jobs available in this country, but for some reason people prefer not to take them. I think you are going in exactly the right direction. Let us in- crease the level of skill of our young people, particularly the ones that now drop out of school. I do not take the figure for June 1962 as typical of the labor mar- ket. Many of those boys and girls reported as unemployed in .June are merely looking for summer work. They are going back to school in the fall. Senator PRoxMI1u~. I know. I am seasonally adjusting all these figures, and in October, November, and all during the school year there will be millions of those teenagers who will be out of school and out of work. Mr. ELLIS. Look at October, for example, when the schools are in full session. I think you are going in the right direction. Let us in- crease the level of skill of these boys and girls. PAGENO="0059" POLICIES FOR FULL EMPLOYMENT 49 I do not know whether raising the school dropout age would do it. That is at 14 primarily in the Southeast, and in most of the rest of the country it is now 16. I do not think you could make it 18. Senator PR0XMIRE. No, but it could be from 16 to 17 in some parts of the country. Mr. ELLIS. I would prefer to see it done in pulling them through and point out the opportunities. Point out how much better life they will have later if they increase their education now. Senator PROXMIRE. When I have spoken in most of the high schools in my State and everywhere, they stress the commercial or monetary value of staying in school. But I think if you could make it manda- tory-after all, we used to permit students to leave after grade school, and very few people had a high school education, many years ago, and we have been making progress, but it has been slow. Mr. ELLIS. Right. Senator PROxMIRE. Secretary Goldberg said just the other day that* now for the first time labor leaders are really serious about a 35-hour week, and about this approach to the problem. I do not blame them for being concerned. I do not blame them for feeling this way. They see their people un- employed. They donot know whether or not these tax-reduction pro- posals are going to work. And frankly, I do not think a $10 billion or even a $15 billion tax reduction is going to do the big job that many people expect it to do. It may help some. Therefore I feel we should pay some attention to the supply side of this equation. One way would be to keep our young people in school. That would help a lot. Another way: Imagine the massive unemployment problem we would have today if we did not have social security. The fact that we have 14 million people receiving social security checks, and therefore it is unnecessary for them to work, and they are able to retire-I can see if we can continue what we did very constructively, I think, in the first part of this session, and reduce the retirement age from 62 to 60, but make it voluntary, and at the same time reduce the benefit that will be received under these circumstances- What is the cost? If a person chooses to retire at 60, and believe me, on the basis of the petitions I have received, thousands and thousands would do so-you open up jobs and industry for younger people, and you do not have to have this very heavy cost of reducing hours from 40 hours to 35 and trying to maintain the same wages, which would really aggravate our problems. I cannot see what is wrong with trying to look at the supply side of the equation, as well as the demand side. I think it has been over- looked badly. Mr. ELLIS. In the first place, Senator, I do not think there is any strong push back of the 35-hour week. Labor does not want to work less and enjoy more leisure at the cost of a lower standard of living. Senator PROXMIRE. They want more jobs. But I think while I would concede there is no strong push now, believe me, if the cycle does what it has almost always done, and we move into recession and get 7 or 8 percent unemployment, there is going to be terrific pressure. Mr. ELLIS. What I meant to say is that you cannot reduce the hours of work and pay the same weekly wage. PAGENO="0060" 50 POLICIES FOR FULL EMPLOYMENT Senator PROXMIRE. Not without a punishing increase in costs. I do not favor it now. Mr. ELLIS. I do not, either. I do not think labor wants a shorter workweek with a lower standard of living. And it is impossible, without increasing productivity correspondingly, to have a lower workweek at the same weekly income rate. Our standard of living is based upon what we produce. Senator PROXMIRE. I will not argue with you on the facts. I would say Mr. Meany has indicated that he is serious about this. And he is the spokesman for 16 million workers. Mr. ELLIS. But would it not result in more moonlighting? Senator PROXMIRE. Again, I am not arguing the merits. I think perhaps moonlighting has been somewhat exaggerated. But whether it would or would not, I think it is something we should be concerned with. And I think there is a legitimate reason behind this, because the working people are really concerned about seeing a situation in which, even in periods of recovery and economic prosperity, there are 4 million people unemployed. And while your figures are perfectly correct, I call your attention to the charts on page 43, which show that about 2 percent of the unem- ployed have been unemployed for more than 15 weeks, and some 3.6 percent of the married men are out of work, and of the experienced wage and salaried workers, a very, very high percentage, over 5 per- cent, are out of work. Mr. ELLIS. Senator, would you say that it is possible that the wage rate is also affecting unemployment, that labor in some cases has priced itself out of the market? Mr. WISHART. At certain points administered prices in industry have reduced possible demand to a level which has created unemploy- ment. In terms of wage costs, the fact is that the wage costs per unit of output have been declining in absolute terms over the past 3 years. And I refer you to an exhibit submitted by Mr. Reuther before this committee last February. Senator PRoxMIim. This is certainly true in many industries. It seems to be true in steel and in some other areas, even though they have had very substantial wage increases. Mr. WISHART. These are overall figures, covering manufacturing industry as a whole. Senator PRoxMTnm. There is an indication of this, too, in the fact that we have had fairly stable prices over the last couple of years. Mr. WISHART. Might I say, too, that labor's proposal for a shorter workweek-and I am speaking on behalf of a labor organization, here-is not one to be underestimated in any sense of the word. Obvi- ously, we would prefer full employment, with a 40-hour workweek, but without full employment, without the prospect of full employ- ment, the proposal for a shortening of work hours is one which ha~ behind it genuine force, momentum, and support. Senator BtTSH. Do you really believe that union members would want to reduce their workweek from 40 hours to 35 hours without sub- stantial increase in pay? Mr. WISHART. Not without substantial increases in pay; no. PAGENO="0061" POLICIES FOR FULL EMPLOYMENT 51 Senator BUSH. So it is not just a reduction in the workweek they want. It is really to get an increase in pay through that device. It that right? Mr. WISHART. An increase in hourly rates would be involved in such a reduction. Senator BUSH. So as to mean a stabilization in wage costs? It would result in a net income increase to the members. Is that true? Mr. WISHART. I would not concede that a rate increase is necessarily an increase in wage costs. Under the impact of automation- Senator PROXMIRE. What the workers want to do is to preserve their present annual income or weekly income. You speak for the AFL-OIO, and they want a shorter workweek not because they are lazy or do not want to work 40 hours, but because they know so many people who are relatives and friends and so forth who cannot get work, and they see in the auto industry and the steel industry people who have worked for 10 and 15 years and are thrown out because the automation has created a situation in which far fewer people can do more work. Is that not correct? Mr. WISHART. Yes. And in some sectors of the auto industry there has been the deliberate application of a 6-day workweek, creating conditions under which the unemployed may lose their right to pen- sion, to hospital, surgical, and other coverages. This has been part of the operation in the Detroit area. Senator BUSH. This is why I raise the question, then, as to this 35-hour workweek, as to whether it would not result in considerable more overtime payment, beginning at the 35-hour level, and whether it would actually result in decreased employment for those who need the work. Mr. WISHART. This would certainly not be the purpose. Senator BUSH. I beg pardon? Mr. WISHART. There has been a proposal for the increase of over- time premium to obviate this tendency on the part of employers to work a limited work force an unreasonable number of hours per week, in order to avoid certain fringe benefit costs. Senator BUSH. The thing that puzzles me about the proposition is this: If you have a reduction in the workweek to 35 hours, whether employers would rather pay-they are going to work 40 hours any- way, maybe more-whether they would rather pay the overtime rate to those employed, rather than train a bunch of new workers to take up the one-eighth slack, or whatever it would be, and whether they would not find the latter more expensive than paying the overtime. What is your judgment on that? Mr. WISHART. My judgment is that in most industries today the choice would be for the 35-hour workweek. This might be a problem which we will face down the road, assuming the achievement of the 35-hour workweek. All the problems flowing from that have not been given total analysis at the present time. Senator BUSH. Do you think the 35-hour workweek would actually increase employment? Mr. WISHART. This is the reason that labor is solidly and substan- tially supporting the idea of reduced hours, without reductions in weekly take-home pay. PAGENO="0062" 52 POLICIES FOR YtJLL EMPLOYMENT Very frankly, the preference would be for not only the maintenance of weekly take-home pay, but for the increase in take-home pay, an mcrease in annual earnings. Organized labor generally would be willing on a short-term basis to sacrifice this goal of increased annual earmngs, were it possible, through this action, to provide jobs for those currently unemployed. Senator BusH. They believe, then, that it would provide more jobs- this 35-hour workweek proposal. Is that right? Mr. WISHART. This is the reason that proposal has been seriously advanced. And in the New York City area, in a number of construc- tion industries, it has been applied at a level below the 35-hour level, as I am sure you know, Senator. Senator Busu. Twenty-five; yes. Representative WIDNALL. Normally, when you talk about a 35-hour workweek, you are talking about mass employment in an industry. Are there not thousands of jobs, union jobs, that have been lost re- cently because of pricing out of the market individual home repair work, electrical work, plumbing work, building a gameroom, building an extra room? You have had this tremendous increase of do-it-your- self, because labor has priced itself out of the market with the indi- vidual homeowner. Now, those are all jobs, but they are odd jobs, they are not the type of job people want, because there is not enough employment in them. And it is increasingly difficult to fill such jobs. Mr. WISHART. I am not familiar enough with that, except from the view of the putative and injured do it yourselfer, to he able to say any- thing authoritative on this. I would like, if I may be pardoned, to refer back to one earlier statement in regard to the educational approach on the problem of unemployment. The Armour Automation Committee did a good deal of work in this general area in seeking jobs for displaced packinghouse workers. We found that there were in certain labor markets a number of unfilled jobs, jobs as computer programers, jobs as missile designers, jobs as electronic engineers. But we found also that a worker who had had perhaps 4 or 5 years of primary education, and who spent 25 years cutting hides off steers, somehow could not qualify for these openings. In regard to vocational training, our conclusion was one of some hesitation. Our feeling was that training in very specific skills in this period of automation, with very rapid shifts in skill requirements, was not necessarily the most desirable thing. Our feeling was that the concentration should be on basic education, in reading and writing and arithmetic, to provide workers who are then available for industry to go through the usual procedures of on-the-job training in the spe- cific skills required in a given situation. Senator BUSH. I would agree that is probably the case. Senator DOUGLAS (presiding). Any further questions? * We want to thank you gentlemen very much. (Whereupon, at 12:30 p.m., the committee was recessed, to recon- vene atlO a.m., Wednesday, August 8, 1962.) PAGENO="0063" STATE OF THE ECONOMY AND POLICIES FOR FULL EMPLOYMENT WEDNESDAY, AUGUST 8, 1962 CONGRESS OF THE UNITED STATES, JOINT ECONOMIC COMMITTEE, Washington, D.C. The committee met at 10 a.m. in room AE-1, the Capitol, Hon. Wright Patman (chairman) presiding. Present: Representatives Patman, Reuss, Thomas B. Curtis, and Widnall; Senators Douglas, Proxmire, Pell, Bush, and Javits. Also present: William Summers Johnson, executive director; John R. Stark, clerk; Hamilton D. Gewehr, research assistant. Chairman PATMAN. The committee will please come to order. This morning we have as our panel Mr. Douglas Greenwald, Mr. George Katona, and Miss Mona Dingle of the Board of Governors of the Federal Reserve System. This morning we continue hearings on the state of the economy. We have with us a panel of distinguished economists who are spe- cialists in surveys of business and consumer expectations. Before we begin, I would like to say a special word of thanks to Miss Dingle and her associates on the staff of the Board of Governors, who worked over the weekend in order to speed up the tabulation of their most recent survey of consumer plans for purchases. We will proceed now with Mr. Greenwald first, and then the mem- bers of the committee may put questions to the panel. If there is no objection, the committee will ask questions under the 10-minute rule. Mr. Greenwald, you may proceed in your own way, sir. STATEMENT OP DOUGLAS GREENWALD, MANAGER, DEPARTMENT ;Ø~ ECONOMICS, McGRAW-HILL PUBLISHING CO., NEW YORK, N.Y. Mr. GREENWALD. Thank you, sir. My assignment is to discuss the current and short-run health of the economy with particular reference to the key area of the economy- private investment in new plants and equipment. My contribution, for the most part, will be based on recent important factual informa- tion from McGraw-Hill's surveys of business' anticipations. And re- sults of these surveys indicate that capital investment intentions by business constitute an element of strength in the business outlook. In my department of the McGraw-Hill Publishing Co. we have made surveys of plans for business' spending on new facilities for 15 years. We also maintain a monthly index of new orders for non- electrical machinery which reflects the new incoming business of pro- 53 PAGENO="0064" 54 POLICIES FOR FULL EMPLOYMENT ducers of capital equipment, and a quarterly forecast index of machinery orders, which reflects the producers' expectations for four quarters ahead. The indexes cover a relatively small number of large manufacturers of machinery. We generally survey business on its plans for domestic investment twice a year-in the spring and in the fall. The spring survey is very comprehensive and is geared to longer range plans; the fall survey covers fewer questions and is geared to short-range plans. In October 1961 we carried out our fall survey ot business' plans for 1962 and 1963. Our comprehensive survey of business' plans for 1962 to 1965 was made during March and early April of this year. At the end of June we carried out a special checkup of plans. The McGraw-Hill checkup of spending plans showed that business, in general, is planning to invest approximately the same amount in new plants and equipment in 1962 that it reported to us in our com- prehensive survey taken earlier this year, and a considerably higher amount than it anticipated last fall. The table below shows the results of the three McGraw-Hill surveys and actual 1961 capital ex- penditures as reported by the U.S. Department of Commerce. (The table follows:) Business plans for capital spending in 1962 [Billion dollars] Industry 1961 actual 1 1962 planned- As of October 1961 As of March and early April 1962 As of end of June All manufacturing Mining Railroads Other transportation and communications Electric and gas utilities Commercial 13. 67 .98 .67 5.07 5. 52 8.46 14. 59 .99 .64 5.03 5.87 8. 72 15.41 1.09 .85 5. 50 5. 74 9.39 15.30 1.08 .87 5. 50 5.82 9.39 Total, all business 34.37 35. 84 37. 98 37.96 1 U.s. Department of Commerce. Mr. GREENWALD. Our fall 1961 survey indicated that business had plans to invest $35.84 billion in 1962, an increase of about 4 percent over 1961. Over the past several years our fall surveys of business' plans have always provided the correct direction of change in invest- ment as well as fairly reliable indications of the degree of change. The McGraw-Hill comprehensive survey of business' plans for new plants and equipment taken early this spring indicated that business firms had raised their investment sights significantly from the fall. Planned investment for 1962 was $37.98 billion, up 10.5 percent over 1961. During the years that we have been making these spring sur- veys, they have proved remarkably accurate in indicating the trend of overall investment for the year ahead, except in 1950, when all plans were altered by the Korean war. During the last decade, the average error between the McGraw-Hill survey's planned percentage change and the Department of Commerce's percentage change for actual data is only 3.5 percent. Senator BUSH. That doesn't mean 3½ percent annually? PAGENO="0065" POLICIES FOR FULL EMPLOYMENT 55 Mr. GREENWALD. Yes, sir. The average annual error. Senator DOUGLAS. Somewhere in the range of a billion dollars. Mr. GREENWALD. In the earlier years it would be smaller in dollar terms, and in the current years it would be bigger. Senator Douor~s. But the average range would be about a billion dollars? Mr. GREENWALD. Yes, sir. We do not conclude from this experience, however, that we have a sure-fire forecasting device. We claim nothing for the results of our surveys except that they report present plans. We heavily emphasize the proposition that our surveys are not promises of what is actually going to happen. Our special checkup in late June showed that business planned to spend $37.96 billion on new plants and equipment this year, up 10.4 percent over 1961. This checkup was based on plans of a substantial cross section of business, accounting for 35 percent of total capital investment. For the most part the results reflect the plans of large companies. This re- check provided no indication of what small companies were doing about their investment. To begin with, investment plans of small com- panies were not up as much for 1962 as those of larger companies. The downward movement of the stock market in May and June may have had some impact on their investment plans. However, small com- panies account for a relatively small percentage of total capital in- vestment. Our checkup pointed up the fact that business in general had not cut back or canceled plans for investment in new facilities in 1962 as a result of the sharp drop in stock prices in May and June or the so-called loss of business confidence. Manufacturing industries overall planned to invest $15.3 billion this year, down about $110 million from plans reported to us in the spring. Steel, machinery, electrical machinery, stone, clay and glass and miscellaneous manufacturing industries plan to invest less in 1962 than they did earlier. However, transportation equipment (air- craft, railroads and shipbuilding) fabricated metal products and in- struments, chemicals, rubber and food industries plan to increase their capital expenditures this year more than planned originally. Among manufacturing industries, railroads and utilities planned slightly higher capital investment for 1962 than they did earlier, while the mining industry cut its plans. About 80 percent of the companies that answered in our recheck in- dicated they had made no change in their 1962 plans for new plants and equipment. The remaining 20 percent indicated some changes in their planning. But this group was split right down the middle, with half increasing plans and half cutting them. Among the companies indicating investment cutbacks, only a very few cited economic conditions as the reason. In most cases where investment plans were lower than they were earlier, the reasons given had absolutely nothing to do with a lack of business confidence or the drop in the stock market. Instead, technological delays and con- struction delays were the reasons given. . . We should point out that in the past years of high and rising busi- ness activity a large number of companies increased investment plans during the year. This has not been the case so far in 1962. 8T869-62----5 PAGENO="0066" 56 POLICIES FOR FULL EMPLOYMENT This recheck was taken before stock market prices began to recover, before margin requirements were reduced from 70 percent to 50 per- cent and before revenue procedure 62-21, with its more realistic depre- ciation guidelines regarding lives of machinery and equipment, be- came effective. It is conceivable that these three factors, along with the 7 percent tax credit for new machinery and equipment purchases, which Congress may soon make a part of the Nation's law, could re- sult in higher capital expenditures at the end of this year than are now anticipated by companies and by business economists in general. However, it is my opinion that their impact on capital spending may be slow in coming. We have some factual evidence on this point. In our spring survey, we asked the question If the administration's program of tax incentives for investment were enacted, how much would this increase your capital expenditures in 1962? Business as a whole indicated that it would raise its 1962 plans by only 1 percent, or about $300 million. Nine out of every ten com- panies replying indicated that they would not use such a program at all in 1962. The fact that American business is going ahead with its investment plans for 1962 was not a surprise to us. It confirmed our belief that business plans for new plants and equipment, once made for the year ahead, are generally carried out. In the past, wars, recessions' and booms have led to significant changes in investment plans. But in my view, we are not likely to be in any of these three situations this, year. Also, it makes good sense for businessmen to go right ahead with their modernization programs in 1962. Business firms reported to us in our recent checkup that this year's capital investment programs are stressing modernization, with the hope that these cost-cutting proj- ects will'result in better profit margins. ` In our earlier survey this year, manufacturers reported that they planned to devote 70 percent of their 1962 investment dollar to mod- ernization. The reason for their concern is obvious. `About 40 per- cent of U.S. plant and equipment dates back to before 1951, and nearly 25 percent goes back to World War II or even before that. These significant statistics were also revealed by our spring survey. Only a very small percentage of investment is going fOr new capac- ity this year. Most of this is going for capacity for new products which are an important part of the payoff of industry's tremen- dous expenditures on research and development during the last de- cade. Little investment is going for additional capacity for existing products Based on' the McGraw-Hill measures of manufacturing operating rate, we estimate that manufacturers, on the average, are currently utilizing 84 percent of their capacity, whereas they prefer to operate at about 90 percent. Therefore, it is true that industry has a modest amount of excess capacity at present. And, the gap between the operating rate and the preferred rate may widen if manufacturing, output were not to continue to expand during the rest of the year As this committee well knows, my department compiles `the only direct measure of manufacturing capacity Only a few months ago I testified on the McGraw Hill measures of capacity before the Sub PAGENO="0067" POLICIES FOR FULL EMPLOYMENT 57 committee on Economic Statistics of the Joint Economic Committee. In its report on measures of productive capacity, the committee reconi- mended and I quote- an exploration of the McGraw-Hill techniques would offer an excellent oppor- tunity for a joint public-private project in which McGraw-Hill, the pioneer of this technique, might work in cooperation with a suitable Government agency. We at McGraw-Hill are giving this project serious consideration. Another piece of evidence that confirms our belief that investment will continue to expand throughout the rest of this year is provided by the quarterly McGraw-Hill nonelectrical machinery new orders forecast index. For today's hearings, I have had computed, earlier than usual, a preliminary estimate of our forecast index for the four quarters ahead. Although this index does not provide a precise gage of the future level of new orders, it provides an indication of relative changes in the confidence of machinery manufacturers. Capital goods manufacturers now expect to book a far bigger dollar volume of new orders in the current quarter than they ever did before. They anticipate that new orders will subsequently fall off and that the decline will continue into the first quarter of 1963. They fore- cast that the second quarter of 1963 will see a slight pickup in their new orders. The group of machinery manufacturers reporting forecasts to us in our current quarterly survey are slightly less optimistic about prospects for new orders for the last two quarters of 1962 than they were 3 months ago. One reason for decreasing optimism about th6 immediate future among this particular group of companies is the fact that their actual incoming new orders in June dropped by about 10 percent. But despite this sharp drop for one month, their anticipations for the last half of 1962 are only off about 2 percent from what they were back in April. And most of the returns for this calculation arrived in my office before the new procedure for depreciating machinery be- came effective. Corporations now have a high enough rate of cash flow to finance a considerably higher level of investment than is now planned for 1962. Our comprehensive survey taken early this year showed that businessmen anticipated increasing their volume of cash flow, com- posed of retained earnings and depreciation, at a faster rate than their investment in new plants and equipment. At that time they expected to increase cash flow by 14 percent and investment by only 10.5 percent. It is my belief that the McGraw-Hill data on plant and equipment expenditures indicate that this key segment of the economy will con- tinue to expand this year. If plans hold up for the year as a whole, then the quarterly rate of capital expenditures may be expected to reach $39 billion in the fourth quarter compared with a rate of about $37 billion in the second quarter. I now turn briefly to other major areas of the economy: Inventories, consumer spending, housing, the net export balance and Government spending. Inventories are currently being built up at a much more moderate pace than earlier this year. In the first quarter, business was accumu- lating inventories at an annual rate of about $6.7 billion. In the second quarter the rate dropped to about $3.5 billion. In the cur- PAGENO="0068" 58 POLICIES FOR FULL EMPLOYMENT rent quarter, it probably is still lower. The rate of addition to in- ventory will continue to slow down during the rest of the year. However, considering the relatively low inventory-to-sales ratios, it is unlikely that business will reverse its policy soon and let its in- ventories run off. However, a declining rate of inventory addition means that the negative impact on our Nation's total dollar volume of business has already taken place. Consumer expenditures, which are by far the largest sector of the total business picture, are dependent on many psychological factors. I will leave the `discussion of this sector to George Katona, except to note that as long as personal income rises, and at this time we cannot see any reason to expect it to turn down before yearend, consumer spending on goods and services may be expected to follow the same general path. Housing is booming. Private starts in the second quarter were ex- ceedingly high at an annual rate of nearly 1.5 million units, despite a drop in June. And because of the lag betwen a start and put in place construction, we can look for the dollar volume of new housing construction to break through previous record highs. The net export balance is just about holding its own. Exports have been holding up very well, while imports have not increased signifi- cantly. We do not expect to see a significant change from the current rate of surplus of exports over imports during the rest of the year. Thus the net export situation will have a neutral effect on the economy in the' months ahead. This year's Federal budget guarantees a modest rise in Federal spending right through the end of the fiscal year, June 30, 1963. How- ever, the increase during the current fiscal year will be considerably smaller than the big gain registered during fiscal 1962. Meanwhile, State and local spending on highways, schools, and other projects is due for a large increase over the coming months. States and cities are taking advantage of relatively easier money markets to issue a record volume of construction bonds. In conclusion, the pluses and minuses of the various sectors of the economy add up favorably for the rest of the year. There is nothing now in sight which clearly indicates that in the next few months there will be a marked change in the direction of the economy. Chairman PATMAN. Thank you, sir. Senator DouGLAs. There is just one question I would like to ask, Mr. Chairman. This is a very able statement, but the witness stated that States and cities are taking advantage of relatively easy money markets. I wonder what your evidence is for the money markets being easier. Mr. GREENWALD. We were looking at the rates on State and munic- ipal bonds, and we found that they were around 3.27 in early June. Senator DOUGLAS. 3.29 as of July 14. Mr. GREENWALD. But this compares with ~.40, 3.50, and 3.60 in earlier periods of this year. Senator DOUGLAS In April it was 3.08 and in the last 3 months they have gone up 21-hundredths of a percentage point, or relatively speak- ing, have gone up 7 percent. Mr. GREENWALD. I think, Senator Douglas, you are looking at the figures on the triple A State and local. PAGENO="0069" POLICIES FOR FULL EMPLOYMENT 59 Senator DOUGLAS. That is right. Mr. GREENWALD. If you look at the total for States and local bonds which is in the Federal Reserve Bulletin, you get a slightly different picture. Senator DOUGLAS. That is you don't think this index on page 29 of the indicators is useful? Mr. GREENWALD. I think it is useful, but I look at the total for State and local bonds. Senator DOUGlAS. What is that? Mr. GREENWALD. Starting with January, it was 3.55, February 3.40, March 3.30, April and May 3.21, and the week to which I referred, which was June 2, it was only 3.27. Senator DOUGLAS. An increase of 2 percent. Mr. GREENWALD. Yes sir. But relative to the earlier periods in the year, it is still low. Senator DOUGLAS. Recently, as compared to April, there has been an increase? Mr. GREENWALD. That is right, sir. Senator DOUGLAS. Thank you. Chairman PATMAN. Miss Dingle, economist from the Board of Governors of the Federal Reserve System, we are glad to have you, and you may proceed in your own way. STATEMENT OP MONA DINGLE, CHIEF, CONSUMER CREDIT AND FINANCES SECTION, DIVISION OP RESEARCH AND STATISTICS, BOARD OP GOVERNORS OP THE FEDERAL RESERVE SYSTEM Miss DINGLE. I understand you are interested in receiving from me a report on the most recent quarterly survey of consumer buying intentions. Unlike Mr. Greenwald and, I assume, also Mr. Katona, I will not attempt to make any forecast of what is likely to happen in the next 6 months but will merely report my best interpretation of what the most recent Quarterly Survey of Consumer Buying Inten- tions shows. We do appreciate your recognition for our weekend work, but I would like to add that a great deal. of appreciation is due to the Bureau of Census staff, which was on an around-the-clock schedule part of last week and which spent a great deal of weekend time itself checking the data and seeing that their interpretations of the data generally tallied with ours. Before I refer to the data that were collected, let me say something about the nature of the buying plans data themselves. Taken alone, these data are by no means a direct forecast of subsequent sales. They represent individual consumers' best estimates of the likelihood of their subsequent purchases as reported in sample surveys, and thus give a measure of consumers' interest in a market as of the interview date. Purchases that consumers subsequently make reflect not only the strength of their interest as expressed in the plans data but also supply conditions and developments affecting consumer spending such as changes in employment and income. In general, consumers who report plans to buy are substantially more likely to purchase than those who do not, but many planners do not purchase and many nonpianners do purchase. Survey experi- PAGENO="0070" 60 POLICIES FOR FULL EMPLOYMENT ence shows that purchase rates of nonpianners are particularly affect- ed by changes in economic conditions, while purchase rates of plan- ners show somewhat more stability. Senator DOUGLAS. Is this an argument for planning? Miss DINGLE. We would certainly appreciate it if all consumers did plan definitely far in advance. I hope that you as a consumer will do so. The interpretation of buying plans data is complicated by their seasonality. Plans show seasonal movements that are not identical with those of purchases, and unfortunately the Quarterly Survey of Consumer Buying Intentions has not been: in existence long enough. to enable us to develop seasonally adjusted series. This is the fourth year of interviews, but all four of these years have shown different types of economic developments. The year 1959 was one of general economic expansion characterized by strong consumer demand, but expansion was interrupted by a pro- longed steel strike in the second half of the year. The first half of 1960 was strong, and the decline in economic activity in the second half was tempered by continued strength in the automobile market. Most of 1961 was characterized by recovery, but consumer expendi- tures for durable goods lagged compared with other recent cyclical recoveries. This year has shown mixed developments, with consumer purchases of durable goods declining in the first quarter and picking up in the second and with. the strong demand for automobiles accounting for a substantial part of the second quarter rise. These differences among years create problems of comparison by affecting quarter-to-quarter movements in plans as well as the relationship between plans and purchases. There are special problems involved in relating plans to buy auto- mobiles at this time of year to developments over the coming months. Important factors in realized purchases are the supply of old model automobil~s, and of new ones once they are introduced, and consumer reception of new model automobiles. Shortages due in part to strikes kept purchases down in 1959 and to a lesser extent in 1961, while :in 1960 sales were encouraged by. the large supply of old model auto- mobiles which were sold at discounts from list prices. As is illustrated in the material that has been distributed, infor- mation is obtained in the Quarterly Survey of Consumer Buying Intentions covering buying plans reported for varying time periods and with varying degrees of certainty, and data are tabulated for various groups of consumers. We have always considered it desirable to make the data available in detail in order to enable analysts to. make their own interpretations. . . I hope the other members of the panel and the committee will take advantage of that. I tried to show as much detail as I could, given the limitations of time. , .,. Tables 1, 2, and 3 and the chart showing the movements of buying plans are being released today with our quarterly press release. on buying plans data. Additional tabular material will be included in an article which will appear in the Federal IReserve Bulletin for August and, which will be released earlier in preprint form.. PAGENO="0071" POLICIES FOR FULL EMPLOYMENT 61 Table A and the bar chart have been especially prepared to facili- tate the comparison of current plans and recent movements with those in the corresponding period of earlier years. I might say I do not plan to refer directly to tables and charts but to summarize what they show. Most of my statements can be followed in table A. In comparing the level of plans this year with those in earlier years, it should be kept in mind that the data given show percentages of all families in the United States and that the total number of families has been increasing at the rate of about 2 percent per annum. Thus, in terms of numbers of families reporting plans, a figure of 5 percent in 1962 is equivalent to 5.1 percent in 1961 and 5.3 percent in 1959, and a figure of 20 percent in 1962 is equivalent to 20.4 percent in 1961 and 21.2 percent in 1959. Movements are shown for ,the period April-July for all items except used cars, for which January- July movements are shown. Movements of course reflect cyclical as well as seasonal developments. As would be expected, the July data do not all point in the same direction, and they may lend themselves to varying interpretations depending in part on one's analysis of related developments. In general, however, reported buying plans were at or close to highs for the current cyclical upswing. Automobile buying plans may have weakened slightly from the strong April level. Plans to buy household durable goods, however, after lagging throughout 1961 and picking up from January to April, strengthened further from April to July. Buying plans for houses have shown little change since earlier this year. Reports of plans to buy new cars within 6 months were unchanged from April to July this year, compared with increases in the corre- sponding period of the expansion years 1959 and 1961 and a small decline in 1960. Plans to buy in 3 months and in 6 to 12 months were down somewhat. Buying plans reported in July were about equal to those in July 1961 and higher than in either 1959 or 1960. Plans to buy used cars continued strong in July. Since this figure was abnormally high in April of this year, I have shown changes from January to July for used cars rather than from April to July. For this period, 6-month plans increased, compared with reductions in each of the 3 preceding years. Reported plans to buy used cars in July were higher than in any of the 3 preceding years. The Quarterly Survey, while concentrating on buying plans, also asks several other questions pertaining to the automobile market. In July, the proportion of families that expressed dissatisfaction with the car* currently owned, which had been running above year-earlier levels, declined to a level below that in July 1961 but above 1959 and 1960 levels. The proportion of families that reported shopping for a car in recent weeks also declined to a level about the same as in 1961 and below that of other recent Julys. As in each of the 2 preceding years, reported plans to buy houses within the next 12 months showed little change from April to July, but short-term plans and definite plans apparently strengthened some- what. In July total plans to purchase within a year were slightly higher than ii~i 1961 but slightly lower than in 1960. The increase from a year ago was concentrated in plans to buy new houses. PAGENO="0072" 62 POLICIES FOR FULL EMPLOYMENT Plans to buy household durable goods, which had continued weak throughout 1961, showed greater strength in July than in any other recent survey. Plans to buy such goods declined less from April to July than in either 1960 or 1961, as a less than seasonal reduction in plans to buy air conditioners was offset by an increase in plans to buy most other items covered. As in the second half of last year and the first half of this year, but in contrast to the 1959 to early 1960 expansion period, strength was concentrated in plans to buy within 3 months and in definite plans, as opposed to plans to buy in 3 to 6 months and in more tentative plans. Three-month plans were at the highest July level since the survey began, while total 6-month plans were only moderately higher than in ~961 and below earlier July levels. In general, planners expressing plans to buy within 3 months and those saying that their plans are definite are more likely to purchase than those expressing tentative plans to buy or plans to buy after a longer period. On the other hand, such planners account for a rela- tively small share of total purchases in any period, and a high level of aggregate purchases requires large purchases by tentative planners and by consumers classified as "nonpianners." It is possible that the tendency for 3-month plans and definite plans to rise while the more tentative plans remain low may mean that people are willing to make those purchases to which they have given considerable thought but that they are adopting a wait-and-see atti- tude with respect to making longer range plans. It should be noted that the weakness of 6-month plans for house- hold durable goods compared with earlier years was concentrated particularly in refrigerators and washing machines; plans to buy television sets and growth items such as air conditioners and clothes dryers are generally close to or above 1960 levels. The strength in 3- month plans, however, was particularly great for refrigerators and washing machines. There has apparently been some shift recently in the income struc- ture of plans to buy new cars and household durable goods. While total plans to buy these items were generally equal to or above year- ago levels, plans on the part of families with incomes of $7~500 or more-about 25 percent of all families-were at the lowest July level in the 4-year history of the Survey. Plans to buy houses and used cars on the part of this upper income group, however, were equal to or above year-earlier levels. Plans to purchase household appliances by high-income respondents have remained weak during the entire period of economic expansion, while plans of lower income groups have strengthened. Recently there has been some pickup in plans on the part of high-income re- spondents to buy growth items-air conditioners, clothes dryers, dish- washers, and radio and phonographic equipment-but their plans to buy the items labeled as major durables-washing machines, refrig- erators, and television sets-were at new July lows. Senator BUSH. Why do you call those growth items? Miss DINGLE. They have been expanding more with respect to own- ership in recent years than washing machines, refrigerators, and television sets. Like other items, at the time of introduction they PAGENO="0073" POLICIES FOR FULL EMPLOYMENT 63 were purchased primarily by the higher income groups and are now expanding into the lower income groups. Senator BUSH. Thank you. Mr. GREENWALD. It might also be that these are relatively new items, if I might add a point here, and fast growth begins in the period when you first market new items, air conditioners, and so on. Miss DINGLE. Washing machines, refrigerators, and television sets are owned by an extremely high proportion of all families. The de- mand is either the result of necessary replacements or obsolescence. Practically all purchases of those items are made by families that already own one. Most families don't have much need for more than one washing machine or refrigerator, except perhaps for summer camps. There is expansion in the numbers of owners of television sets. One might refer to color television as being a growth area, but television sets are ~eneral1y very, very widely owned. This reduction in plans may reflect in part saturation in the own- ership of such appliances by high-income families and a tendency to make expenditures in other directions, rather than any significant change in their willingness to spend. Plans to buy new cars on the part of the high-income group appear to have weakened from April to July. While I don't feel that I am in a position to explain this decline, it is possible that it may reflect in part the recent stock market de- velopments and perhaps some sense of economic uncertainty on the part of this group. A shift of buying plans from higher to lower income groups does not necessarily presage a decline in purchases on the part of all planners, since purchase rates for planners generally differ little among income groups. Purchase rates of nonplanners are higher in the upper income group, however, and any sign of caution on the part of this income group might be reflected in a reduction in overall purchase rates. In looking at data for families with incomes of $7,500 or more, it should be recognized that these families constitute a relatively small part of the total, and hence that the data are subject to more sampling variability than data for all families or for families with incomes below $7,500. Planning rates of this group over a period of years may also be affected by general increases in consumer incomes and the movement of new families into the higher income group. Unlike the surveys conducted by Professor Katona, the Quarterly Survey of Consumer Buying Intentions has only a limited number of questions directed toward general economic attitudes and financial developments. I hope he will say a great deal more about this area in the course of his discussion. Concerning income prospects, slightly fewer consumers than in other recent quarterly surveys expected their incomes to increase over the coming year, and a correspondingly higher proportion expected their incomes to be unchanged. There was no change, however, in the number expecting lower incomes or uncertain about their income prospects. Slightly fewer families than in other recent surveys also reported an increase in income compared with a year earlier. (The tables and charts referred to follow:) PAGENO="0074" 64 POLICIES FOR FULL EMPLOYMENT BUYIN~ PLAN LEVEL - JULY WITHIN 3,6, AND 12 MONTHS AUTOMOBILES NEW 1962 `61 `60 `59 1962 `61 `60 `59 NC/CE. -- THOSE INDICATING UNCERTAINTY AMIUT TIMING WITHIN TUN 6-PC/NTH PERIOD ARE INCLUDED IN TEC SECOND 3 lE)NTHS SEE NOTI~S TO TABLE A FOR ITAMG INCLUDED IN HOUSEHOLD DURABLE GOODS GROUPS USED Per cent _12 MONTHS i-~-6 MONTHS *.-3 MONTHS WITHIN 3 AND 6 MONTHS HOUSEHOLD DURABLE GOODS MAJOR I1~EMS GROWTH ITEMS Number per 100 families - 16 .6 MONTHS - 12 -3MONTHS~ ~ I l~o PAGENO="0075" 0 5 - 0) 0) 8 8 0) 0' 0 0; 0 0' 0~ 0 0) 00 0 0) 0 0 8' 8* 0) 0~ 8' 0 8 0 0 CO 8 0' B CO 0 0' CCCCCCC)C) C~C)CC00 0)0000000 CICCC000CC On-1"-ICCCC 000)003 00CCCC030~ 0000CC 00C)CCCCOO COCCO-IC) -`0~00 00CC0)-'~ ~ 00000 ~ 00 00 ~ 00000 CC 0003 C) 00 33333 ~ 33333 00 00000 OOCCCC 00300 IIl~ + III 001000000 I00++ -`CCIC' C) CC ~3 0300 : 03000)00 00000-100 F! CO 0) B 0) 0 L:~J 0 CC 0000 00 000000 ~ 00 0000300001 0003 ~ ~ CC 00 -~ 100000000 00 ~ -100 ~ ~-~1 OOblC-1 CC 000 ~ 00 C) 00000CC CC 00 ~ 03CC ~ C) 000000 ~ 00 00 ~ 0303-1 0000000301 CC 0000 ~ CC ~ ~ 000000CC 00CC CC 000CC 0000 ~ 00000000-1 00~1~CC00 CCCC-ICCCCO ~H~t tt~. II)fl~ I ++~ +~ + I I I ++~++~ 00CC CC ~: 03: 00 03 ~ CC 0000000000 l+++ +I~I l~ 1+1 00: ~ 000000 00CC CC 000000 0003-3 ~ 0000 a 0' 31) CO CCI PAGENO="0076" 66 POLICIES FOR FULL EMPLOYMENT AUTOS AND HOUSES PLANS TO BUY WITHIP~ 6 MONTHS - Percent NEW AUTOMOBILES 6 5 1962 ~ ~ 1961 i~o -3 I I I USED AUTOMOBILES ~ 5 WITHIN 12 MONTHS HOUSES 6 - ~ 5 I I 1 I JAN. APR. JULY OCT. JAN. Note.-.Plans to buy new autos and used autos include pro rota shares of planners undecided between new and. used. They differ.from proportions in Table 1 which include only specific plans to buy either new or used cars. HOUSEHOLD. DURABLE GOODS - PLANS TO BUY~ WITHIN 6 MONTHS No. per 100 lamilies - 24 1960 - . - 1962 1961 I 16 WITHIN 3 MONTHS : JAN. APR. JULY OCT. JAN. PIOTE:..Plans to buy items listed in Table 2. PAGENO="0077" POLICIES FOE FULL EMPLOYMENT 67 TABLE 1.-Plans to buy houses and durable goods, selected periods, 1960~621 Buying plan April 1960 July 1960 April 1961 July 1961 October 1961 Janu- ary 1962 April 1962 July 1962 Planning to buy new or used auto- mobile: 2 Within 12 months Within 6 months Within 3 months Planning to buy new automobile Within 12 months Within 6 months Within 3 months Planning to buy used automobile Within 12 months Within 6 months Within 3 months Planning to buy house (new or ex- isting): Within 24 months Within 12 months Within 6 months Planning to buy household durable goods: 3 Within 6 months Within 3 months Planning to buy major household durable goods: Within 6 months Within 3 months Percentage o fall families 17. 1 8.8 3.1 7.0 3.3 1.2 7.2 3. 9 1.4 11. 1 5.3 2.5 16.8 8. 1 2.7 6.9 3. 1 .9 7.2 3.8 1.4 11.2 5.4 2.4 16.6 8.4 2.9 6.8 3. 1 .9 7. 7 4. 1 L 7 10.0 5. 1 2.3 17.4 8.4 3.0 7.6 3.4 1. 1 7.9 4.2 1.6 10.0 5.0 1.9 18.5 9. 1 3.0 8. 1 3.7 1.4 8.2 4.4 1.4 10.6 5. 1 2.0 18. 1 9. 1 2.6 7.8 3. 7 1. 1 8.2 4.3 1.3 9.8 4.8 1.8 18.9 10.2 3.6 7.7 3.4 1.3 9.2 5.6 2. 1 10.0 5.2 2.3 17.4 8.8 3.1 7.4 3.4 1. 1 8. 1 4. 5 1.7 10. 1 5.2 2.3 P1 ans per 100 families 21.9 7.4 13.9 3.8 20. 1 5.9 14.0 3.8 20.2 6.7 13.0 3.7 18.4 5.8 12.8 3.9 19.6 6.9 13. 1 4.5 18.8 4.8 12.2 3.2 20. 1 7.2 13.0 4.0 19.3 6.8 13.2 4.5 1 As reported in interviews in the 1st month of each calendar quarter. Interviews are taken in the week that includes the 19th of the month. Planning period begins on date of interview. 2 Includes those undecided between new and used. 3 Sum of plans to buy washing machines, refrigerators, television sets, air conditioners, clothes dryers, radio and phonographic equipment, and dishwashers. 4 Sum of plans to buy 1st 3 items in note 3 above. TABLE 2.-Plans to buy specified durable goods within 6 months, selected periods, 1960-62 [Percentage of all families] Type of durable goods April 1960 July 1960 April 1961 July 1961 October 1961 January 1962 April 1962 July 1962 Washing machine Refrigerator Television set Air conditioner Clothes dryer Radio and phonographicequipment1~ Dishwasher 6.0 3.8 4. 1 3.4 1.8 1.9 .8 5.9 4.0 4.0 1.4 2.0 1.9 .8 5.3 3.6 4. 1 2.6 1.8 2.1 .8 5. 1 3.4 4.2 1. 1 1.7 2.1 .7 5.4 3.3 4.5 1.2 1.9 2.5 .8 5.2 3.1 3.9 1.9 1.8 2.3 .6 5.4 3.4 4.2 2.6 1.8 1.9 .8 5.3 3.6 4.3 1.3 2.1 1.9 .8 I Radios or phonographs (or their component parts) costing together $100 or more. PAGENO="0078" 68 POLICIES FOR FULL EMPLOYMENT TABLE 3.-Past and eo~pected changes in income, selected periods, 1960-62 [Percentage distribution of families]J Dfrection of change April 1960 ruly 1960 April 1961 3uly 1961 October 1961 Janu- ary 1962 April 1962 Thly 1962 Current income compared with a year earlier: Higher 22.2 2L 5 20. 7 20.6 22.6 22. 2 23. 1 2L 1 Same 6L 3 61.9 59.9 61.0 59.9 60.2 61.6 63.7 Lower 15. ó 15.7 18. 5 17.6 16.6 16.5 14.6 14.4 Doesn'tknow 1.0 .9 .8 .9 .9 1.0 .8 .8 All families 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Expected income compared with current:1 Higher Same 24.2 60.2 24.6 59. 6 23.9 59.4 24. 7 58. 5 23.7 59.3 24.0 60.0 24.2 60.3 23.2 61.2 Lower 5.6 5. 9 5.4 5.8 5. 7 5.0 5. 1 5. 1 Doesn't know 10.0 9.8 11.4 11.0 11.3 11. 1 10.4 10.6 All families 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 1 Expected a year hence. N0TE-Detalis may not add to totals because of rounding. Chairman PATMAN. Thank you, Miss Dingle. Before calling on Mr. Katona, I would just like to invite Miss Dingle's attention to the fact that she referred to the idea that the stock market might have something to do with consumer caution. In this connection, Mr. Greenwald said in his statement-this is a very significant statement-that business in general had not cut back or canceled plans for investment in new facilities in 1962 as a result of the sharp drop in stock prices in May and June or the so-called loss of business confidence. Miss DINGLE. I wish we knew what the effect of the stock market decline was. Certainly I would not like to be in the position of saying exactly what it is. One of the questions frequently asked is what the stock market decline has done to consumer confidence, and if it had any effect directly, it would be more likely to be on the upper-income groups. I would not want any sign of weakness on their part to be overemphasized, and certainly it does not show up in their plans to buy houses or used cars. I thought this was a matter that might be of interest in view of the questions that have been raised. Chairman PATMAN. Thank you very much. Mr. Katona you may proceed in your own way. I believe you have a prepared statement. STATEMENT OP GEORGE KATONA, SURVEY RESEARCH CENTER, INSTITUTE POR SOCIAL RESEARCH, UNIVERSITY OP MICHIGAN Mr. KATONA. Thank you. I `have been director of the economic behavior program of the Survey Research Center since its establishment in 1946 and professor of eco- nomics and `of psychology at the university of Michigan. Originally, I have been a psychologist, but devoted the last 25 years to a study of consumer behavior and expectations. Our research program stems from the conviction that the role of consumers in the American economy has undergone substantial changes. Before World War II it was justifiable to consider business PAGENO="0079" POLICIES FOR FULL EMPLOYMENT 69 investment and Government deficits or surpluses as the sole autonom- ous factors influencing the business cycle and to assume that the con- sumer sector .was an unimportant transmitter of income generated elsewhere. But during the past 25-odd years the number of middle- income families has increased greatly, and today a very substantial proportion of American families have discretionary income; many families also have some reserve funds; credit is available and~ buying on credit is widely accepted by consumers; finally, a sizable share of consumer spending is for postponable and discretionary expenditures. Today we must recognize three forms of investment: business in- vestment, consumers' tangible investment expenditures for housing, automobiles, and appliances, and investment in human capital-prirn manly for education and health. Consumer investment expenditures are not a function of money alone. Ability to buy is important, but changes in willingness to buy may occur independently of changes in income and may influence dis- cretionary consumer demand. That optimism or pessimism, confi- dence or its absence matter has often been asserted in the past. What is new is that we are in a position to measure changes in consumer at- titudes and expectations. The Survey Research Center began with such measurements 15 years ago. Even after 15 years of experience, shared over the last few years by other organizations, there remain many unsolved problems. Yet several crucial turning points in con- sumer expenditures for durable goods have been signaled in advance by Survey Research Center data on consumer expectations, and statis- tical analysis indicates that consumer expectations, as measured by the Survey Research Center, have substantial predictive value. It is not possible to determine changes in attitudes and expectations through a few simple questions. The Survey Research Center con- ducts hour-long personal interviews at regular intervals, each time with a different nationwide sample of consumers, drawn by rigorous methods of probability sampling. Senator DOUGLAS. May I ask how large your sample is? Mr. KATONA. Our quarterly samples are about 1,350 families, and the first quarter of the year it is about double. Senator BUSH. What is the geographical distribution? Mr. KATONA. It is all over the Nation from Atlantic to Pacific. Senator DOUGLAS. Is that about the same number of persons sam- pled in the Gallup poll? Mr. KATONA. The Gallup poll unfortunately gives very little in- formation about the size of its sample and the sampling composition. The number of cases is not the most important point. We assume from published data and information that Gallup still does not use rigorous probability methods. Senator DOUGLAS. But on numbers, I have seen various statements that the probable number covered by the Gallup poll is somewhere around 1,500. Have you seen those? Mr. KATONA. I have seen those, too. I don't know the facts. The number is not essential as is well known from the Literary Digest debacle. There were thousands and thousands of interviews. Senator DOUGLAS. I understand. Chairman PATMAN. There are 3,070 counties in the TJrnted States. That is about one for every two counties? PAGENO="0080" 70 POLICIES FOR FULL EMPLOYMENT Mr. KATONA. No. Senator Douor~s. There are about 1,500 of these counties which are insignificant in size. There are many counties-I will not mention in which State-which consist primarily of sagebrush. Charman PATMAN. You mean one to the county, then, instead of one to two counties? Senator DOUGLAS. It would be very interesting to get the sampling figures. This figure of 3,100 counties is very deceptive, as anyone who runs for office in a large State knows. Mr. KATONA. May I say that the sampling variations are important to assess the significance of certain small changes. But on the whole, modern statistical mathematical research has proved that sampling is substantially solved. If you have the money, you can draw reliable small samples. The real questions are reporting errors people not telling the truth, or not expressing themselves correctly; how to formulate the questions, since the answers depend on how the ques- tions are formulated. Here are our great problems, and not in sampling any more. Senator DOUGLAS. You have to have a minimum number, however. Mr. KATONA. Of course. Chairman PATMAN. You may proceed. Mr. KATONA. The fixed question-free answer method of interview- ing is used; respondents answer in their own words and are asked to explain why they think as they do. We do not ask multiple-choice questions which suggest the answers. We conduct such surveys now four times a year, in February, May, August, and November. Our August survey, devoted especially to a study of consumer re- actions to the stock market decline and the tax reduction proposals, is now in the field; the findings will `be available in September. There- fore I am basing my discussion on our May survey, the major findings of which were given to survey sponsors early in June and released to the press on July 3. I brought along a few copies of the survey report for submission to the committee. With your permission, I shall summarize themajor findings and conclusions and omit detailed documentation in my presentation. The reason is I would like to concentrate my oral presentation here on new data and its interpretation. Statistical documentation of the data is available here in this supplementary material. The Survey Research Center's measures of consumer attitudes and expectations advanced from the low point registered in February 1961 for about 12 months. Yet the improvement was not as extensive as following the 1958 or the 1953-54 recessions and did not continue in 1962. As table 1 of the survey report shows, there was even a small decline in the center's index of consumer attitudes from February to May 1962. The decline was so small, when sampling variations are taken into account, that it is appropriate to view the index as having stayed at a plateau during the first half of 1962. The recovery was not as long and not as large as following previous recessions, and over the last few months, that is from February to May 1962, we had a sidewise movement. While general consumer attitudes indicate the sluggishness of the recovery from the 1960-61 recession, in one important area our data have justified optimism since the spring of 1961. Attitudes toward PAGENO="0081" POLICIES FOR FULL EMPLOYMENT 71 the automobile market and intentions to buy new cars showed an upsurge as early as May 1961 and remained on a high level during the following 12 months. The original report given to the press over a month ago shows a table about intentions to buy cars. Let me summarize here three major figures. They showed that according to our surveys, 13.8 per- cent of families intended to buy cars during the next 12 months in February 1961; 16.4 percent in May 1961; and 17.4 percent in May 1962. The statistical data are presented in the report submitted to the committee. I may add that the upsurge of automobile intentions and, generally, of attitudes toward automobile buying was shown in our surveys, whereas it was not reflected or at least not strongly in the surveys conducted by the Bureau of the Census and reported by Miss Dingle. In each of its surveys the Survey Research Center asks more than 50 questions about consumer attitudes and expectations. There have been times in the past when practically all these measures pointed uniformly upward or downward. Not so in the recent past. In addi- tion to questions about automobiles, questions about personal financial prospects and market conditions have indicated satisfaction and optimism in 1962. In particular, the feeling that rising prices are reducing real income has become less frequent during the past 12 months. On the other hand, there was a change for the worse in people's opinions about economic prospects, especially among upper income people. The consumer's mood is sober because of three persistent concerns: the recurrence of recessions, the relatively high level of unemployment, and the cold war. The great majority of Americans have drawn the conclusion from the experiences of 1958 and 1960-61 that Government and business are capable of forestalling a depression, but can do nothing to stop the recurrence of short and nevertheless painful recessions. Our findings are, if you ask people whether a depression like in the thirties will recur, the overwhelming majority says, "No, it is im- possible. Government and business know how to deal with it." If you ask how about recessions, how about some short peaks of unem- ployment, the overwhelming majority says, "No, we can't do anything. They will recur. They are in the cards." Given this frame of mind, people are sensitive to bad news. We concluded, therefore, from an analysis of our data that up to May 1962 there was a sidewise movement which, although it did not signal a downturn, indicated that consumers would not contribute to a faster economic growth-unless new stimuli alter the prospects seen by them. I turn now to an analysis of consumer reactions to two new develop- ments, the stock market decline and the tax cut proposal. The dra- matic break in the stock market occurred the end of May, when inter- viewing for our May survey was almost completed. Yet the market was already weak in the preceding weeks and even months. Neverthe- less, we have reason not to attribute the findings reported up to now to stock market developments. It must be kept in mind that stock- holdings are highly concentrated: Our surveys show that only about 18 percent of the 55 million American family units own stock, and 87869-~2-------~6 PAGENO="0082" 72 POLICIES FOR FULL EMPLOYMENT only about 7 percent of family units own stock worth $5,000 or more. Thus the proportion of people who have suffered losses, even paper losses, is relatively small. * Yet the decline in the stock market has received wide publicity, and I expect to find in our August data that a very substantial pro- portion of consumers have heard of it. On the other hand, on the basis of past data, I expect to find that only a small proportion of the American people accept the notion that the stock market decline is a signal for an economic recession. Most Americans do not see a close connection between what happens in the stock market and what happens to the economy. This attitude is in line with the high de- mand for automobiles which continued in .June and July. But there exists a minority with different views and therefore, overall, taking majority and minority together, the probability is that the August data will indicate more consumer caution and uncertainty than the May data. Over the past few years the Survey Research Center has carried out extensive studies about consumer attitudes toward taxes. Since there has been some discussion about the results of a recent Gallup poll-it was criticized by President Kennedy at his press conference last week-permit me to submit some data. In May and again in November 1961 we asked the following ques- tion of representative, nationwide samples: There has been discussion about reducing taxes at the present time; do you think this would be a good idea or a bad idea? The findings are reproduced in my table below. It appears that in 1961 the American people were about equally divided between those who thought tax reduction was a good idea and those who thought it was a bad idea. Naturally, many people might not have given any thought to the problem and might have made snap judg- ments. Of particular significance, therefore, is a question about the reasons people have for their opinions. After they say that would be a good idea or a bad idea, we asked them, "Why do you think so ?" In reply to this question, we found that only 13 percent of all people favored a tax cut because they thought it would increase purchasing power and stimulate recovery. So, if you wish to call it that, the sophisticated economic notion was shared last year by about 13 percent of American consumers. Slightly over 20 percent favored a tax cut because, as they put. it, "taxes are too high." On the other hand, 35 percent held that tax cuts would not be appropriate since the money was needed for national defense and other Government services. Another 8 percent were against tax cuts because they feared deficits or felt the budget should be balanced. We shall have more data along these lines when our August survey is completed. Then we shall also know more about how people would use the money from a tax cut. Past data indicate that most low~ and middle-income people would spend the money. Recently people may have heard much more about the problem of a tax reduction than a year ago. Nevertheless, probably, the con- nection between tax reduction and increase in purchasing power is PAGENO="0083" POLiCIES FOR FULL EMPLOYMENT 73 not fully understood. During World War II when our group made extensive studies of war bonds for the Federal Government, we found that in the opinion of many people the Government could not buy the tanks and planes if the people did not buy war bonds. In 1946 a substantial proportion of the American people said, "We buy war bonds to bring the boys back home," as if it would be im- possible to ship the boys back home from the South Pacific if people would not buy war bonds. Similar erroneous notions still prevail about taxes and defense ex- penditures. There are many people who believe that if taxes are not high enough, we can't do our duty in defending the country and in fighting the cold war. I conclude that should a tax cut be enacted, the Government would have an additional task of informing and edu- cating the public about the reasons for its action. Also, I may add, the Government should sponsor surveys about consumer attitudes toward a tax cut, both if the measure takes effect and if it does not, so as to understand better what is happening in our economy. Should taxes be reduced now? As said before, people feel un- certain and cautious because they are not aware of any factor that might be capable of stimulating the economy and reducing unemploy- ment. In a tax reduction, I believe, many people would see such a stimulus. We are not in a recession today, even though the extent of the recovery is far from satisfactory. According to available indications there will be no recession in the consumer sector during the winter of 1962-63. Therefore the argument, let us wait with the tax reduction, is not without merit. But the last few weeks have brought forth a new consideration. Probably very many people have heard about the tax reduction proposals. There is a risk that they would view a decision by Congress not to reduce taxes now as a disappointment. A negative decision about the tax cut might then represent a new factor adding to pessimistic views and making the recurrence of a recession more probable than it has been. What Congress does is important; how the people interpret what Congress does or doesn't do is likewise important. (The chart and report referred to are as follows:) Opinions on the advisability of a taa~ rednetion, spring and fall, 1961 [Percent] Tax reduction All families' Family Income Under $3,000 $3,000 to $4,999 $5,000 to $7,499 $7,500 to $9,999 $10 000 and over A good idea Pro-con A bad idea Don't know, not ascertained.... Total Number of cases 42 6 43 9 53 4 29 14 43 7 44 6 39 6 47 8 32 6 57 5 33 4 55 8 100 2,256 100 564 100 462 100 581 100 250 100 282 1 includes cases whose Income was not ascertained. PAGENO="0084" 74 POLICIES FOR FULL EMPLOYMENT Reasons given for opinioiis (all families) Good idea because: Percent Demand needs to be increased; to stimulate recovery 13 Taxes are too high 22 Bad idea because: Government needs money; defense expenditures high 35 Tax cut would cause deficit; budget should be balanced 8 NoTE-The questions were: "There has been discussion about reducing taxes at the present time. Do you think this would be a good Idea or a bad idea 7" "Why do you think so?" Source: Survey Research Center, the University of Michigan. CONSUMER ATTITUDES AND INcLINATIoNs TO Buy, MAY 1962 Survey Research Center, Institute for Social Research, University of Michigan, Ann Arbor, Mich. The Survey Research Center conducted the latest of its quarterly Surveys of consumer attitudes and inclinations to buy between April 23 and. May 29, 1962. A nationwide cross section of about 1,300 adults, selected by probability methods, was interviewed. Similar surveys have been conducted regularly since 1951. This report summarizes the major findings of the May 1962 sur- vey. In addition to measuring consumer expectations and inten- tions to buy, these surveys are particularly concerned with investi- gating the reasons for changes in attitudes. The surveys are directed by George Katona and Eva Mueller. Consumer attitudes show stability over the past few months. The American people remain soberly optimistic and appear disposed to continue the high level of spending evident during the spring months of 1962. The outlook appears particularly favorable for the automobile market. These are the indications obtained from the latest Survey of Consumer Attitudes and Inclinations to Buy, conducted by the Survey Research Center of The University of Michigan from April 23 to May 29, 1962. The Center's Index of Consumer Attitudes is at the same level as in November 1961, but slightly below January 1962. The recent decline is so small (when sampling variations are taken into account) that it is appropriate to view the index as having stayed at a plateau during the past half year. As table 1 shows, this plateau is significantly below the peak levels attained In 1955-56, but does not compare unfavorably with more recent highs reached by the index. The overall stability of the index is brought about by counterbalancing changes in two major areas of consumer sentiment. Consumers' satisfaction with. their personal financial situation has improved since November. Favorable changes in personal finances seem to be reinforced by price stability, or more precisely, by absence of the feeling that rising prices are reducing real income. Fewer people indicate that they have worries of an economic kind. The recent accumulation of liquid assets by consumers has contributed to their feeling of financial well-being. Yet, as in past years, many people are far from content with their savings performance and strive to save more. The proportion of peo- ple who expect to be better off in another year has not been higher at any time in the past 10 years (table 2). And even longrun personal financial expectations which usually show great stability, have grown somewhat more optimistic in recent months. At the same time, people's expectations regarding business conditions in the coming year, which improved decidedly between November 1961 and early 1962, PAGENO="0085" POLICIES FOR FULL EMPLOYMENT 75 show some change for the worse since the beginning of the year. A very small deterioration also occurred in attitudes toward longer term economic prospects. Table 3 indicates that evaluations of the business outlook are considerably more favorable now than at the bottom of the 1960-61 recession, but (as in November 1961) are well below peak levels. The weakening of optimism about business prospects since January is particu- larly pronounced among people with incomes of $7,500 and over. Moreover, this is the only group which views business conditions less confidently than last November. It is likely that people in the upper income brackets are most sensitive to stock market news, and that stock market developments account in part for their change in attitudes. Yet, this group may also be most aware of public discussions about the somewhat unsatisfactory strength of the recovery. Although stock prices declined throughout the interviewing period, the most dramatic break in the stock market occurred near the close of interviewing. This may explain the fact that only 3 percent of all people spoke spontaneously of the drop in stock prices when discussing economic news they heard recently. Direct questions on what people know about stock market developments and how they react to them were not included in the survey. Still, it is possible to compare interviews taken early during the interviewing period with those taken in late May when people might have been more concerned about the stock market decline. These comparisons reveal only a slight deterioration in evaluations of business conditions in late May as against late April and early May. Since late May the stock market has dropped further and has been repeatedly in the news. If the downward trend persists, it might well come to have a stronger impact on consumer confidence and expectations. The Survey Research Center's August survey will (among other things) be concerned with this question. Answers to questions about the news people heard in the past few months show clearly that consumers are mindful of a number of unfavorable aspects of the business situation other than the stock market. Among the 51 percent of people who could recall some recent economic news, 28 percent referred to un- favorable news, and only 23 percent to favorable news. Even without the 3 percent who spoke about the stock market, references to adverse developments exceeded references to favorable developments by a small margin, while the reverse was true in November 1961. (At that time 21 percent referred to unfav- orable news and 26 percent to favorable developments.) The current mood of consumers is sober, perhaps even cautious, because of three persistent concerns: the recurrence of recessions, the relatively high level of unemployment, and the cold war. Given this frame of mind people are sensitive to bad news. Adverse developments in particular industries or localities, which may be of minor importance in the overall picture, are discussed and remembered. In May more people than last November said they had heard or read that business is declining; occasionally mention was made of specific industries, particularly steel. The steel price stabilization was rarely mentioned, and in these few cases opinions regarding it were divided. People also spoke about intense business competition, the impact of automation on employment opportunities, and labor problems. Attitudes toward market conditions for major consumer goods were very favorable already last November. Evaluations of the automobile and housing market have improved slightly since then, while buying conditions for house- hold goods are viewed in about the same way as in November (table 4). Satis- faction with recent price trends for durable goods and houses accounts to a large extent for the judgment that this is "a good time to buy." Viewed as a whole, expressed buying intentions for major consumer goods exhibit no clear trend either up or down. Buying plans for new automobiles have been exceptionally frequent ever since May-June 1961. In January-February they dipped temporarily, but in May they were back at the high 1961 level or even slightly above. PAGENO="0086" 76 POLICIES FOR FULL EMPLOYMENT Percentage of families e~vpressing intentions to buy a car' All cars New cars 2 Used cars 2 January to February 1961 . May to June 1961 . November 1961 . January to February 1962 . 13. 8 16.4 18.3 17.1 17.4 6.3 8. 9 9. 5 8.5 9.7 7. 5 7.5 8.8 8.6 7.7 May1962 I Families tbat reported they would or probably would buy, plus 3~j of those who said they might buy during the next 12 months. 2 Uncertain whether new or used apportioned equally between these categories. Plans to buy used cars are the same as a year ago, but are somewhat lower than last fall and winter. Plans to buy a house for owner occupancy are less frequent than a year ago and less frequent than in most recent spring surveys. However, expressed buying intentions for the upper income group do not show a decline over the past year. Intentions to make major home improvements remain at peak levels. Plans to purchase home appliances are now slightly higher *than a year ago for almost all major appliances, but in most cases comparisons with earlier years are not favorable. Clearly there is an element of caution in consumer sentiment. Yet it should be emphasized again that people evaluate their own financial situation favor- ably and are satisfied with buying conditions. Hence, the sidewise movement of the index of consumer attitudes should not be viewed as a signal of an impend- ing deterioration of consumer confidence. Unless the flow of unfavorable eco- nomic and political news increases, the state of consumer optimism in May points to a sustained high level of spending, particularly if personal incomes continue to rise gradually. On the other band, it is evident that the consumer is not in an exuberant frame of mind. There are no indications in the survey that people are dis- posed to upgrade their standard of living more rapidly in the period ahead than they did during the past few years. Thus, the impetus to faster economic growth, sought by government and business, is not likely to come from the consumer sector in the near future-unless new stimuli alter the prospects seen by consumers. TABLE 1.-Indecc of consumer attitudes and inclinations to buy [Fall 1956=1001 Date of study ~ ~ Exciud- ing buy. lug in- tentions (6 ques- tions) Includ- ing buy- lug in- tentlons (8 ques- tions) Date of study . Exelud- Ing buy- lug in- tentions (6 ques- tions) Includ- lug buy- lug in- tentlons (8 ques- tions) June 1955 October 1955 May 1956 August 1956 November to December 1956.... June 1957 November to December 1957_ January to February 1958_ - -- May to June 1958 October 1958 104.2 102.6 99.3 99.8 100.3 94.4 86. 0 82.2 86. 5 92.7 102.2 102.7 99. 1 97. 6 102.4 95. 1 86.7 83.0 86.6 91.5 May to June 1959 October to November 1959~.~_ January to February 1960 May 1960 October to November l960~.... January to February 1961 May to June 1961 November 1961 January to February 1962 - -- May 1962 95.1 91. 1 96.7 92.9 92.8 92.4 94.4 96. 4 98.7 96. 8 100. 2 90.2 99.3 91. 7 93. 1 91. 7 95.0 96.2 99.1 96.3 PAGENO="0087" TABLE 2.-Consumers' evpectations regarding their financial situation a year hence [In percentj expected change in financial situation November to Decem- ber 1956 October 1958 May to June 1959 October to November 1959 January to February 1960 May 1960 October to November 1960 January to February 1961 May to June 1961 November 1961 May 1962 A. All families: Better off Same Uncertain Worseoff Not ascertained Total 32 48 14 6 (1) 31 46 15 7 1 34 48 12 5 1 33 47 15 5 (1) 40 40 12 7 1 35 45 13 6 1 31 47 17 5 (1) 37 42 13 7 1 38 45 10 6 1 33 48 13 5 1 37 47 10 5 1 100 100 100 100 100 100 100 100 100 100 100 B. Families with incomes of $7,500 and over: Better off Same Uncertain Worseoff Not ascertained 43 44 8 4 1 44 38 12 5 1 49 41 8 2 (1) 43 40 12 5 (1) 50 35 9 5 1 (1) 43 43 9 5 41 43 11 5 (1) 44 40 8 7 1 47 38 8 7 (1) 44 43 9 3 1 49 39 7 4 1 Total 100 100 100 100 100 100 100 100 100 100 100 Less than 3/~ of 1 percent. N0TE.-The question was: "Now looking ahead-do~you think that a year from now you people will be better off financially, or worse off, or just about the same as now?" C 0 CI) C PAGENO="0088" 78 POLICIES FOR FULL EMPLOYMENT 00 CO 0) 0) 0) 0) 00 0 I 0 0 0 0 0) ,0 `0) 0 `0) l~1~ 0) 10 0) 0) * ,~ CO~ i0 "0) * 0) :~, 8,c0 ~ v ~ ;`~ ..u~ ~ ~ ~ ,~ `-00 `0)~ 0)00 `0)~ ,~0o0)0)0 000)0)0 ~ct'I;)c~Z ~ 0)CO 00 ~CO r~ ~-0~ CO CO CO CO ,-, ~ Coo) ~ o~ ~ - Co L~ ~ ~ COCO~CO'-4 ~lOc0)CO 0 ~`-4 `00 CCO ~4 ~ 0)) )-~~ CO,o CC0)C~ I ~ ~ `C- ~-)1O4 ~C)CO COCCCO~CO CO `° LL ~r CO~~CCCO ~ ~,© ~ 0)~ t'. ~ CO CO CO ~0) CO 0)100110 CO C'. CO CO ~`OI r~ ~ 1010 t'-CO ~lCCOCO .-~ 0 ~ C')'0) CC CO CO CO CO CO ~-o ,0) CO CO CO t'.~ CC CO C- 0 CO " ~ ~ 0 0 COOl `0),', CO CO "4 CO 100)' CC CO ,~ C'- CO CO ~~oo 0)00 o ~`.I~ 00C--~CO CO ,~ ,~ E0E~8 ~ ~ CO ~0CO,0),4 `0) `0) `C 0 cO `0) S CD `0) C) `0) 0) 0 E CO 14 0) ,0 CD 0) `0) 0) `S `0 0 C) `0) 0) .~ `0) 0) 0 0) `C 0 I Iii 0 PAGENO="0089" TABLE 4.-Opinions about buying condition,s for large household goode, cars, and houses [In percent] Opinion June 1955 November to December 1957 June 1959 October to November 1959 May 1960 October to November 19(10 May to June 1961 November 1961 May 1962 Large household goods: Good time to buy Uncertain; depends Bad time to buy Total Cars: Good time to buy Uncertain; depends Bad time to buy Total 55 27 18 39 34 27 48 37 15 43 36 21 44 38 18 42 39 19 45 38 17 48 38 14 49 39 12 100 100 100 100 100 100 100 100 100 50 27 23 26 39 35 33 42 25 32 34 34 41 40 19 40 40 20 44 42 14 42 44 14 47 38 15 100 100 100 100 100 100 100 100 100 Houses: 26 28 46 42 33 25 38 31 31 - 37 33 30 35 31 34 42 28 30 41 35 24 45 32 23 Good time to buy Uncertain; depends Bad time to buy (1) Total 100 100 100 100 100 100 100 100 iNot available. "Thinking of the automobile market-do you think the next 12 months or so will be a NoTE-The questions were: "Now about things people buy for their house-I mean good time or a bad time to buy a car? Why do you say so?" furniture, house furnishings, refrigerator stove, TV, and things like that. Do you "Generally speaking, do you think now is a good time or a bad time to buy a house? think now is a good time or a bad time to luy sue large household items? Why do you Why do you say so?" sayso?" 0 0 CD 0 PAGENO="0090" 80 POLICIES FOR FULL EMPLOYMENT Chairman PATMAN. Thank you, sir. Senator Douglas? Senator DOUGLAS. First, I want to compliment all three of the panelists for these very informative and objective analyses. Consumer expenditures take about 65 percent of the gross national product, gross private domestic investments about 14 percent, Gov- ernment purchases somewhere around 21 or 22 percent. We have covered two of these fields today. I take it that all three of the wit- nesses agree that so far as objective measurements are concerned, there is not likely to be any decrease in personal consumption expendi- tures or private domestic investment. There may, indeed, be an increase. In the concluding paragraphs of Mr. Katona's paper, he threw in a new argument which I never heard before; namely, since states- men, polticians, economists, and journalists have been advocating a tax cut, the public is likely to be greatly aggrieved if it does not come. What you are saying is that, though there is no sound economic reason for these positions on the part of a statesman, politician, economist, or journalist, nevertheless, they will so affect public opinion that you have to conform with their faulty analyses. This, indeed, is a strange argument which I find very difficult to accept. Mr. KATONA. May I say, Senator, I did not say there is no sound economic argument. I think we all know one, that the 1962 recovery has been sluggish. Senator DOUGLAS. That is true. Mr. KATONA. Second, that the rate of growth of our economy since 1958 is nothing to be proud of. So I would say there are certain argu- ments. The third argument, that the recession is here or is threat- ening during the next few weeks, does not exist in my opinion accord- ing to our data. Even then one may argue that preventive medicine is perhaps bet- ter than to operate when the appendix is about to burst. I leave that up to your judgment. As to the argument that people believe it, we have lots of evidence over the past few years that people's interpreta- tion of what is going on influence their action. Senator DOUGLAS. But if the interpretations are faulty, then must you conform to the faulty interpretations or try to change the inter- pretations and to have statesmen, politicians, economists, and journal- ists less trigger-happy and more restrained in their prescriptions? Mr. KATONA. Again the word "faulty" is a value judgment which is hard to evaluate. It is not in line with objective indicators, but very often objective indicators don't prove good predictors because of people's notions and interpretations. So I think it is a real factor. I am not radical regarding the analysis of psychological factors. I think both aspects are of importance. Ability to buy, which will probably continue to rise, is of tremendous importance. But the psychological notions and reactions to the ongoino discussions which emphasize recession and the need of tax cuts shouI~d not be forgotten. Senator DOUGLAS. It is interesting that the argument for tax cuts now seems to be turning from the claim that it is necessary to prevent a recession, to the argument that it is necessary to speed up the rate PAGENO="0091" POLICIES POE FULL EMPLOYMENT 81 of economic growth. In other words, it is turning to a long-time factor. As I see the situation, the benefit of a tax cut would be to create a deficit which would be met by increased borrowing and the creation of additional monetary purchasing power to buoy up consumers' in- come to the level of the prices charged by industry. I would like to ask if it would not be a better long-time remedy to try to bring prices down to the level of consumers' income rather than expanding con- sumers' income to the level of prices? Mr. KATONA. I do not know of any way to bring prices down. Senator DOUGLAS. You don't believe in the antitrust policy? Mr. KATONA. I do. Chairman PATMAN. Are you seriously insisting that we could roll back prices, Senator? Senator DouGLAs. I am saying we should try. Chairman PATMAN. We tried that during the war. Senator DOUGLAS. There you had a big expansion of the money supply. If you try to reduce price while expanding the money sup- ply at a rate much faster than the growth in production, the effort is likely to be ineffective. Mr. KATONA. We have made extensive studies on people's reaction to prices, and people thoroughly dislike inflation and are worried if prices rise out of understandable reason. They also distrust price reductions. What creates consumer confidence is price stability. Peo- ple get accustomed to prices. After a while they think this is the right price just because it has been in existence for a year or longer. Price stability is perfectly satisfactory in the minds of most American consumers. Senator DOUGLAS. You see what we are getting into. If you say t:hat an increase in consumer purchasing power is necessary in order to speed up the rate of economic growth-and I agree with this-and then you say we cannot get it through a reduction in prices but only through an expansion in money income to be effected by tax cuts and governmental deficits, you are saying, in effect, that there must be a continuous injection of additional monetary purchasing power into the economy and continuing govermnental deficits in order to main- tain substantially full employment. I think we ought to examine that very carefully before we come to that conclusion. This is really the difference between Keynes' 1936 book and his 1929 book on the theory of money. I have always thought the theory of money was basically sound. But the 1936 book, I think, disregarded the fact that the high unemployment in England, which continued ever since 1920, was, in my judgment, primarily due not only to a high interest rate policy of the Bank of England, which was part of it, but also due to the presence of an increasing degree of monopoly, quasi-monopoly, restriction of output, cartels, and so forth, which spread like a fever through British society and in which Keynes, himself, was one of the chief promoters. If we abandon the effort to get a greater degree of competition in an industry and consequently a greater degree of price reduction, I think we are going to be driven to what you say. But we are going to pay a very heavy price for it. Before we turn to it, I would suggest most seriously that we try the other route. PAGENO="0092" 82 POLICIES FOR FULL EMPLOYMENT Mr. KATONA. May I just say, Senator, on the question of con- tinuous injection, I did not advocate a continuous injection. The people strongly believe that the Government can do something. People look to the Government for a new stimulus, for new trust. Senator DOUGLAS. Is it possible that the Federal Reserve could do something? Mr. KATONA. May I just say, first, about taxes, I do believe and there is every indication that millions and millions of Americans would consider a tax reduction as something rosy on the horizon and would get more optimistic and would spend more, not only spending the money they save in taxes, but still more, so that there would be an expansion in the next 12, even 24 months. Whether later one needs further injections, that is beyond us. I argue for giving now a stimulus to the people, new hope and new thoughts that something is being done to improve the situation and to reduce not only unemployment but the threat of unemployment. Senator DOUGLAS. I will just make two replies, because my time is almost up. The first is that your study of last year indicated that there were as many people opposed to a tax cut as were in favor of it, and you have not yet made your August study this year. So this is surmise on your part and not sound statistical material. Second, the first lesson that any military commander must learn- he has two lessons-the first is so that his men do not fire prematurely on the enemy, to hold their fire, as Prescott said at Bunker Hill, until you see the whites of their eyes. The second, which even first sergeants have to learn, and lieutenants and generals have to learn, that you should not commit your reserves too quickly. You should have a reserve so that you don't mistake a diversionary attack for a main attack. I have been rereading Churchill's "Finest Hour." When the Nazis broke through the French line near Sedan and Churchill made his first visit to France and talked with General Gamelin he said, "Where is your strategic reserve?" Gamelin replied, "There is none. When the Germans came through, they went all the way." So I have felt if you face the possibility of a recesion, a tax cut is not the first thing you should do-a reduction in the interest rates is the first step. That has always been classic doctrine until the last 2 or 3 months. If that is not sufficient, and a recession is really on you, then the tax cut. Senator BUSH. If you faced a recession or you were in a recession, the reduction in interest would come with it, would it not? Senator DOUGLAS. Yes. I am speaking of a reduction of the in- terest rate as a pieventive measure to stimulate housing. When you stimulate housing, you stimulate building materials, lumber, brick, cement, steel, electrical equipment, and so on. I have taken up more than my time, Mr. Chairman. Chairman PATMAN. Thank you, Senator Douglas. Senator Bush? Senator BUSH. I am glad the Senator did take up more than his time. I think he developed a very interesting line of thought here. Senator DOUGLAS. The Senator is always a gentleman. Senator Busu. I agree with what the Senator said about the tax cut, but I am very dubious about his feeling about interest rates. PAGENO="0093" POLICIES FOR FULL EMPLOYMENT 83 Senator DOUGLAS. I have said you would be dubious about that. Senator BUsh. It seems to me that interest rates are a reflection of the business situation and not a cause of it, you might say, one way or another. If business is good, interest rates are apt to go up. I think history would show that they do not inhibit the expansion of business. Many of our greatest periods of expansion in this country have come when high interest rates prevailed throughout the period. I think particularly of the 1920's, when for that whole decade we had relatively high interest rates. Certainly they did not inhibit a very broad and deep expansion of our economy at that time. I would like to ask our friends from McGraw-Hill particularly this question: What effect do you think a tax cut at the present time, of the nature that is being discussed, something of the order of $5 to $6 billion, would have on busines confidence generally? I am not talk- ing about the consumer now as Mr. Katona was, but I am talking about the people that are responsible for the management of the great reservoirs of savings of our people and of the great funds that are at the disposal of the companies, large and small, upon which so much depends, especially the direction we are going to go with the national economy. In other words, these people have the decisions to make, as you pointed out in your testimony. What is your judgment regarding the effect, Mr. Greenwald, of a tax cut now upon business confidence gen- erally? Mr. GREENWALD. I think it would act as a stimulant. Senator Busi-i. On confidence? Mr. GREENWALD. Especially on confidence, sir. However, I would like to point out that at this time I don't see any necessity for a tax cut. Senator BUSH. I gathered that from your testimony. You think while there is no necessity for it, still it would have an increasing effect upon business confidence? Mr. GREENWALD. I think it would. Senator BUSH. How do you reconcile those two points of view? Mr. GREENWALD. I say that I don't think it is necessary at this time, because I think we have a very high level economy. I think our rate of growth, and we can get into the numbers game on the rate of growth in any direction, shape or form you would want to take it. However, if we go back to the end of the war and start from 1947, the rate of growth of the United States has been roughly 3.65 percent per year at a compounded rate. I think this is a good rate of growth. I don't believe that we should have to worry about 4, 5, or 6 percent rate of growth. If you consider where we are today, it seems to me that is a high-level economy. I think if we were to talk about our strengths rather than our weak- nesses, we would probably be better off. I think tax reform would help the confidence of business because this would mean there would be more incentive for them. Businessmen are looking for profits. Profits are important. I think there has been a profit squeeze despite the fact that profits are relatively high. I believe that if businessmen were told that the profit squeeze is going to be eased, that, profits will be better after taxes, then I think there is more incentive for the busi- nessman. This develops confidence. PAGENO="0094" 84 POLICIES FOR FULL EMPLOYMENT Senator Busir. As the Senator from Illinois pointed out, if you have a tax cut of the order of $5 or $6 billion, this would be probably in addition to what other deficits we may face in fiscal 1963. Those estimates are now of the order of $4 billion or mayb& more than that, without any thought of a tax cut. So we are thinking in terms of a possible deficit of $10 billion that might occur from a tax cut at a time when, as you point out, things are very good. The economy is high, gross national product is high, national income is high, and the various elements of the economy are strong and looking strong. Wouldn't you be fearful, or would you be fearful that the financing of this kind of a deficit which, as the Senator pointed out, would largely have to be done by addition to the money supply through financing through the banking system, that this would have an infla- tionary effect which might injure the very object or retard the very object we are seeking to attain? Mr. GREENWALD. I would say no in this respect. I think our econ- omy does have excess capacity, as I pointed out. We have to close the excess capacity gap in unemployment and in facilities. The most important thing it seems to me would be to close this gap. The way I would think of tax changes would be along the type of tax reform where business would get some advantage and the consumer would get some advantage. - Senator BUSH. Mr. Ellis, the Du Pont economist, pointed out yes- terday that we always have excess capacity in some areas. It is not unusual or undesirable that we have excess capacity. In some areas of the economy we don't have excess capacity. We are running close. We don't run to our full capacity for very long. I just wonder if this talk about excess capacity is not exaggerated from time to time. What is your comment about that? Mr. GREENWALD. I would say no, sir; I don't think it is, especially when we deal with the manufacturing area. In other areas I can't say because I don't know enough about them. When I talk about capacity, I am talking about what the companies are telling us about capacity, not something that I estimated. This is a direct measure. If a company tells us it is working at 80 percent of capacity and it would like to operate at 95 percent of capacity, I know that that par- ticular company has 15 points of what might be called excess capac- ity. This margin has to be reduced to the point where it can do its best job and produce its best profitmaking operation. On the average for all manufacturing, we now arrive at an 84 per- cent operating rate and a 90 percent preferred rate. So you have a gap of only 6 points. But there are 6 points to eliminate before you would get the most efficient operating rate. Senator BUSH. On that point, aren't we gradually closing it? Mr. GREENWALD. We are. We have moved up from the low of the recession. However, you can say in a way that we have not moved up as fast as many of us thought we would. I don't know whether that is significant or not. But, if the businessman makes a plan and he thinks he is going to do so much in sales but doesn't, then you might say that this has some impact on his confidence. However, I don't think it has had much impact up to this time. Senator Busii. I think your estimate of the plans of businessmen is very reassuring, indeed. I certainly agree with your own opinion PAGENO="0095" POLICIES FOR FULL EMPLOYMENT 85 that your whole appraisal of the situation does not warrant considera- tion of a tax cut at this time. I have no further comment. Chairman PATMAN. Senator Proxmire? Senator PROXMIRE. First, I would like to say that I am very happy to see you again, Mr. Greenwald. You did a marvelous job before our Subcommittee on Statistics. I am happy to see in your statement you say you are considering seriously an exploration of the McGraw-Hill techniques as a public-private project because you are the pioneeer of this technique and you have done excellent work in this area and your firm is considering this seriously. I would also like to tell you how very grateful I am to you for mak- ing the statement you have just made this morning. Just yesterday one of the most distinguished Members of the Senate, Senator Javits, attacked President Kennedy's leadership and said there was a lack of confidence in the country, in the President of the United States and talked about the administration's alleged agonizing uncertainty and und,ecisiveness. Senator Javits was serious, and I challenged him on the floor of the Senate yesterday to document it, and in my judg- ment it was not there. You documented exactly the opposite case, and you have done it in spades here this morning. You point out that the manufacturing industries overall plan to invest $15.3 billion this year. It is down only $110 million, which is not a significant drop. Then you point out that in most cases, when investment plans were lower than earlier, the reasons had nothing to do with the lack of business confidence or the drop in the stock market. You show there are a number of industries which have increased their investment plans. Altogether I think this is solid documentation that there is no un- certainty that is provoking a lack of business confidence on the part of our business managers. I think coming from McGraw-Hill, which is an objective organiza- tion, an organization which publishes Business Week, as I understand it, and is close to the business community, is an extremely significant assertion on your part. I would like to ask you: You responded to Senator Bush that we needed a tax cut and that this would particularly be encouraging to the business community. Mr. GREENWALD. Excuse me. Senator PROXMIRE. I beg your pardon. You said that a tax cut would stimulate the economy. You did not say we needed one. You said the exact opposite, that it was unnecessary. You reassert once again that the investment credit proposal of the administration would `seem to have an insignificant effect on an increase in investment. You say $300 million increase in investment although it will cost the Government $1 billion to get it. That would be about the most expensive stimulation the Government handed out in a long time. Then, you say that the comprehensive survey taken earlier this year shows that businessmen `anticipated increasing their volume of cash flow composed of retained earnings and depreciation at a faster rate than investment in new plants and equipment. At that time they expected an increased cash flow of 14 percent and investment of only PAGENO="0096" 86 POLICIES FOR FULL EMPLOYMENT 10.5 percent. Why in the world do they need further tax cuts de- signed to increase cash flow? They certainly have plenty of cash available. The depreciation improvement which they have received only this year, only a few weeks ago, is going to add additional cash. So they have all the money in the world ready and available for in- vestment. It certainly is not based on this apparently, is it? Mr. GREENWALD. No, it is not. It is based on incentives and con- fidence. The incentive to the businessman. I think that is the only point that I would make about why we even should think about a tax cut now. Senator PR0XMIRE. You say an incentive to the businessman. You would agree that the profits were higher now than last year and the year before? Mr. GREENWALD. In dollars but not in percentages of sales or return on equity. Senator PROXMIRE. Yes, sir, Mr. Ellis showed that in percentage of investment they were the highest of any year since 1957 with the exception of 1959. Mr. GREENWALD. If we look at ratios to sales, this is not the case. We did an editorial at McGraw-Hill not too long ago in which we talked about the squeeze on profits. If you take into consideration the long trend, I think we went back to 1946-50, the average profit on sales was 5 percent in 1951-5'S, 3.6 percent in 1956-60, 3.2 percent and in 1961 the profit percentage 3.1 percent. It came down substan- tially in those 5-year periods. Senator PROXMIRE. Let us assume there is a relative squeeze on profits and you make a strong case that profits should be higher. Nevertheless, what would persuade business to invest when they have ample cash reserves to make the investment is an increase in con- sumer demand under these circumstances, isn't that correct? Even if the after-tax profit picture could be improved why in the world would a business invest if they don't have a specific reason in terms of satisfying a demand? Mr. GREENWALD. I would agree with that, sir. Senator PROXMIRE. So more important than a business tax cut under these circumstances with ample cash flow, the action already taken on the part of the administration with regard to depreciation, the investment credit which is likely to be passed this year- Mr. GREENWALD. I would agree with that because this is the way to close the gap. This is the first step. I think you also have to make the other step, in combination, because in modernization terms in- dustry is pretty far behind. I think we pointed that out in this testi- mony, too. A large percentage of our plant and equipment is obsolete. If we can improve that part of the economy, and this is what we are aiming at, with Revenue Procedure 62-21 and the tax credit, then I think we have a good chance of improving the situation. I would say this is the kind of thing that the businessman is waiting for. He wants to make a better profit margin. I think the level is not bad at this time, but improved margins are what he is aiming for. It is the profit margin that is being squeezed. Senator PROXMIRE. Your position is that a tax cut is not necessary at the present time? Mr. GREENWALD. Absolutely. PAGENO="0097" POLICIES FOR FULL EMPLOYMENT 87 Senator PROXMIRE. If there is a tax cut it would be probably more stimulating for business if it were for consumers and individuals rather than corporations? Mr. GREENWALD. I would like to see both. I think you have to have a combination. Senator PROXMIRE. What you have said is not much of a case for a further tax cut. Mr. GREENWALD. I agree. I see no case for a tax cut. Senator PROXMIRE. I would like to ask Dr. Katona when you break down your statistics they are fascinating in what they tell about what people mean when they say they want a tax cut. On your final page you show that there is no group with incomes of over $3,000 who favor a tax cut. The only group that favors a tax cut are those with incomes under $3,000. These are family incomes. I have computed the income taxes these people would pay and if there are four people in the family with a standard deduction they would pay about $60 a year maximum. Therefore, I suggest these people are not talking about an income tax cut. When you say should we have a tax cut they're talking about a property tax cut. These people pay about $200 in property taxes. They pay close to $75 or $100 in sales taxes on the average. On the basis of my experience of talking with the people in my State they are very con- cerned about high taxes, but they are concerned about the local prop- erty and State taxes. The way your question is worded you say a tax cut, not an income tax cut. Therefore it is significant that those who are most conscious of the Federal income tax say no. Those who would be conscious of local taxes say, "Yes, we want a tax cut." Mr. KATONA. You know, Senator, these are 1961 data and there was no income tax proposal at that time, so we formulated the question that way. It is easily possible that today the opinions are different. Ac- cording to our knowledge, people mean both taxes. It is not correct to assume that they say no if they think of income taxes. According to the arguments made, mostly they think of income taxes. But any kind of tax cut would be a stimulus. I don't see any way to cut property taxes. Senator PROxMIRE. I understand. But the question does not specify. Mr. KAT0NA. That is right. Senator PROxMIRE. It would seem a logical conclusion when you say you think taxes should be cut, without specifying an income tax and you get a response on the part of people whose taxes are concentrated in the nonincome tax area, they say, yes, a tax cut. Whereas, the peo- ple who pay the Federal income tax predominantly, and that is their principal tax, say no tax cut. Therefore, the action indicated for the Congress if we rely on public opinion would be not to cut Federal in- come taxes. Mr. KAT0NA. I submitted this table primarily because of the lower part. I think the reasons people had in 1961 are still of interest. As to the division of opinion which says good idea or bad idea, the data are a year old and the data are of lesser value. In other words, I strongly emphasize the one point, that overwhelmingly those people who a year ago said a tax cut would be a bad idea had reasons which are erroneous, namely, the reasons that then we can't do what we 87869-~62----7 PAGENO="0098" 88 POLICIES FOR FULL EMPLOYMENT must do for national defense. That is why I said if a tax cut should be enacted this year, next year or whenever, it is necessary to inform and educate the people. Senator PROXMIRE. I see. What you said at the very end I think is so important. If you are going to have a tax cut we have to do a far more extensive job of justifying that so that people understand the reason for it and are willing to accept it. Miss DINGLE. May I add one purely technical point? In the under- $3,000 income group you would have a large number of families that do not pay property taxes directly because you have a large proportion of renters. There are also, of course, a number of retired persons who own their own homes, but you do have a large portion of renters in this income group. Senator PROXMIRE. That is right. There are also a large number of farmers, believe me, in this category- Mr. KATONA. There are indeed. Senator PROXMIRE. Whose taxes are overwhelmingly property taxes and many pay no income tax. In our State they are predominantly owners. Their incomes are less than $2,000 per family. My time is up. Chairman PATMAN. Congressman Curtis. Representative Curn~is. I want to get to some specific questions be- cause all of this has been placed in the context of what I regard as begging the question, that a tax cut actually will stimulate the economy in a period of deficit financing. I recognize that the bulk of the eco- nomic profession seems to have advanced that theory. However, I suggest that they have not established that as a correct theory. We have never tried it in the United States. I know of no nation that ever has tried it. I think it is very im- portant to drive that home right in the very beginning. We have had this theory advanced in the Ways and Means Committee hear- ings and I have asked each one of the witnesses why they thought that dealing, as we are, in economic aggregates, in a period of deficit financing-we are talking of balance between the Government sector and private sector-shifting $5 billion from the Government sector in a tax cut to the private sector and then turning right around and taking $5 billion from the private sector and transferring it back to the governmental sector by selling bonds to the private sector-why does that stimulate an economy? Although I do want to get into the details of this I think it is very proper to ask that question here. This is not a proven theory and I am very disturbed that without even debating it and getting into the reasons, all the witnesses seem-even you, Mr. Greenwald- Mr. GREENWALD. I did not say that. Representative Cmrris. To the extent that Mr. Katona, people like yourself, say it is a question of informing and educating the public on this new theory. In my view, I would say propagandizing the public. Mr. KATONA. May I recapitulate, Mr. Curtis. The points are as follows: The strongest stimulus for the consumers to increase their spending, to improve their standard of living, to satisfy the innumer- able wants the American people do have, the strongest stimulus is a rosy outlook-a hope that they get ahead, that there will not be un- employment. A tax cut contributes to the thought of more purchas- ing power. PAGENO="0099" POLICIES FOE FTJLL EMPLOYMENT 89 Representative CUETI5. But does it? That is the whole point. That is the issue. Mr. KATONA. By means of a few dollars to the low-income people. Representative CURTIS. It doesn't go to the poorest. The poorest sectors of our economy are not taxpayers. We are talking about Fed- eral income tax. We are not talking about the lowest income group. Mr. KATONA. Quite a few people who are poor pay income taxes. Representative CrmTIs. There are a bulk of people who are not in the taxpaying brackets. I mean the income-tax paying brackets. I am happy that the American people have responded in this way and have not bought this "pig in a poke" that this automatically is going to do it. Maybe it does but I think it is about time for our economic professors and those in the profession to come forward and get into details and away from these aggregates. You transfer $5 billion from one place to another. There may be something about the mix. Some of the economists were forthright in saying we won't have the public buy the bonds, not in the beginning, at any rate. We would have the Federal Reserve System or our banking system buy them. That is not tax cutting. We are simply talking about printing more money. Maybe that kind of inflationary pressure would help, but that, too, is an issue that needs to be discussed. Mr. KATONA. In one respect you point to the most important fac- tor in my opinion; namely, we need more information about the fac- tors influencing consumer confidence. We do not know enough. Our group has done extensive studies over many years. There are great difficulties in a financing these studies. We have over the last few years received practically uo Federal money in contrast to previous years, and I fully agree with you it is not established. We do not know enough. Representative CURTIS. No, we have never tried it. When we are talking about it we need to refer to it as a theory. I respect those who advance the theory, although I honestly disagree with them, because I don't think they have done the homework necessary to back this theory up. One of our witnesses, I won't identify him, said we had an example in 1954. I pointed out in 1954 we cut Federal expendi- tures. I can begin to see a shifting from the public sector to the private sector. Incidentally, one thing that has not been brought out in these hearings to date is the fact that we have a tax increase that is going to hit all workers including the lower income groups who were not Federal taxpayers beginning in January 1, 1963. This tax increase is going to hit each one of them. It is an average increase of $24. I am referring to the increase in the social security taxes. It goes from $150-and this is the rate paid by worker, matched by employer-to $174. Incidentally, in 1954 when we did cut the individual taxes I had thought we had done, incidentally, a politically astute thing and never could quite understand why the Republicans controlling that Congress got no political credit. It was then that I looked into the fact that at the same time we had increased social security taxes and just, by coincidence, almost the same amount we cut the individual income tax. A worker saw in his pay envelope the same take-home pay because the cut he got was almost eaten up by the increase in the social security PAGENO="0100" 90 POLICIES FOR FULL EMPLOYMENT tax. So many people, as I campaigned in my area, didn't even know they had a tax cut because they were looking at take-home pay. Mr. KATONA. We also had other tax increases. We had an increase in Federal income taxes over the last few years. If I had a $10,000 income a few years ago and now have $13,000 because of inflation, my real income was unchanged. Nevertheless, because nominally my income rose, I had to pay higher taxes. It is time to reverse this con- stant drain on incomes. Representative CuRTIS. I personally am very strongly m favor of a tax reform which is actually in the nature of tax cutting. But I do not relate it to any theory of increasing purchasing power. I relate it to what our tax is doing now in the way of dampening incen- tive in our private sector. Getting back to incentive and business decision and investment, I think any tax cutting not unrelated to reform but following out this untried theory and unrelated to Federal expenditures cut is going to be discouraging to business. I may be in error, Mr. Greenwald, but that is what I would think the business reaction would be. In answer to one of the questions by you, Mr. Katona, if Congress didn't do anything in light of all this talk about tax cutting, I think our business people would actually be encouraged that Congress had enough sense not to dabble around in untried theories. Mr. GREENWALD. I am not talking about a "quickie" tax cut. 1 have only referred to tax reform. Representative Cuwris. I think tax reform is always appropriate whatever the state of the economy is. I see my time is up. Chairman PATMAN. Senator Pell. Senator PELL. Thank you. Dr. Katona, I notice in your testimony you refer to the fact that 18 percent of the 55 million American family units own stock. The other day, as I recall, the President of the New York Stock Exchange said that one out of six individual Americans owned a share of stock, which is considerably more. I was wondering how you equated those two figures. Mr. KATONA. The two statist~ics are pretty much in agreement. The fact is that partly because of our tax laws in very many families there is joint ownership of stock or both husband and wife own stock. Therefore, I believe, as we have argued for years, that the New York Stock Exchange statistics, speaking of individual ownership, are some- what misleading. It is not a question to count separately husbands and wives, and even many children of rich families have beneficial ownership of stock which is counted separately by the New York Stock Exchange. The question is to find out what proportion of American families own stock. Whether every member of the family or one owns stock is not important. The 18-percent figure is subject to error. It may be as high as 20 but it cannot be higher according to all data. That would be 1 out of 5. Senator PELL. Are you including debentures in that or only equities? Mr. KATONA. No. The fact is that of all kinds of bonds only U.S. Government savings bonds are widely distributed. All other deben- tures are owned by a very small proportion of people most of whom also own stock. But we include in equities mutual funds. PAGENO="0101" POLICIES FOR FULL EMPLOYMENT 91 Senator PELL. Thank you. Mr. Greenwald, I noticed your point and was struck by it, that the economy has not gone down of late. I am struck too by an insertion in the Congressional Record by Senator Sparkman in which he put in a series of articles pointing out that never have profits been higher and the economy apparently more booming though we hear to the contrary. You point out that invest- ment plans have not been particularly changed by the investment credit. You feel they are reasonably satisfactory in the United States. Nevertheless, in comparison with Europe apparently we invest about a third as much of GNP in new facilities as do they. This is true even now while Europe has recovered from the holocaust of the war and they are spending two or three times more of their GNP than we. How do you account for the difference? Mr. GREENWALD. If you have a high ratio growth in investment relative to GNP countries generally you grow faster. I think this is fine in many areas of the world but I don't think this applies to the United States any more. I think we have a great record of growth in the past and we are the richest Nation in the world. Senator PELL. My point may be stated better, why is it in Europe they are willing to put more profits into growth than here? Mr. GREENWALD. I am not sure they are putting profits into growth. This raises another question, the comparability of statistics. Many industries for example in England or France are nationalized directly or indirectly. So these comparisons, often cover more than private industry. Senator PELL. In general would you agree with the thought that a larger proportion of the product of a plant or business is spent on new equipment abroad than here? Mr. GREENWALD. Yes, sir, that is true. Senator PELL. What is the reason for that? Mr. GREENWALD. This is something I am not certain about. I think you could argue that this is a question of the incentive that I raised earlier. In the United States you need the businessmen to invest, to feel that he has a reason for a larger amount of investment. I have said earlier before the Joint Economic Committee, that we should be investing somewhere around $42 billion by the end of this year. How- ever, we are only going to spend according to my estimate of plant investment in the fourth quarter, based on our surveys something like $39 billion. Investment of $42 billion would give us a larger ratio, although it might not be as high as in Europe. These countries are expanding from almost desolation, so it was necessary for them to have a high volume of capital investment to make up for the losses they had before. It probably also has to do with labor shortages overseas. Senator PELL. Doctor, as both an economist and psychologist, is the reason for it psychological? Mr. KATONA. I have just come back from a study trip of the Com- mon Market countries. It is very true that in the first 10 years after World War II, which is roughly 1947 to 1957, because of the previous destruction, they have spent very much more on business investment than we have. Today the trend is downward. The new impetus in the Common Market countries comes from consumers, from an enormous increase in installment credit and automobiles, con- PAGENO="0102" 92 POLICIES FOR FULL EMPLOYMENT surner housing and consumer equipment. On the whole, the Common Market countries are Americanizing rapidly and that will show up in lesser business investments, more resembling our rates, and more consumer tangible investment expenditures as well. So if you look at the trend which foreshadows the future rather than on past facts, the differences will, I believe, diminsh. Mr. GREENWALD. May I add to that? At McGraw-Hill we have done surveys of oversea investments of U.S. companies. We will have a survey out some time in early September on plans for U.S. com- panies to invest overseas in 1962~ 1963, 1964. My guess would be, as of this moment, that the results may show some decline which would confirm what you have just said. We do know from surveys of the IFO in Germany that increases in investment in Western Germany have gone downhill. Senator BUSH. On a percentage basis? Mr. GREENWALD. Yes, sir. Senator BUSH. But they began from such a low percentage. Mr. GREENWALD. One year it was plus 23, last year 14, this year it is expected to be 10. They have been building capacity up so fast that maybe they will not be increasing investment next year at all. Again we have to remember that the European Common Market has had a pretty good growth rate since the end of the war, relative to ours. They have built up a lot of capacity. When they get into a situation, and it may be that next year will be the year for them, where they have to go through a recession, then they won't need additional capacity. Business will start cutting back investment. It may be that American companies will be cutting back on their oversea investment next year. So European countries' ratio of investment to GNP in 1963, might be lower than ours. I believe that the trend in this ratio is down in the Common Market. Senator PELL. Thank you, that is all. Chairman PATMAN. I would like to ask you about these savings, Mr. Katona, and then I will yield to Mr. Reuss. I believe you prepared a table for the Federal Reserve Bulletin a couple of years ago, did you not, about savings bonds and ownership of savings bonds? To the best of my recollection there was a figure that 73 percent of the people or families didn't own any savings bonds at all. Is that correct? Mr. KATONA. Approximately. I don't remember the exact number. Ownership has declined since World War II. Chairman PATMAN. Then isn't it a fact that according to those figures 7 percent of the remainder owned about 85 percent of the bonds? I am doing this from memory. Mr. KATONA. I don't know whether it is as much as you say. Chairman PATMAN. Does that sound unreasonable? Mr. KATONA. If you ask me, according to my memory, I had the figure in mind that 10 percent owned 60 percent of the value. Chairman PATMAN. Do you remember, Miss Dingle? Miss DINGLE. I do not know. They are concentrated. A number of owners may own only one $25 or $50 bond. I think it is necessary to remember that particularly in the distribution of aggregates among groups in the economy there is a large sampling error involved. We PAGENO="0103" POLICIES FOR FULL EMPLOYMENT 93 also know in consumer surveys in the past in dealing with items like savings bonds we have not picked up data that tie in directly with aggregates from other sources. We have generally underestimated ownership. I personally have felt that one has to interpret pretty broadly any data on distributions among groups collected in past surveys. I guess I would feel that given the problems with the data, we may not be able to distinguish whether it is 7 percent owning 70 percent or 7 percent owning 80 percent. Chairman PATMAN. You do not remember the figures that I men- tioned: 7 percent and 85 percent? Miss DINGLE. I don't remember. We may have some computations which I would be delighted to look up. Mr. KATONA. The point is well taken. All assets are highly con- centrated. Chairman PATMAN. Will you put that table in the record with your remarks when you correct your transcript, please? Mr. KATONA. Yes, sir. (The information follows:) As shown in the accompanying table, only 27 percent of all spending units reported owning any savings bonds in the 1959 Survey of Consumer Finances, and the top 25 percent of the owners-about 7 percent of all spending units- accounted for almost 85 percent of the value of the savings bonds reported. Quartile ranking of savings bond holders, early 1959 Quartiles . Percentage distribution of- Spending units Savings bond holders Savings bond aggregate All spending units No holdings . Some holdings . Quartile ranking of holders: Highest quartile . Second . Third Lowest . 100.0 26. 7 100.0 100.0 6.7 6. 7 6. 7 6. 7 25.0 25.0 25.0 25.0 83.5 12.3 3.3 .9 N0TE.-Quartiles are obtained by ranking spending units according to size of holdings of savings bonds; one-quarter of all holders make up each quartile. The highest quartile in early 1959 included holders of savings bonds with face value of $1,500 or more. Source: 1959 Survey of Consumer Finances, Board of Governors, Federal Reserve System. SUPPLEMENTARY MATERIAL REGARDING Mit. PATMAN's INQUIRY ABOUT CONCEN- CENTRATION OF HOLDINGs IN U.S. GOVERNMENT SAVINGS BONDS Submitted by George Katona, Survey Research Center, University of Michigan As stated during the hearings of August 8, 1962,, survey data that indicate the proportion of aggregate amounts of savings bonds held by the largest holders (see the table for early 1959 submitted by the Board of Governors, Federal Reserve System, on August 14, 1962) are subject to substantial sampling and reporting errors. More reliable are data that show the changes over time in the proportion of families or spending units who hold no bonds, small amounts of bonds, and large amounts of bonds, respectively. The following table shows that a much smaller proportion of American spending units hold savings bonds at present than shortly after World War II. Yet the proportion of spending units having liquid assets has not declined during the last 15 years. PAGENO="0104" 94 POLICIES FOR FULL EMPLOYMENT Type and size of liquid asset holdings [Percentage distribution of spending units] Type and size of holdings 1946 1951 1956 1960 1962 U.S. savings bonds: Zero $1 to $499 $500 to $1,999 $2,000 and over Total Savings accounts: 1 Zero $1 to $499 $500 to $1 999 $2,000 and over 37 37 20 6 59 24 11 6 69 18 8 5 70 16 8 6 73 15 8 4 100 100 100 100 100 61 16 16 7 55 20 14 11 52 20 15 13 47 19 16 18 49 19 15 17 Total Checking accounts: Zero $1 to $499 $500 to $1 999 $2,000 and over 100 100 100 100 100 66 18 14 2 59 27 10 4 51 31 14 4 43 39 14 4 43 41 12 4 Total All these liquid assets: Zero $1 to $499 $500 to $1 999 $2,000 and over 100 24 29 28 19 100 100 100 100 28 30 23 19 28 27 23 22 24 27 24 25 27 29 21 23 Total - 100 100 100 100 100 1 Includes savings accounts in banks, savings and loan associations, and credit unions. Source: Pp. 77 and 78 of 1960 Survey of Consumer Finances, published by Survey Research Center, Ann Arbor, Mich., in 1961. The 1962 data are from the 1962 Survey of Consumer Finances conducted by the Survey Research Center. Chairman PATMAN. Congressman Reuss. Representative REuss. Would the members of the panel comment on my impression that there is not in sight today in this country the same kind of stimulant to consumer demand that was offered by the automobile in the 1920's or by homebuilding and consumer durables in the late 1940's and early 1950's. Does anybody disagree with that observation? Mr. KATONA. I think I disagree with the conclusion you seem to imply, sir. It has often been stated that we are a wealthy, fat, sat- urated economy, who have all we need, and there are no needs, no wants. Representative REUSS. Let me hasten to add I was not implying that. I know that 20 or 25 percent of our people with very low in- comes are not really in our market economy at all and that the great mass of the rest of our people could, if given the financial means to do so, consume at a higher level. My question was whether there seemed to be specific commodities now on the horizon of the kind which were at the center of the great buying booms in the two periods previously mentioned. Mr. KATONA. There is no single commodity, you are right. None of us have all the things we may want. What kind of things would you like to have? If you asked that shortly after World War II peo- ple mentioned a few things like homes, automobiles, washing machines. Today people mention a long list of things and matters such as vaca- tion trips or summer homes and innumerable other wants. PAGENO="0105" POLICIES FOR FULL EMPLOYMENT 95 Representative REUSS. Don't you find that the list of wants that you get nowadays, as opposed to the list of wants which you got in some earlier period, stresses in a much greater degree, services and intangibles-medical care, recreation, vacations, leisure time activi- ties, nongoods items. Mr. KATONA. And also education and cultural things. Representative REUSS. Exactly. Mr. KATONA. You are right. These are also expensive things. Representatives REUSS. That is right. I am wondering what effects increased expenditures on services have on the economy which may be different from those we would get from the same amount of spend- ing on goods. Mr. KATONA. Travel leads to an enormous investment by the private sector, say for motels, and by the public sector for roads. Representative REUSS. I am not suggesting that a greater demand for medical care is not accompanied by a certain additional demand for hospitals and medical schools. My question is whether a dollar spent on services is likely to produce just as much economic activity as a dollar spent on goods? Mr. KATONA. We don't know the answer to this question. There is structural change in connection with the correctly stated facts in our economy. Mr. GREENWALD. We don't really know what new products are coming along. There may be some magic things on the drawing boards of many companies in the United States. We do know that research and development expenditures have gone up tremendously. We know that new products are a key to all of these programs. We know, for example, from our surveys that 14 percent of manufac- turers' sales in 1965 are going to be in new products that are not now in existence-14 percent of manufacturers' sales. That is a very significant number. Representative REuss. I welcome and recognize what you say. My question, however, was whether there now are in being and ascertained things which look today as exciting as the automobile looked in the 1920's and as the consumer durable goods looked in the early 1950's. Mr. GREENwALD. We may not have any one good but we may have a combination of 5 or 10 which could give sizable stimulus to the economy. In 1961 the economics department of McGraw-Hill did a long-range forecast through 1975. The Russians criticized this report. They called McGraw-Hill, and myself, since I was responsible for the preparation of the report, the Knight of the Electric Blanket and of the Helicopter. I want to point out that we have many new products coming along because of B. & D. Some day we will have wall-sized television screens and many of us will be driving around in our own helicopters. This might be a significant market of the future. Miss DINGLE. May I make one comment? I think there are really two aspects here. I think you have been emphasizing the real investment that is involved in connection with production of goods versus services, which is a complex issue. I think there is another question here and that is the question of what you do to consumer purchasing power and consumer saving versus dis- saving, as represented by debt. I think some economists have been PAGENO="0106" 96 POLICIES FOR FULL EMPLOYMENT *surprised in recent years how greatly there has been an increase in debt in connection with services. Representative CURTIS. Percentagewise to the value of the con- sumer durables. Miss DINGLE. If you look at the expansion in consumer debt over recent years, you will find the so-called personal loans have accounted for a larger proportion of the increase and durable goods credit for a smaller proportion as compared with earlier periods. It is a com- plex question. Personal loans do include some loans that are incurred for purchasing small durable goods, the purpose of which is not speci- fied by the consumer to the lender. But it does also include all of these new areas. It includes the travel credit that many lenders are actively promoting now. It includes educational loans and a number of others. So I would say again it is very difficult to judge how important this is, but the statistics on consumer credit certainly show that we have some new or expanding credit areas in connection with services. Representative REuss. Now let me get on to a very interesting point raised by Dr. Katona. I am struck at the tremendous desire on the part of housewives in the European countries for our whole range of consumer durable goods-dishwashers, dryers, refrigerators, washers, and so on. I won- der if you don't feel that there is a coming boom in Europe in con- sumer goods, Professor Katona. Mr. KATONA. You are 100 percent right. Not only a coming boom, but the boom in the last 3 years is largely due to consumers. It has the consequence that the consumers say that they need more income because they want to have all these attractive things. Over the last year wages rose enormously in the Common Market countries be- cause of consumer needs. You see, traditionally economists have always thought that con- sumption is a function of income. There is truth in it. There is truth also in the reverse. Income is a function of consumer wants and needs. If people desire many things they work for higher income and wage increases. Representative REuss. This brings me to a central question. Couldn't European employers grant most of the new wage demands without inflationary consequences, if the United States furnished a large volume of the desired consumer goods? This would require that the Common Market and the other European countries reduce their present very high tariffs. The export sales we could make as a result would help us to combat unemployment, increase the level of economic activity, and reduce our payments deficit. It would also bring American and European wage patterns close together and so contribute to long-term international payments equilibrium. Did you follow this rather complex question? Mr. KATONA. I did, sir. It is a wonderful thought. I don't believe it is very practicable from the European point of view. Representative REUSS. Isn't it only practicable, but quite necessary frOm the free world point of view? Must we not look at the elements of our problem-surplus European payments, a U.S. payments deficit, overfull employment in Europe, underemployment here, an ebullient growth rate in Europe, and a lagging growth rate here. PAGENO="0107" POLICIES FOR FULL EMPLOYMENT 97 Mr. KATONA. I fully agree with you and all our efforts should be directed toward greater cooperation and mutual tariff reductions be- tween Common Market countries and the United States. Representative REUSS. I am glad to have your answer. My time is up. Chairman PATMAN. We have another meeting here at 2 o'clock with Dr. Ileller and the other members of the Council of Economic Ad- visers. Shall we go further? Representative CURTIS. I personally would like to. Senator PRoxMIm~. I have a couple of questions. Chairman PATMAN. You may go ahead, Mr. Curtis. Representative CURTIS. Thank you very much, because I want to get into some of the details and I spent my previous time on the gen- eral overall picture. Have any series of statistics been developed on new products and services on the market? I have heard a figure that something like 25 percent of the goods and services on the market today were unknown 5 years ago. Mr. GREENWALD. It is an estimate that we may have made at Mc- Graw-Hill. Representative CURTIS. I think there was an estimate. Mr. GREENWALD. What we do in our surveys is ask the question about expectations for new products and what percentage of sales they account for in a period of 4 years ahead. Representative CURTIS. That is a sort of ad hoc thing. Mr. GREENWALD. We check back every year. Representative CURTIS. Is 25 percent accurate? Mr. GREENWALD. That is close but not exact. The time period is wrong. When we asked this question the very first time in 1956, the result was that about 10 percent of manufacturers' sales would be in new products 4 years ahead. When we asked it the last two times we got an answer of 14 percent. This would be for a 4-year period. So if you add these two together you come fairly close to 25 percent but for an 8-year period. Representative CURTIS. I think Monsanto Chemical made the obser- vation (though I may be quoting them wrong) 90 percent of their dollar sales reflected items that were not even manufactured in 1950. Mr. GREENWALD. May I provide you with a few figures, sir? Representative GURTIS. Yes, please. Mr. GREENWALD. I will quote them to you from our survey of busi- ness plants for new plant and equipment, 1962-65. These data are on an industry basis. These are the percents that new products will account for of sales in 1965. For iron and steel, 5 percent; nonferrous metals, 9 percent; machinery, 23 percent; electrical machinery, 22 percent; autos, trucks, and parts, 10 percent; transportation equip- ment, 34 percent; fabricated metals and instruments, 18 percent; the chemical industry, 16 percent; paper and pulp, 10; rubber, 6; stone, clay, and glass, 13; petroleum and coal products, 6; food and bever- ages, 12; textiles, 13; miscellaneous manufacturing, 9; and all manu- facturing, 14 percent. Representative CURTIS. To me it is in this new product area but we will find the answer whether we are going to have a growing and dynamic economy. I was very pleased to listen to Congressman Reuss develop a theme that I have been trying to develop for some time. It PAGENO="0108" 98 POLICIES FOR FULL EMPLOYMENT is my belief that our ecnomy is not tired and sluggish. Quite the contrary, we have "growing pains." What we are seeing, among other things, is a shift from manufacturing to distribution and services and, indeed, to new products. When we have this kind of obsolenscence it does relate to capacity and it relates to unemployment because our skills become obsolete. The lessening of and need for unskilled and semiskilled labor as we move forward is very marked. These are the areas I think we have to get into in order to determine whether we have a growing economy rather than GNP. I don't mean by that that GNP is not a valuable indicator. It certainly is, and very important. But it is not a very good one to measure whether our economy is dynamic and growing. Mr. GREENWALD. This is the point I was trying to make before. As a matter of fact, research and development are still expanding rapidly. This is why we are going to get new products. There is quite a bit of this going on. When I cite industry figures, I don't know which products the iron and steel industry has on its drawing board or which product the transportation industry has in mind. Yet there are many new products coming along which industry expects to be in existence and for sale by 1905. Representative Cunris. Let me go to another area that is collateral and that very few economists have taken note of. I am reading from the HEW indicators in July-on page 27 of the chart 25, "School bond sales." We started in 1957 in the school bonds voted on, in one col- umn, and then the next column is the bond issues passed and the per- centage passed; $1.4 billion of total voted in 1957, $1.8 in 1958, $2.26 in 1959, $2.25 in 1960. And here is the figure, 1.2 in 1961. The drop in percentage of passing was even more dramatic. In 1960, it was $1.8 billion and in 1961, $0.8; a drop of $1 billion in school bonds that were voted. I can well understand why we are seeing a tapering off in school construction which, doesn't show up on the chart on page 27, educational construction. But it is going to. That might be some- thing that Senator Javits could use to back up his point of what indecisiveness does. I lay a good bit of that to all of this talk of Federal aid to school construction and the indecisiveness of action. This is a very important economic indicator in an area where our econ- omy needs to move forward even more so, in this area of training and education. I have one question I would like to direct to all of you, another indicator that worries me. I made some comments be- fore on it, but I see no one picks this up very much. I am talking now about employment figures. This is from page 9 from our Economic Indicators of July. We have continued to have an increased civilian labor force on this chart since 1955 even during recessions. Civilian labor force constitutes those employed, plus unemployed. This has been growing now at a rate of around a million a year. This is where the question comes tG you samplers. We know that our unemployment statistics are based on sampling and on questioning people. The other is a pretty real figure, I guess, the employment figure. What is there about the fact that the employ- ment continued to increase right on up through 1961, but then looking at the monthly indicators, employment or rather civilian labor force decreased from June 1962, 74 million and June of 1961, 74,286,000. Is this an economic phenomenon? And if so, it is a very serious one. PAGENO="0109" POLICIES FOR FULL EMPLOYMENT 99 Or could it be that in the sampling of who are unemployed there is a different standard being set in the questions asked of a person: "Are you looking for work ?" Would anyone comment on this? To me this is a very, very serious situation. Mr. GREENWALD. There is one part of this I know something about. There has been a change in the coverage in April of this year, due to the 1960 Census of Population. The figures for the overlap period are roughly 200,000 different. So if you were to assume that you could now make June 1962 comparable with June 1961, I would as- sume that it would be 200,000 higher and thus roughly the same and not down. I am only pointing this out. Representative CURTIS. I appreciate that. I think we need some comment on this. I would issue here a challenge to the administration to tell us whether there is a new economic phenomenon hidden in this or has somebody changed the rules of the game in the Bureau of Labor Statistics in the method of sampling as to who are the unem- ployed? Because either the unemployed should be a million more than they are, or there is something happening to us in not increasing our civilian labor force. Mr. GREENWALD. If you also look at the employment figures rather than the unemployment figures, these have been going up. Representative CURTIS. They have been going up. But in trying to compute whether there is a recession, or about to be, or anything like that, we relate it to unemployment and all of these people are talking about this gap beween potential based upon the unemployed and unused capacity. If somebody is trying to "rig" these figures- and I think that term deserves to be used until we get an explanation of this thing-then it would show more of a gap and it certainly would should a lesser use situation. The one area of great concern to me has always been employment and unemployment-I know the Senator from Illinois knows this-under the last administration as well as this. I kept my finger on this employment and unemployment thing because I think there is one area where we need to do something. I would say, incidentally, it is in the field of training and retraining and dealing with obsolete skills more than anything else where atten- tion should be paid. Mr. GREENWALD. As you know, I have talked about unemployment at these hearings before. I worry about what this unemployment sta- tistic means. I personally do not believe there is any "rigging" in these figures. I also worked for the Bureau of Labor Statistics many years. Representative CURTIS. I defended, I might say, this group in the Bureau of Labor Statistics against the charges in the article in Read- er's Digest. But when I see no one coming forward pointing out what has happened to a traditional trend of increasing the civilian labor force by around a million a year, and the one area that has not been moving up is in the unemployment area, I think it requires some examination. I said as far as rigging figures is concerned, it needs to be explained what phenomenon has changed this thing other than rigging the figures. I hope they are not rigged. Mr. KATONA. May I say as an independent observer that the entire statistical profession is convinced that Census Bureau and BLS do an outstanding sampling and statistical job in their unemployment PAGENO="0110" 100 POLICIES FOR FUlL EMPLOYMENT studies. There are questions of definition which have widely been dis- cussed in the literature about who are really unemployed, and so on. But as to sampling and interviewing they do an outstanding job. Senator PROXMIRE. I would like to suggest the Congressman has been a very good friend of the Bureau of Statistics and has always sup- ported them and has been a champion of their integrity and honesty. I do think that this is so serious and such an excellent point is made that before this afternoon we ought to get an explanation from the Department of any changes that are involved in these figures and a justification to the extent they can make one of why we have this stark and dramatic change. I think the Congressman has made a very legitimate and proper point. Representative CURTIS. I want to thank the Senator. I am trying to be helpful. I, too, would presume we could rely on the figures. If this is so, we have seen a dramatic change in the development of the civilian labor force. Senator DOUGLAS. If the Congressman would yield, I also have al- ways had great respect for the BLS and the Census. They are not perfect, of course, but I think they have been kept free from political influence. I think this failure of the civilian labor force to grow is one of the most disconcerting developments. Yes, sir; we had some pos- sible explanations of it which happen to agree with my own ideas and which I, therefore thought, were very fine; namely, that it translates into particularly young people and particularly unskilled people arid minority groups who cannot get a job because industry or the economic system does not grow. And who because they do not have a job sort of drift around in a hopeless fashion. I live in a great city, as you do. I see these groups in my own city. My daughter has an apartment just off Central Park in New York on the West Side, just four blocks from her a few days ago they had an outright war between the Puerto Ricans and the Negroes. These young people are largely those who dropped out of school, can't get a job. They are neither. at school or at work. They are milling around the streets. They are young and unskilled and members of minority groups. When all three of these disadvantages hit them at once it creates a terrible situation. I think it is much worse this year than last year. I felt for over a year that this was the greatest internal problem in the United States. Mr. GREENWALD. What you are really saying is that they are not in the labor force.. Senator DOUGLAS. Yes. This is disconcerting. There may be some change in the method of measurement of BLS. And I agree with both my colleagues that it should be explored. I want to suggest it is not merely changes in measurement. Mr. GREENWALD. If they were in the labor force then they would probably be all unemployed on this basis. Senator PROXMIRE. Yes. We would have as heavy unemployment now as a year ago which was 7 percent. Mr. GREENWALD. This is a function of the idea that we are a highly technological economy. We have gone so far ahead technically that we are not going to find jobs for these people unless they are well trained in the future. Senator DOUGLAS. Unless there is enough demand. PAGENO="0111" POLICIES FOR FULL EMPLOYMENT 101 Mr. GREENWALD. Not even then, because unskilled workers cannot take a job in technical fields. Senator PROXMIRE. I want to apologize for keeping you longer but I would like to take a few more minutes. Mr. Katona, in your response, and Miss Dingie suggested this, you said that a lot of these people who have incomes of less than $3,000 are not taxpayers, property taxpayers, they are renters. I would like to suggest on the business of the statistics I have just gotten over the phone most of these people are not Federal income-tax payers at all. As a matter of fact, of the returns filed for people with incomes of less than $3,000, there are some 21-million-plus, and more than half of those returns are not taxable. These are for individuals. If we recognize the fact that there are families involved here, that is more than one individual in each unit with total income of less than $3,000 I would say that probably two out of three of the people in this lowest category pay no Federal income taxes. These are the people who bring out your total answer that there appears to be a fair balance between tax cut as a good idea and a bad idea. If we recognize this factor, and most people are subjective enough in talking about their own taxes, you would have a very substantial advantage on the side of those people who in 1961 felt a tax cut was a bad idea. Mr. KATONA. I am very grateful to you, Senator. I plead guilty. I have not thought of breaking down our data by taxpayers and non- taxpayers. I learned better and I shall do so in future surveys. I again would like to emphasize that this balance, whatever those data on the top part show, whether there are 40 or 50 percent who say good or bad idea, is not too important. We asked the question in 1961 when it was more an academic question mainly to get some baselines for the 1962 or 1963 inquiries and to ask the question about reasons. In other words, to find out something, why do people think as they do, or how do they think about deficits and about taxes, and so on. I have submitted this table primarily for the sake of the second part of the table and to counteract notions which appeared in the press that 72 percent of all people, including the low-income people, are against the tax cut, which appeared in newspapers last week from a public poll. Senator PRoxMnu~. Their question was not as good as yours. Their question was if this would increase the debt or the deficit. It was sug- gestive and it was loaded. I say this although the result supported my own bias. Mr. KATONA. I would not put great stress on these figures and your point is well taken. Miss DINGLE. I would say that this makes very clear, as I have been convinced in the past, that it is desirable to put out data insofar as possible with relevant breakdowns of which the income breakdown is probably the most important. I think the age breakdown is also important. I think it makes it possible for people like you and other intelligent users to be able to pick out the groups which may be most important for a given question. Senator PROxMIRE. I think Dr. Katona's breakdown was really the crucial thing. Briefly, I would like to suggest that there is a price the European countries are paying, too, in addition to all the factors which you emphasized of their enormous unfilled needs and their Americanization attitudes because of the movies and other things from PAGENO="0112" 102 POLICIES FOR FULL EMPLOYMENT this country developing Americanized demand. They are adopting our standard of desire. This is an explanation, a big explanation or part of the explanation, for the growth of their economy. They have suffered a much greater degree of inflation in those countries than in this country without exception. In some cases it is worse than others. Isn't that correct? Mr. KATONA. Very true. Senator PROxMIRE. Mr. Greenwald, would you agree that higher interest rates now would tend to block some of this rosy picture that you painted in construction and municipal bonds? I should say school construction and hospital construction as well as home and business construction? Mr. GREENWALD. If you mean we are going to have additional changes- Senator PROXMIRE. Yes. If the Federal Reserve Board adopts the policy of continued increased interest rates. Mr. GREENWALD. Yes, sir. I did point out that housing is practi- cally at an alltime peak. Even if you lowered the interest rates I don't believe it would help too much. Senator PROXMIRE. What do these alitime peaks mean? In terms of family formation we ought to be at an alltime peak every year be- cause we have more people involved. Mr. GREENWALD. I am not arguing this. I would say in the area of construction you are operating pretty close to capacity relative to some other industries. Senator PROXMIRE. We had such a long construction recession. We have not yet achieved in a single year as large a number of housing starts as we did in 1950. Mr. GREENWALD. This is another one of those statistical series for which we have a break in comparability. So we have only the 1959 figure of private housing starts which just fell short of 1.~ million units. Mr. KATONA. May I say one word about interest rates? According to our studies of consumer decisionmaking, what they take into account when they decide, there is no doubt that in housing, interest rate matters. In other words, a sizable drop in interest rates would stimulate many people to go ahead with house buying and build- ing plans. In consumer durables, automobiles, et cetera, it does not matter, as Senator Douglas knows best, because interest rates are so high that even a one or two percentage point drop is not significant. Senator DOUGLAS. In the case of automobile costs it does not matter because they do not know what they are. Mr. KATONA. It would not matter. Regarding business investment probably it would not matter because risk factors play a greater role. So the i~npact of reduction in interest rates is restricted to housing, I believe. Senator PROXMIRE. Which is tremendously important in terms of employment. The other point was that perhaps a new industry along the line that Congressman Reuss is pursuing, Fortune magazine said might have the kind of impact automobiles had in the 1900's, is the space industry. This year we will have a $2 billion increase in spend- ing for man-to-the-moon. They expect to be spending at the rate of $10 to $15 billion a year by 1970. Because so much of this is con- PAGENO="0113" POLICIES FOR FULL EMPLOYMENT 103 centrated in research and development the byproducts of possible industrial expansion could be perfectly enormous for our society. Mr. KATONA. No doubt that is a necessary observation. Senator PRoxMniE. Thank you very much, Mr. Chairman. Senator DOUGLAS. We will meet at 2 o'clock. (Whereupon, at 12:30 p.m. the committee was recessed, to be recon- vened at 2 p.m. the same day.) AFTER REOESS (The committee reconvened at 2 p.m., Hon. Wright Patman, chair- man of the committee, presiding.) Chairman PATMAN. The committee will be in order, please. This afternoon the committee continues hearings on the state of the economy and the question of what changes might be made in Federal policies to achieve maximum employment, production, and purchasing power. We are privileged this afternoon to have the Council of Economic Advisers. The program of the President is, of course, the outcome of a decision process in which advice, recommendations, and considerations of many kinds from many sources, inside and outside the economy, play a part. The professional economic advice of the Council is one element. It is not and should not be the sole considera- tion in the formulation of Presidential economic policy or of con- gressional policy. In congressional testimony and in other public statements the Council must protect its advisory relationship to the President. liVe assume that the committee does not expect the Council to indicate in what respect its advice has or has not been taken by the President nor to what extent particular proposals or omissions of proposals reflect the advice of the Council. Dr. Heller, this morning we had a witness from McGraw-Hill Pub- lishing Co., Dr. Greenwald, and he testified on one point that would interest you. He said that the survey that McGraw-Hill made in late June indicated that business planned to spend $37.9 million on new plant equipment this year, more than 10 percent over 1961. He also said that McGraw-Hill's checkup survey made in late June indi- cated, and I quote: Our checkup pointed up the fact that business in general had not cut back or canceled plans for investment in new facilities in 1962 as a result of the sharp drop in stock prices in May and June, or the so-called loss of business confidence. Among the companies indicating investment cutbacks only a few cited economic conditions as the reason. In most cases where investment plans were lower than they were earlier, the reasons given had absolutely nothing to do with a lack of business confidence or the drop in the stock market. Instead techno- logical delays and construction delays were the reasons given. Dr. Ackley, we want particularly to welcome you back to Wash- ington and to congratulate you and the Council on your membership. We regret Dr. Tobin's leaving, but we are delighted to have you and are looking forward to a long and fruitful association. After hearing from Dr. Heller and other members of the Council, if they have state- ments, members of the committee will ask questions under the 10- minute rule. Dr. Heller, I understand that you have a prepared statement, and I understand that you would like to proceed with your prepared state- ment. That will certainly be all right. You may proceed as you desire. 87869-82-----8 PAGENO="0114" 104 POLICIES FOR FULL EMPLOYMENT STATEMENT OP WALTER W. HELLER, CHAIRMAN, COUNCIL OP ECONOMIC ADVISERS; ACCOMPANIED BY GARDNER ACKLEY AND XERMIT GORDON, MEMBERS Dr. IJELLER. Thank you. Chairman PATMAN. You are recognized, Dr. Heller. Dr. IJELLER. Thank you. We are pleased to appear once again before the Joint Economic Committee. I might say that in accord- ance with your request we have prepared a statement on economic outlook and policy today. In developing this statement we have tried to be responsive to the questions put by the committee, and I think we have in effect also prepared, at least on a small scale, the kind of midyear economic review that some members of the committee have at times thought desirable for presentation to the committee. As the chairman has indicated, I should like to read this statement on the per- formance of the economy, the outlook and policy problems. We are examining the economic outlook today because the current expansion has not been as vigorous as all of us hoped and most of us expected. The expansion has slowed down in 1962 and we must be alert to the danger that the current recovery, like its immediate pre- decessor, will not carry us to full employment. Nevertheless, we should recognize the important economic gains that have been scored during the past year and a half. From the first quarter of 1961 to the second quarter of 1962- Gross national product rose from $501 to $552 billion, a rise of 10.2 percent (or a rise of 8.5 percent after price correction). Consumption in constant prices increased by more than $250 per family (annual rate). Corporate profits before taxes have increased by roughly one- fourth. Labor income increased by nearly 9 percent. Unemployment (seasonally adjusted) declined by about 1 million persons, with the rate falling from 6.8 to 5.5 percent (and to 5.3 per- cent in July). In order to conserve time we have put many of the statistics into a separate statement called "Summary of 1961-62 Economic Expan- sion and Policies." Chairman PATMAN. Without objection, you may insert them as a part of your remarks in the record. (The statement referred to follows:) EXECUTIVE OFFICE OF THE PRESIDENT, COUNCIL OF ECONOMIC ADVISERS, Washington, August 6, 1962. SUMMARY OF 1961-62 ECONOMIC EXPANSION AND POLICIES A. THE RECORD OF GAINS Since the beginning of the current expansion taken as of February or the first quarter of 1961: 1. The U.S. gross national product rose from an annual rate of $500.8 billion in the first quarter of 1961 to $552 billion (second quarter, 1962) or 10.2 percent in five quarters. In constant prices, the gain was 8.5 percent. 2. Personal income increased from an annual rate of $404.2 to $440.4 billion (June 1962)-a rise of 9 percent. PAGENO="0115" POLICIES FOR FULL EMPLOYMENT 105 3. Corporate profits before taxes increased by a fourth from $39.8 billion (an- nual rate) to $50.1 billion (first quarter 1962). The level for the first quarter of 1962 was slightly below that of the fourth quarter of 1961. 4. Industrial production expanded by more than 15 percent (June). 5. Labor income increased from $282 billion (annual rate) to $309 billion (June)-or almost 10 percent. 6. Payroll employment in nonagricultural establishments rose by 1.9 million jobs (June). 7. The number of persons unemployed declined by 23 percent (seasonally adjusted) from 5 to 3.8 million persons (July). The unemployment rate dropped from 6.9 to 5.3 percent of the civilian labor force. 8. Prices remained virtually stable. The industrial, as well as total, wholesale price index declined. The total index fell from 101 to 100.1 (June) on a base of 1957-59=100. Consumer prices rose by only 1.3 percent from 103.9 to 105.3 (June) -with most of the increase in the service sector. B. ELEMENTS IN THE RECOVERY 1. Consumption: (a) Personal consumption expenditures have risen $24 billion (annual rate in five quarters-$l0 billion in services, $8 billion in nondurable goods, and $6 billion in durable goods. (b) In constant (1961) prices, per capita consumption increased by nearly $75 (or more than $250 per family) as Americans advanced their living standards. (c) Durable goods purchases in the last two quarters were 5 percent above 1959 and 1960 levels, while disposable personal income was about 10 percent higher. (d) Auto sales have accounted for most of the gains in consumer durable purchases since the first quarter of 1961. Although June sales were som& what lower than the preceding 3 months, July sales rebounded on a season- ally adjusted basis. The total number of cars sold in the first 7 months of this year is 25 percent greater than in the same period of 1961. (e) The savings rate has stayed near 7 percent during the recovery. It is not high as compared to most postwar years, but it has not shown the decline that marked the first year of previous recoveries. (f) The expansion in consumption occurred at the same time that the consumer was strengthening his liquidity position. During 1961 holdings of liquid assets (cash, bank deposits, savings, loan shares, and government bonds) rose by over $20 billion and consumer debt by only $1½ billion. 2. Investment: (a) Business fixed investment (total of producers' durable equipment and nonresidential construction) rose by $5.4 billion or 12 percent in five quarters. (b) Investment has lagged behind corporate cash flow (consisting of after-tax profits and capital consumption allowances). Cash flow rose by $71/2 billion from an annual rate of $47 billion in the first quarter of 1961 to nearly $541/2 billion in the first quarter of 1962 (preliminary estimates indi- cate it was about the same in the second quarter). (c) Improved operating rates have stimulated investment, but excess capacity remains a drag on capital spending. Operating rates have risen about two-thirds of the way back to preferred operating rates, from the low levels that existed in early 1961. (d) Total manufacturing and trade inventories at the end of June 1962 were $4.4 billion, or 4.8 percent, above their level in February 1961. But sales increased faster-by 10.3 percent over the same period. The inven- tory-sales ratio declined from 1.58 to 1.47 in April and May, but rose to 1.50 in June. (e) Housing has increased sharply over last year. Residential construc- tion expenditures in July were $25.7 billion (annual rate) or 29 percent higher than in February 1961. Housing starts in June were 1.4 million units (annual rate) compared to 1.2 million units in February 1961. 3. Government: (a) Federal receipts (on a national income account basis) rose $13 billion (annual rate) from the first quarter of 1961 to the first quarter of 1962, re- flecting higher profits and incomes. Federal receipts are expected to show further rises in the second quarter. PAGENO="0116" 106 POLICIES FOR FULL EMPLOYMENT (b) Federal purchases of goods and services rose by $6.5 billion, of which $5.3 billion was for national defense. (The rise in five quarters was $7.1 billion of which $5.6 billion was for national defense). Other Federal expen- ditures rose by $2.8 billion. (c) The income-and-product deficit declined from an annual rate of $6.3 billion in the first quarter of 1961 to $2.4 billion in the first quarter of 1962. (d) State and local purchases increased $4.6 billion (annual rate) from the first quarter of 1961 to the second quarter of 1962. 4. Money and credit: (a) The money supply (excluding time deposits) rose by $4.1 billion or 2.9 percent from February 1961 to June 1962. Including time deposits, the increase was $20 billion or nearly 9.4 percent. (b) Bank loans increased $12.2 billion or 10.7 percent from February 1961 to June 1962. (c) Long-term interest rates have been unusually stable for a period of economic expansion. However, in the past month, the average yield on Government bonds has risen somewhat, reaching a level of 4.02 in July com- pared to 3.81 in February 1961. 5. International: (a) The overall balance-of-payments deficit, as measured by U.S. gold sales and increases in foreign dollar holdings, showed improvement in 1961 and further gains in the first half of 1902. The payments deficit was $1.9 billion (annual rate) during the first quarter compared to $2.5 billion for the entire year 1961 and $3.9 billion for 1960. Latest indications are that the deficit has decreased further and is now running at an annual rate of $1.0 to $1.5 billion. C. STRONG AND WEAK SPOTS IN TflE CURRENT OUTLOOK 1. The economy expanded vigorously during 1961; the pace of advance in 1962 has been considerably slower. There are a number of weak spots in the economic data for May and June. Only a few preliminary figures are available so far for July. (a) Personal income advanced only $2.1 billion from April to June com- pared to $6.4 billion from February to April. (b) Retail sales declined in both May and June. (Judging by depart- ment store sales, sales rose in July.) (c) Unemployment as a percentage of the labor force rose slightly in June over May levels and then declined to 5.3 percent in July; however, this is still considerably higher than at our full employment goal. (d) Inventory accumulation has tapered off markedly. Accumulation of manufacturing and trade inventories in the second quarter of 1962 was less than half the amount in the first quarter ($0.8 billion compared to $1.6 billion). Due to the drop in sales, overall inventory sales ratios rose in June. 2. The prices of common stock have fallen 18 percent from March 15 to August 3, reducing the estimated price-earnings ratio from 19.7 to 16.6 (based on estimated second quarter earnings). Stock prices on August 3 were 58.12 (Standard & Poor's price index) compared to 55.11 on the day before the 1960 elections. The realization that inflation has been brought under control is an important factor in the decline of the stock market. The decline in stock prices is a source of concern in economic policy because of its possible adverse effects on consumer and business expectations. Margin requirements were reduced from 70 to 50 percent July 9. 3. Private long-term interest rates are still generally below those at the trough of the economic cycle in February 1901 and borrowing ease continues. 4. The outlook for continued price stability is favorable. 5. Federal purchases are headed upward, though at a slower rate. State and local spending is expected to continue its upward trend. 6. The Commerce-SEC survey taken in April and May shows investment plans for 1962 at a level 8 percent above 1961. This result was the same as the February survey, and it points to continued moderate increases in plant and equipment outlays for the rest of this year. D. ADMINISVIAT10N'S PROGRAM FOR STRENGTHENING THE ECONOMY 1. An 8-percent tax credit, totaling $1~4 billion, on new investment ~n thA~Ilifl- ery and equipment has been proposed to the Congress. The administration's PAGENO="0117" POLICIES FOR FULL EMPLOYMENT 107 proposal would increase the rate of profit on a typical new 10-year asset to the same extent as a 20-point reduction in the corporate income tax. 2. A comprehensive tax reform bill, involving a net reduction in individual and corporate income taxes, will be outlined later this year for consideration by the next Congress in 1963. The President has recommended that the reduc- tion in the tax rate be made effective as of January 1, 1963. He has also said that, if economic conditions warrant, he will request a tax cut in 1962. 3. Standby authority for temporary income tax reduction has been requested of Congress. This tool could be used quickly and effectively to combat economic recessions. 4. Depreciation guidelines for business have been revised, reducing tax bills on 1962 profits by an estimated $1.5 billion and releasing these investable funds for business use. 5. Taxes have been removed on surface transportation effective November 16, 1962, and have been reduced by 50 percent on air transportation. 6. Extension of temporary unemployment compensation and improvement of our welfare programs have also been requested. 7. The Manpower Development and Training Act was enacted in March 1962. launching a $400 million program. In addition, a bill to aid in employment of our youth is pending before Congress. Money invested In training or retrain- ing of our unemployed can benefit society by a multiple of that investment, quite apart from the immeasurable return to the worker in regaining a sense of pur- pose and hope. 8. Area Redevelopment Administration was established in 1961 to aid areas of chronic unemployment. The act provides funds to aid commercial and in- dustrial development, technical assistance in community planning, and retraining of unemployed workers. To date 700 communities have participated and over 10,000 people ade in training programs. 9. A bill has passed the Senate authorizing $750 million immediately for ad- ditional Federal, State, and local public works in areas of heavy unemployment and $750 million of stand-by authority for the future. A bill now in the Rules Committee of the House provides $900 million immediately for additional public works but does not provide standby authority as requested by the administration. 10. Pending before Congress is a bill to provide $500 million in aid to urban areas for the development of mass transportation. 11. The President's trade expansion program (passed the House) will stimu- late the foreign market for American production and improve the competitive position of the United States in relation to the European Common Market. The bill allows the President to reduce tariffs 50 percent generally and to abolish them on certain goods. Government aid is to be provided for U.S. workers and industries affected by the change in tariff regulations. 12. A Consumers' Advisory Council has been established to advise the Govern- ment on issues of broad economic policy, governmental programs protecting consumer needs, and the flow of consumer research. 13. Many other measures such as aid to education now pending before Con- gress would provide additional stimulus to the economy. N0TE.-All figures are seasonally adjusted or based on seasonally adjusted data except prices and interest rates. Dr. }JELLER. If advances could be maintained at this pace, on the average, we would achieve full employment-full utilization of our resources consistent with our interim goal of 4 percent unemploy- ment-sometime late in 1963. But obviously we are still all concerned by evidence that the next 5 quarters are not likely to yield equally strong advances. Gross national product (in constant prices), after rising at a rate of 9 percent per year from the first to fourth quarter of 1961, has been rising at a rate of only about 31/4 percent per year in the first half of 1962. Personal income increases averaged $2.6 billion (annual rate) per month during the 10 months of recovery in 1961, but have been averaging only $1.6 billion since December. After rapid gains during 1961, corporate profits seem to have changed little in the past 2 quarters. On the other hand, the first half of 1962 has witnessed a more rapid improvement in employment and a PAGENO="0118" 108 POLICIES FOR FULL EMPLOYMENT more rapid decline in unemployment than we experienced last year. In early 1961 we were in the position of having to recover not from one but from two recessions-for the recession of 1960 came on top of the incomplete recovery from the recession of 1957-58. There can be no doubt that impressive gains in employment and output have been made in the past year and a half. But the economy has not yet regained the reasonably full utilization of its labor and capital which it last experienced in early 1957. It is in this context that we must reexamine the means for achieving the goals of the Employment Act of 1946: "maximum employment, production, and purchasing power." The postwar era taken as a whole has, to be sure, witnessed re- markable progress in the achievement of these goals. The worst rates of unemployment in the postwar era were about 71/2 percent of the labor force, much better than the best performance of the econ- omy in the 1931-40 decade, when the unemployment rate remained consistently above 14 percent, about twice as much as the highest post- war figure. But the record of the past 5 years-while a great improve- ment over the prewar era-has not matched that of the first postwar decade. From 1946 until mid-1957, full utilization of resources was the normal state of the American economy. Unemployment signifi- cantly exceeded 4 percent of the civilian labor force only about one- third of the time, principally during and immediately after the two brief recessions of 1948-49 and 1953-54. Since late 1957, unemploy- ment has fallen below 5 percent of the labor force only briefly. It reached a peak of 7 percent in the recession of 1960-61, and has averaged 6 percent for the 5-year period. Nor has the plant and equipment capacity of American industry been fully utilized. Ac- cording to one widely used measure-and I might say we are aware of the limitations of measures of capacity, particularly after reading the excellent report of this committee on the subject-manufacturing operating rates in the past 5 years have averaged 6 percentage points lower in relation to capacity than in the previous decade and have consistently remained well below the peak efficiency rates preferred by businessmen. After dropping to 77 percent at the beginning of 1961, the average operating rate rose to an estimated 87 percent in the second quarter of 1962, still several points short of preferred levels. Our capacity to produce has continued to expand since mid-1955 by roughly 3~/2 percent per year, reflecting (1) a growing labor force, and (2) higher productivity stemming from improved and expanded equipment and plant, greater skill of workers and management, and technological innovations. But our actual production has grown less rapidly; at an annual rate of 2.7 percent from mid-1955 to date. Actual gross national product has not kept pace with the economy's potential: beginning with 1958, unused potential output has amounted annually to an estimated $25 to $50 billion (1961 prices). The gap between potential and actual output has narrowed from over $50 bil- lion early in 1961 to roughly $30 billion today. But idle resources have continued to be the Nation's outstanding extravagance and inefficiency. It is important to improve this record of recent years. Our leader- ship of the free world, the opportunities for our youth, the security of our aged, the mobility of our surplus farm population, the pros- PAGENO="0119" POLICIES FOR FULL EMPLOYMENT 109 pects for meeting growing public needs, the rejuvenation of our chronically depressed regions, the capacity of our economy to adapt smoothly to the expansion of our international trade, all of these are linked to the goal of maximum employment. As President Kennedy said in his Economic iReport for 1962: A full employment economy provides opportunities for useful and satisfying work. It rewards enterprise with profit. It generates saving for the future and transforms it into productive investment. It opens doors for the unskilled and underprivileged and closes them against want and frustration. The con- quest of unemployment is not the sole end of economic policy, but it is surely an indispensable beginning. DEVELOPMENTS IN THE FIRST HALF OF 1962 At the end of 1961, the rise of GNP in three quarters of recovery had exceeded the upswing from the low point of GNP in the compa- rable periods of the preceding two recoveries. While certain factors were weaker than in 1954-55 and 1958-59, others were stronger, lead- ing to an expectation that the economy would continue upward at a relatively strong pace in 1962. Nevertheless, on the basis of past experience, the growth during 1962 was projected to be more modest than in the recovery quarters of 1961. What I am saying is that the $570 billion estimate of GNP that was used as the underpinning to the budget projections actually represented a slower rate of recovery in 1962 than in 1961. The shift from inventory liquidation to restocking that follows a recession nor- mally yields large gains in the early stages of recovery. Some slow- down in the rate of advance must be expected as the expansion con- tinues. But the change of pace was sharper than anticipated-in the three quarters of recovery in 1961 GNP advanced at an annual rate of nearly $13 billion per quarter; its increases in 1962 were only $6.4 billion in the first quarter and $7.0 billion in the second. Apart from statistical adjustments resulting from the revision of 1961 date, actual GNP in the second quarter, at $552 billion, ran at least $10 billion below projections. This disappointing outcome is virtually all traceable to investment in plant and equipment and inventories. In relation to income, con- sumer buying has held up relatively well; housing is now close to its predicted flight path after an erratic dip in the first quarter; exports are slightly above expectations; and Government purchases have be- haved about as expected. Although business fixed investment began to rise more promptly in this expansion than in earlier recoveries, its performance since the turn of the year has been disappointing. As against an expected in- crease of roughly 14 percent in 1962 over 1961, it now appears that the gain for the year will be closer to 3 percent. That figure of 8 percent is roughly consonant with the 10-percent figure you mentioned, Mr. Chairman. I am sorry that we do not have a revised estimate at the present time. This weakness of investment has sometimes been attributed to a "profits squeeze." In fact, corporate profits have increased, as al- ready noted, by one-fourth over the period since the first quarter of 1961, although in the aggregate further profit gains do not appear to PAGENO="0120" 110 POLICIES FOR FULL EMPLOYMENT have occurred so far in 1962. In the logic of our private enterprise system an adequate level of profits is essential to economic progress. Profits should be higher than they are today, and they will be higher when our productive capacity is more fully utilized. It can be esti- mated that if the economy were operating at a 4-percent unemploy- ment level, corporate profits after taxes would be a healthy $30 bil- lion-compared to a $25.6 billion annual rate in the first quarter of 1962. Corporate profits after taxes reached a peak of $22.8 billion in the inflationary year of 1950, a peak which they did not surpass until 1955, and which even today they surpass by only a modest margin despite the considerable growth in corporate sales and in the total investment in corporate assets since 1950. Still, we cannot look at corporate profits in isolation. Since 1950, corporate depreciation and other capital consumption allowances have risen from $9.4 billion in 1950 to $28.7 billion (annual rate) in the first quarter of 1962. Together, corporate profits after taxes plus corporate capital consumption allowances-often called "corporate cash flow"-have risen from $32.2 billion in 1950 to $54.3 billion in the first quarter of 1962. A comparison of business fixed investment with corporate cash flow can only be approximate since noncorporate investment is included in the investment figures, but it gives some indication of business atti- tudes toward investment in relation to the flow of depreciation and after-tax profits. Most of the time from 1951 to 1957, business fixed investment exceeded corporate cash flow; since mid-1958, the reverse has been true continuously, and the distance has widened in the current expansion; cash flow has grown about $7 billion (an- nual rate) above the $47 billion level of the first quarter of 1961; business fixed investment has meanwhile advanced $5.4 billion from its $44.7 billion rate in the trough quarter. Although investment for modernization and cost-cutting is rising moderately-and surveys sug- gest that about 70 percent of plant and equipment investment is for these purposes-the gains in profits during 1961 did not generate en- thusiasm for a major expansion of plant and equipment. The overall willingness of business firms to invest has not kept pace with their overall ability to invest out of internal funds. Inventory investment in the second quarter is estimated at the relatively low annual rate of $3.4 billion. The working down of steel inventories was a factor in recent months, but even apart from steel, the general pattern of inventories reflects a cautious policy by busi- ness firms. Inventories were growing less rapidly than sales through most of 1961 and into the spring of 1962. Inventory-sales ratios which. were declining from levels already relatively low by past standards would typically have heralded a speedup in inventory accumulation, but this has not occurred in 1962. Business conservatism toward capital goods and inventories ap- pears to be grounded in the experience of the past 5 years. The American economy since 1957 has had continuously slack labor mar- kets, buyers' markets for materials, and persistent excess capacity. It has proved difficult for businessmen to work up much enthusiasm for~ buying or building ahead of minimal needs with that history still fresh in their memories. The Nation's businessmen have had their PAGENO="0121" POLICIES FOR FULL EMPLOYMENT 111 share of disappointments in the past 5 years. They saw markets contract m 1957 just as they were adding new plant capacity and new labor to meet expected growth in demand. Much of the expanded capacity had to remain on the sidelines when the 1958-60 expansion fell short of full use of the Nation's great productive strength. To be caught lono~ on capital and labor and short on markets tends to breed caution the next time around. We do not have the stimulus of large backlogs of demand that marked the early postwar years. We do not have-and do not want- the stimulus to buying that inflationary expectations can provide. Against this background, it is difficult for private demand to carry the economy to full employment under existing tax rates. During a period of recovery, an appreciable share of the growth in business and personal incomes is drained off into Federal taxes. I might say that this was a concern which we, as you may recall, ex- pressed in our initial testimony before this committee in March of 1961. The fact is that the automatic stabilizers do cushion a down- ward movement, but at the same time exert a very considerable drag on a recovery. This tends to hamper the growth in both consumer and producer demand upon which continued expansion depends. During the five quarters of the current expansion, Federal taxes (net of transfers) have taken $12 billion of the $51 billion increase in total incomes, but Federal purchases have taken only $7 billion of the $51 billion increase in total output. The difference between the $12 bil- lion of added taxes (net of transfers) and the $7 billion of added purchases is a measure of the drag on the recovery exercised by the Federal budget. If tax receipts had grown less rapidly, or expendi- tures more rapidly, total demand would have grown faster, and the expansion of output and income would have been greater. The auto- matic stabilizing effects to the Federal budget., which help to cushion a recession, also tend to retard a recovery. If the economy were at full employment today, we estimate that total income and total output would be about $30 billion higher than at present. But Federal tax receipts would be about $9 billion above present levels, and private saving would be $5 or $6 billion higher than today. Thus, taxes and savings would be drawing $14 or $15 billion from the economy, which would have to be offset by additional in- vestment and Government expenditures for full employment to be maintained. This means that, at present levels of Government ex- penditure, our present tax system bars the way to full employment unless we are able to raise private investment about $14 or $15 billion above present levels. I will come back to this point later. PROSPECTS FOR THE MONTHS AHEAD The most recent evidence on economic activity, though mixed, offers cause for concern. After a slow start in January-February, and then a brisk pickup in March and April, the 1962 economic expansion slackened in May and June. Those measures of overall activity which primarily reflect the results of the execution of past decisions to hire, buy, and produce-for example, the overall measures of income, em- ployment, production, and construction-kept setting new records almost every month. PAGENO="0122" 112 POLICIES FOR FULL EMPLOYMENT However, as previously indicated, the pace of advance was not satis- factory. And any appraisal of the outlook must also recognize the recent softness of many indicators which record current decisions and which point toward future economic decisions. For example, the movements of orders and contracts are likely to foreshadow changes in production and shipments. New orders for durable goods have been moving downward since January and in June were 7 percent below their January peak. Machinery and equipment orders are lower than in January, although they recovered some lost ground in May and held almost even in June. Housing starts and building permits have shown considerable strength in recent months, even though the latest figures are considerably below the high points of the present expansion. Com- mercial and industrial construction contracts are another area of recent strength on which the latest returns point downward. The factory workweek frequently indicates the needs of manufacturing firms for additional labor. It has declined during both May and June. The stock market is one of the many factors which help mold and reflect economic expectations and attitudes toward spending, but the full im- plications of the slide in the market from March to June will not be clear for many months. As we look ahead, we see mixed evidence on the various components of expenditure. CONSUMPTION Consumers have raised their spending in pace with gains in their incomes during the current expansion, and there is little evidence to suggest a marked departure from that pattern in the months ahead. A rather sharp and widespread decline in retail sales during June was worrisome, but preliminary data for July indicate a strengthen- ing in department store sales, new auto sales, and total retail sales, after allowing for seasonal changes. Past experience and current surveys indicate only a limited possibility that consumers will spark a renewed advance in the economy. (I believe you reviewed some of those current surveys this morning.) Such a spark would probably have to arise from the volatile area of durable goods purchases. In the current expansion, autos have supplied most of the strength in that sector, and it would be surprising if demand for 1963 autos were to top the brisk activity in 1962 models. HOUSING With the aid of rising incomes, readily available mortgage credit, and lower interest rates, homebuildin~ has done very well. The sharp rise in starts this spring carried housing activity to high levels. But, following a sharp decline in starts for June, total housing outlays fell in July. Permits come first in the chronological sequence of per- mit-start-construction activity. The recent data on permits point nei- ther to a continued slide in starts below the June level nor to a re- surgence to the high levels of April and May. PLANT AND EQUIPMENT Surveys of business intentions point to continued modest increases in fixed investment during the remainder of 1962. The recent Mc- PAGENO="0123" POLICIES FOR FULL EMPLOYMENT 113 Graw-Hill survey found no evidence of cutbacks in late ,June after the stock market decline. Recent softness in orders for equipment raises some doubts about the outlook for plant and equipment invest- ment but the evidence is not conclusive. At the same time, the recent- ly announced reform of depreciation guidelines and the pending tax credit for investment serve as sources of future buoyancy in this sec- tor. INVENTORIES In the postwar period, every recession has been dominated by in- ventory cutbacks. But today, given the conservative inventory-sales ratios already prevailing, it would be surprising if large-scale inven- tory liquidation were initiated. Reduction in stocks of steel has been an important factor holding down inventory investment in recent months. With that adjustment apparently nearing completion, in- ventory investment might revive this fall or winter. On the other hand, new orders and unfilled orders are important determinants of inventory policy, and strong incentives to build stocks probably would arise only in response to a reversal in recent trends in such orders. GOVERNMENT Purchase of goods and services by the Federal Government are expected to increase at a moderate rate in the next few quarters, giv- ing some support to the private economy. The upward trend of State and local outlays will surely continue. These prospects for various components are difficult to add up. They do not sum up to a crisis in the economy, nor do they offer any assurance of spontaneous resumption of brisk advances in the private economy. A continued period of modest upward movements or leveling off is one reasonable possibility. We experienced this in 1956-57, with gains in output just large enough to prevent a significant rise in unemployment. But we cannot rule out the alternative pos- sibility that the recent slowdown in the expansion represents advance warning of an economic decline. A more explicit verdict would not do justice to the perplexing and inconclusive crosscurrents in the evi- dence before us-nor to the obvious limitations of the science of economic forecasting. But even in the face of much greater uncertainty than usual about the pace of further advance and the possibility and timing of an economic downturn, this much is clear: The U.S. economy is still oper- ating considerably short of its potential and action on the important economic measures recommended by the President is needed to strengthen its performance. POLICY ACTIONS Pending proposals: The slowdown in the rate of expansion in 1962, combined with the current uncertainties in the economic outlook, underscore again the importance of action on the President's recom- mendations in the Economic Report last January for- a defense-in-depth against future recessions * * * a three-part program for sustained prosperity which will (1) provide standby power, subject to congres- sional veto, for temporary income tax reductions, (2) set up a standby program PAGENO="0124" 114 POLICIES FOR FULL EMPLOYMENT of public capital improvements, and (3) strengthen the unemployment Insurance system. These three measures, or reasonable alternatives-providing up to $10 billion of temporary income tax reduction (at annual rates), $2 billion of public works acceleration, and stronger unemployment com- pensation-would, as the President said in January- enable Federal fiscal policy to respond firmly, flexibly, and swiftly to oncoming recessions. By enacting the foregoing proposals or the related measures that now lie before it, the Congress could provide a significant economic stimulus at the present time. As the President noted in his statement on June 7: * * * I have asked the Congress to provide standby tax reduction authority to make certain, as recommended by the eminent Commission on Money and Credit, that this tool could be used instantly and effectively should a new reces- sion threaten to engulf us. The House Ways and Means Committee has been busy with other important measures, but there is surely more cause now than ever before for making such authority available. The public works acceleration legislation which has passed the Senate and is pending in the House will provide for additional Fed- eral, State, and local public works in areas of heavy unemployment. (The Senate bill also includes provision for additional standby au- thority permitting the extension of the program should conditions warrant.) The temporary extension of the period of unemployment compen- sation benefits earlier authorized by the Congress has now lapsed, and its renewal has been requested. Such a program alleviates in some measure the hardship of those most directly and immediately affected by continued excessive unemployment. Moreover, the result- ing addition to consumer purchasing power strengthens consumer buying. Other measures now pending before the Congress can also provide immediate as well as sustained support for further economic expansion: The investment tax credit, part of the 1962 revenue bill, promises further significant incentive to business investment, in addition to the encouragement already provided by the new depreciation guide- lines. The proposed Trade Expansion Act of 1962 will contribute to the administration's program to expand our exports-a potential source of increased demand for the output of our farms and factories, im- portant for this reason as well as for its contribution to improving our balance-of-payments situation. The proposed Youth Employment Opportunities Act, aimed es- pecially at the severe unemployment and underemployment of our young people out of school, would make inroads on a particularly unfortunate byproduct of slack in our economy. TAX REDUCTION Beyond these important and timely measures now pending before the Congress, a program to improve the rate of utilization of our resources and the rate of growth of our. economy must include th~ PAGENO="0125" POLICIES FOR FULL EMPLOYMENT 115 even more fundamental measures of tax reduction and tax reform. On June 7, President Kennedy stated: * * * our tax structure, as presently weighted, exerts too heavy a drain on a prospering economy * * *, A comprehensive tax reform bill * * * will be offered for action by the next Congress, making effective as of January 1 of next year an across-the-board reduction in personal and corporate income tax rates which will not be wholly offset by other reforms. In other words, it is a net tax reduction. The President has also indicated the possibility of asking for earlier action on tax reduction if economic developments should require it. Apart from the announced intention to recommend both individual and corporate income tax reduction effective January 1, 1963, unless adverse economic developments require earlier action, no decision has been made on the size, composition, and timing of a recommended tax reduction. But the basic case for easing the net tax drain on the economy, as well as the broad principles which should guide tax re- duction, are reasonably clear in the light of our unsatisfactory eco- nomic experience of the past 5 years. A reduction in net tax liabilities of both consumers and business spurs the economy's advance toward full resource utilization in three important ways: First, it increases the disposable income of consumers. The statis- tical record indicates that consumers consistently spend from 92 to 94 percent of their total disposable income. And past experience also confirms that increases in such incomes are very largely and very quickly translated into higher consumer spending. As the private income released by tax reduction is spent, markets strengthen, produc- tion rises, new jobs are created, and incomes and profits rise accord- ingly. This generates added cycles of private spending and leads to further increases in output and employment. This process alone- the so-called "multiplier effect"-translates the original personal tax reduction into an increase in gross national product considerably larger than the reduction itself. Second, by bolstering sales and pushing production closer to ca- pacity, tax reduction stimulates investment in inventories and in plant and equipment, the so-called accelerator effect. This further expands gross national product, raises profits, and reduces the deterrent effect of excess capacity that since 1957 has plagued the economy and curbed expansionary investment. Third, by reducing the G-overninent's share of business earnings, tax reduction improves profit margins and increases the supply of internal funds available for investment. This strengthens both the incentives and the financial ability of businessmen to undertake the risks involved in new investment. Decisions on size, composition, and timing of tax cuts will need to give appropriate weight to the following economic considerations: 1. The longer-term need for reducing the excess of Federal reve- nues over Federal expenditures that would be realized at full employ- ment, a need that depends on: (a) The current size of the full employment surplus, estimated at $7 to $8 billion on a national-income-accounts basis; (b) Its prospective size in light of projected growth in Federal expenditures and Federal revenues as the economy expands; PAGENO="0126" 116 POLICIES FOR FULL EMPLOYMENT (c) The amount of surplus at full employment that is needed to curb inflationary pressures while maintaining a high level of invest- ment. 2. Any short-term need that may exist for overcoming temporary deficiencies in consumer and investment demand. 3. The necessity of combining individual and corporate income tax reduction in the manner best suited to stimulating both consumption and investment, to support both markets and incentives. 4. The appropriate relationship to the projected reform of the tax structure, a reform designed to improve equity and remove the arti- ficial tax barriers or concessions that divert resources from their most efficient uses and thus impair our rate of economic growth. 5. The invigorating effect of tax reduction on the economy and the resulting "feedback" of revenues to the Federal Treasury which limits the net budgetary cost of the reduction and, over time, may even wipe out its initial addition to a budget deficit. 6. The monetary policy being pursued-for example, if monetary policy becomes more restrictive for balance-of-payments reasons, a larger tax reduction would be needed to yield a given economic stimulus. MONETARY POLICY As the last point indicates, fiscal policy and monetary policy are tightly interwoven, indeed are in part substitutes for one another. A given stimulus to the economy can be achieved by a relatively easier fiscal policy coupled with a relatively tighter monetary policy, or vice versa, but the effects on the balance of payments and on the invest- ment-consumption balance in the economy may be rather different in the two cases. During this economic recovery, the task of monetary policy has been especially difficult. There has been a compelling need for gen- eral monetary ease, as part of expansionary economic policy for full~ employment and adequate utilization of our resources. It has been especially vital to maintain reasonably low long-term interest rates and a plentiful supply of investment funds in order to stimulate private investment and quicken the tempo of growth in potential out- put. Yet, concurrent with these objectives, it has been necessary to dis- courage ]arge flows of capital out of this country that could complicate the task of restoring a healthy balance of payments and confidence in the dollar. The problem of capital outflow is tied primarily to our level of short-term interest rates relative to those of other countries, and it has therefore been necessary to prevent short-term rates from falling too low. At the same time, the monetary and debt authorities have tried to shield long-term rates, so critical to economic expansion, from the restrictive impact at the short end of the maturity spectrum. Since February 20, 1961, the Federal Reserve has conducted its open-market operations in all maturity sectors of the U.S. Govern- ment securities market. On balance, the Federal Reserve has actually sold short-term U.S. Government securities in the open market since that date, but it has bought longer term securities, primarily 1 to 5 years, in amounts much larger than the sale of short-term securities. Most of the purchases o~ long-ferm ~@euritie~ toQik place in 1961, PAGENO="0127" POLICIES FOR FULL EMPLOYMENT 117 Since then, such purchases have been more limited. The Treasury Department has also adapted debt management policies in part to these same objectives, primarily through concentrating new cash offerings of securities in the short-term area, but also by buying long- term securities for the Treasury investment accounts to the extent that such purchases were consistent with the objectives of these funds. The action that the Federal Reserve took, effective January 1 this year, in raising the maximum interest rate payable on commercial bank time deposits to as high as 4 percent, has increased the total flow of funds through financial institutions. This has put pressure upon these institutions to find investment outlets and has helped to reduce yields on both mortgages and muncipal bonds. Actually at this point of time, 17 months after the beginning of economic recovery, long- term private interest rates are generally below their levels at the cyclical trough in February 1961. This does not say they are low enough. What it says is that as far as the statistical record is concerned, they are below the trough levels in February 1961. They are also below the levels at the corresponding stage of the 1958-59 recovery, despite the postwar peak in interest rates that intervened. The reduction in long-term rates has had to overcome two psychological barriers, rather stubborn ones-first, some persistence of inflationary psychology in the financial community despite the lack of tangible inflation; and, second, vivid memories of the experience of 1958-59, when economic recovery was accompanied by sharp increases in long-term rates (as I recall, the sharpest in a hundred years in comparable phases of the business cycle). The total of demand and time deposits and currency has been in- creasing since February 1961, by more than 7 percent per year, and the availability of bank reserves has been generally favorable to the expansion of bank credit. Banks have been going more heavily into municipal bonds and mortgages. Very little of the expansion of bank loans and investments over the past year has been in U.S. Gov- ernment securities. In relation to economic activity, liquidity in the economy is not much changed from its postwar low. A special word is in order on the relation of monetary policy to the balance-of-payments situation. We have, from the beginning, taken a number of determined and effective measures to improve our balance of payments and maintain confidence in the dollar. In deal- ing with the balance of payments, however, it would be self-defeating to adopt policies that would undermine the vigor of the economy; for example, through restrictive monetary-fiscal policies. Confidence in the dollar is dependent upon a strong, growing American economy. Further, a revival of vigorous growth here will make the United States a more attractive outlet for long-term investment funds, both domestic and foreign. As a result, monetary and debt-management policy must continue to aim at providing ample credit and liquidity to support needed recovery and growth, consistent with the require- ments of balance-of-payments policy. Finally, as monetary and fiscal policies are brought into coordinated focus, these points stand out: 1. At a time when the Federal budget was becoming progressively less expansionary in its net impact on the economy during the 1961-62 PAGENO="0128" 118 POLICIES FOR FULL EMPLOYMENT recovery, monetary policy remained easy, partly through conscious~ effort of the monetary authorities, partly because expansionary forces have not been as strong as expected, and partly because 1961-62 may mark the end of a rising trend-related to inflationary expectations- in interest rates. 2. Balance of payments and gold outflow considerations currently demand a more restrictive monetary policy than would be desirable from the standpoint of the domestic economy. To this extent, fiscal policy must be more expansionary than would otherwise be necessary in order to promote domestic economic expansion and narrow the ex- cessive gap between our economic performance and our economic po- tential. Indeed, closing this gap can play an important role in build- ing longrun confidence in the dollar. As the steps currently being taken to eliminate the balance-of-payments deficit and strengthen our international monetary position achieve their objective, the curbs on our freedom to use monetary policy to meet the needs of the do- mestic economy will be progressively reduced. 3. Any move toward sizable tax reductions must, of course, be ac- companied by a willingness to move toward higher interest rates if this should prove to be necessary (a) to discourage any adverse capital flows that might develop, or (b) to offset any inflationary pressures that might ensue if the rebound toward full employment should prove to be unexpectedly rapid. With a gap of approximately $30 billion between actual and potential output, the prospect of inflation from excess demand is surely remote. 4. If budget deficits are incurred, the method of financing them must be carefully adapted to the prevailing economic circumstances. A careful balance must be struck between bank and nonbank financing, a balance which will not thwart or nullify the expansionary effect of budget measures in an economy with excessive unemployment and ex- cess capacity, but will prudently shift Federal debts into nonbank hands as the economy comes close to or reaches full employment. Summing up, let me say that relative monetary ease has facilitiated economic expansion in the recovery of 1961-62; that even greater ease would have been possible in the absence of international payments pressures; that those pressures throw an additional burden on fiscal measures as part of a coordinated economic policy for full employ- ment and faster growth; and that care must be exercised not to over~ compensate for such international monetary pressures by premature OT excessive tightening of credit and interest rate. CONCLUSION We would be dangerously complacent if we focused only on such im- pressive advances in our economic well-being in recent years as: The rise of over $50 billion in gross national product since the first quarter of 1961, and the accompanying rise in employment, personal income, and 2rofits. The shrinkage of our balance-of-payments deficit from $3.9 billion in 1960 to $2.5 billion in 1961, and the prospect of further shrinkage to $1.5 billion or less this year. The 4 years of stability in our wholesale price level since 1958. PAGENO="0129" POLICIES FOR FULL EMPLOYMENT 119 The continued growth in our economic potential at rates exceeding prewar averages. But when we look ahead, instead of backward, it is the size of the job yet to be done that demands attention and commands action: the continued hardship, inequity, and waste of unemployment; the ex- cessive amounts of unused industrial capacity; the unsatisfactory pace of economic expansion in 1962; and the remaining gap in our balance of payments. My statement today has put its emphasis on this un- finished business of economic policy. The uncertainties of current economic developments and prospects underscore the urgency of that unfinished business. They also intensify the need for action oh those economic measures that the President has already put before Congre.ss, and the need for forethought on the tax adjustments which are needed to remove barriers to the expansion and full utilization of the great potential of the American economy. Chairman PATMAN. Thank you very much, Dr. HelTer. I assume you are speaking for the Council? Dr. HELLER. I am, Mr. Chairman. Chairman PATMAN. Dr. Heller, when you were before the com- mittee in January presenting the President's economic report for 1962, I believe you then projected a GNP for the year of $570 billion. You mentioned that in your statement, I know. Is that correct? Dr. HELLER. That is correct. Chairman PATMAN. What amount of investment in plant and equip- ment did you project for 1962 at that time, do you recall, Dr. Heller? Dr. HELLER. We projected a 14-percent increase in the investment in plant and equipment over 1961; that is, a total of about $39 billion for 1962. Chairman PATMAN. Do you recall your projection of Federal ex- penditures? Dr. HELLER. May I put those in terms of the rise that we expected from 1 year to the next? Chairman PATMAN. Yes, sir. Also construction expenditures and consumer durables. Rather than delaying the hearing, Dr. Heller, I will ask you if you have the question to put the answer in the record if you will, please. Dr. HELLER. Thank you, Mr. Chairman. (The figures referred to follow:) An increase of $8 billion from lOBi to 1962 was expected in Federal expendi- tures on an income-and-product basis with about $51/2 billion of the increase occurring in purchases of goods and services. Data in the first half of 1962 are consistent with those projections. It was anticipated that residential construction in 1962 would run $3 billion above the 1901 average-or $1 billion above the fourth quarter of 1961. Despite the weak first quarter results, the average for 1962 is likely to be within $1 billion of the projected level. No explicit projections of public construction or nonresidential building were made. A $5 billion rise in 1962 over 1961 was expected in consumer durable expendi- tures-slightly more than half in autos and the rest in other durables. The second quarter of 1962 showed a level of $31/2 billion above 1961, with nearly all of the gains coming from autos. Chairman PATMAN. What figure did you project for money supply on the average for the year 1962? 87869 O-~2--9 PAGENO="0130" 120 POLICIES FOR FULL EMPLOYMENT Dr. HELLER. I do not believe we made an explicit projection for the money supply. Chairman PATMAN. What is the money supply now for the latest date for which you have any data? Dr. HELLER. The total money supply is $145 billion, consisting of $30 billion of currency outside of banks, $115 of private demand deposits. Chairman PATMAN. Is the GNP figure. of $552 billion correct for the second quarter of 1962? Dr. HELLER. That is the preliminary estimate of the Department of Commerce; yes, sir. Chairman PATMAN. May I point out that between the fourth quar- ter of the last year and the second quarter of this year GNP increased by 2½ percent, but your money supply grew in the same period on a seasonally adjusted basis by only 0.9 percent. Is that correct the way you understand it? Dr. HELLER. From the trough of the recession until the middle of this year GNP rose to the second. quarter by about 81/2 percent on a price corrected basis and the money supply grew about 9 percent. Senator PRox~rIRE. I think Chairman Patman is talking about time deposits. Dr. HELLER. Thank you, Senator. I am including time deposits in this 9-percent figure. Chairman PATMAN. I might point out also in the second quarter of 1961 the money supply amounted to 27.8 percent of GNP. In the second quarter of this year it equals only 26.4 percent of GNP. This volume of money relative to the size of the economy requiring money is now the lowest since* 1929. In trying to find out why the predic- tions you gave us last January were wrong, have you considered whether or not your. projections were sabotaged by the monetary au- thorities? Dr. HELLER. We try to look at all of the factors in the situation. Chairman PATMAN. That is one of them, I believe you will admit. Dr. HELLER. I think it is fajr to say that the level of interest rates is one of the important factors influencing construction activity and plant and equipment investment. If the level of interest rates could have been lower and the money supply greater, the conditions for investment would have been more favorable. Chairman PATMAN. Dr. Heller, I might also point out from the fourth quarter of 1960, just before President Kennedy took office, to the second quarter of the present year the gross national product in- creased 9.6 percent. `Within the same period the money supply in- ci~eased at only about one-third of that rate or a total of 3.3 percent. This brings up a question. `When I first came to Congress, Dr; Heller, about 34 years ago, I was one of the group advocating the payment of t.he adjusted compensation certificates to three and a half million vet- erans of World War I, commonly known as' the bonus. We finally secured its passage under Mr. Hoover and overrode his veto to get half of it paid by loans with interest, but that was not sat.isfactory to us. Then we commenced a campaign to pay it off in cash, and we succeeded after passing it several times in the House and Senate, and almost over the President.'s veto in 1935, only lacking eight votes, but in 1936 we passed it over the President's veto, with provision for pay- PAGENO="0131" POLICIES FOR FULL EMPLOYMENT 121 ment to veterans of over $2 billion. We expected that to add a lot of purchasing power and help the country because it would go into every nook and corner of America, as you know. Each veteran had an average certificate of $1,015. And yet, when payment was made it did not seem to have much of an effect and we were puzzled about it. But I soon discovered that when the money was paid, the monetary authorities for the first time in history doubled the reserve require- ments of banks, which absolutely nullified the payment of that money and retarded the country. The reason I bring that up now is that it occurs to me that we have a comparable situation. We have a situation where we want to do something to increase purchasing power among our people and the monetary authorities are, in effect., threatening to veto it through monetary policy; and they can do it. I can certify to that because I was a witness to it in 1936. They did it then. And they have the power to do it now. Have you thought about that prospective trouble? Dr. HELLER. Mr. Chairman, as I tried to indicate in my statement, I think you are 100 percent correct in saying that the interrelation- ship of fiscal policy and monetary policy has to be kept in the fore- front of our policy thinking. It is perfectly true that it is possible to nullify expansionary monetary policy by restrictive fiscal policy or vice versa. It is a source of concern to us that in response to balance-of-pay- ments pressures monetary policy has not been as easy-particularly in the last few months-as would be required by the domestic economic situation alone. I think that we must be extremely vigilant to make sure that any tightening on the monetary front is really a necessary response to the balance of payments and the gold outflow situation. Chairman PATMAN. I think you will have to assess carefully what the monetary policy may do. You cannot guard against it because you do not have the power to guard against it. In effect, the Federal Reserve Board members have 14-year terms. I do not think President Kennedy has selected even one. Dr. HEu4ER. One. Chairman PATMAN. He has selected one. One out of six. Of course, the Open Market Committee is the most powerful group on earth. By law, it is composed of 12 members. Seven members of the Federal Reserve Board and five presidents of Federal Reserve banks. But in effect and in practice the 12 presidents of Federal Reserve banks come into this Open Market Committee, and they advise with them. Their views are sought and obtained at the meetings of the Open Mar- ket Committee and for all practical purposes they are full participants. So these 12 presidents of Federal Reserve banks are selected by repre- sentatives of the banks and the banks want higher and higher interest rates all the time. I feel that we are in a little danger trying to bring this country back to full employment with a situation like that, where the monetary authorities have the power to veto what you do. I hope Congress gives some consideration to this question in the interest of full recov- ery and employment. ~enatpr Bush? Senator BUSH. Mr. Chairman, `during the previous 8 years I heard a great deal about the tight-money policy of the previous adminis- PAGENO="0132" 122 POLICIES FOR FULL EMPLOYMENT tration. I always contended in discussing that it was not a tight- money policy, but rather a sound-money policy. I am rather sympa- thetic with the attitude of this administration in respect to monetary policy so far. You would not define it as a tight-money policy, would you, Dr. Heller? Dr. HELLER. I would not. But a sound-money policy sometimes is a tight-money policy and at other times is an easy-money policy. Senator BUSH. If you look at the statistics that are being piled up here in this hearing, it seems as though housing was going ahead apace this year, and that is influenced by the rates of money, I suppose, to some degree. But certainly the interest rates have not seemed to in- hibit the increase in housing construction which is going ahead at a very good rate. A million and a half starts this year, I believe. Also consumers' credit has been expanding considerably. That does not seem to have been inhibited by interest rates. Is that not so? Dr. HELLER. These things are relative in the sense that if interest rates were still lower I presume that housing starts would be still higher. But a rate of 1.4~or 1.5 million starts, which it looks like at the present time, is a very substantial advance over the trough of 1961, and indeed a very respectable showing in terms of the history of the 1950's. That does not say we would not want more. Senator BUSH. I would like to say that I congratulate the adminis- tration for its attitude on this question of monetary policy. I think it has been very satisfactory so far, and I hope. it would not be dis- lodged by any of the loud requests for lower interest rates artificially produced by the Government. Have we ever had a temporary tax cut of the type that is being discussed now for the purposes that are being discussed now? Dr. HELLER. No, we have not. Senator BUSH. I have not been able to recall that has ever been tried before. Dr. HELLER. No. Senator BUSH. So this would be an experiment, then? We are not able to forecast in the light of what may have happened before, but it would be a new adventure if we were to embark upon a temporary tax cut fOr the purpose of spurring the economy, especially in the face of expected deficits, is that true? Dr. HELLER. That is correct, Senator. There have been extensive discussions of this possibility in the whole postwar period, but it has never been undertaken, even though we seemed at one time in 1958 to be. close to it. But there was a certain Easter recess after which people in Congress seemed to back away from it. Senator BUSH. Thought better. Dr. HELLER. Anyway they reconsidered it. Senator BUSH. Dr. Heller, a few years ago I read a book by Pro- fessor Galbraith which is a very interesting book on the economy, "The Affluent Society." In that book he advocated a different ap- proach to the tax situation. He said he thought if we were going to go ahead and expand that we were going to have to very greatly broaden our base of taxation. He advocated an addition to the tax, that we should not be entirely dependent upon the income tax to the extent that we are, which is probably heavier than any other country today, I understand. PAGENO="0133" POLICIES FOR FULL EMPLOYMENT 123 He talked about some sort of a tax, I think he called it a production tax. It was a tax upon the production of goods, generally speaking. Is that correct? Do you recall? Dr. HELLER. Essentially the Galbraith position was to change some- what the balance between private and public goods and make public goods less expensive and private goods more expensive. But I be- lieve that he was directing this particular comment on consumption taxes primarily to the State and local level. He was suggesting that State and local governments should not be quite as bashful about using taxes that would be a direct burden on private consumption. Senator BUSH. You did not gather he was directing that toward the Federal Government tax system? Dr. HELLER. That was not my impression though I stand subject to correction. Senator BUSH. It was my impression, but I have not read that book for about 3 years, so I would not want to argue that point with you. Dr. HELLER. I have not read it for 19 months. Senator BUSH. You have not had much time in that period. Mr. Chairman, I have no further comments. Chairman PATMAN. Senator Douglas? Senator DOUGLAS. Dr. Heller, you know I have a very high opinion of you. Dr. HELLER. That is an ominous opening statement. Senator DOUGLAS. It is very sincere, I assure you. When you esti- mated last January when you appeared before us that the gross na- tional product would be $570 billion for calendar 1962, I asked you if you were not a little optimistic and you replied no, you thought this estimate was well taken. Then I asked you this question which ap- pears at the top of page 11 of the hearings: Suppose you do not reach these goals-one must always have plans ready in case the program of attack does not succeed. Dr. HELLER. That is right. Senator DOUGLAS. Do you have any plans that you want to reveal or do you think it is wise not to discuss them? Dr. HELLER. I do not want to suggest, Senator, that we have some hidden weapons or secret weapons that are in reserve for this purpose. Weapons are available that I think are familiar to this committee and to all of us. For ex- ample, monetary ease. If the recovery is not as vigorous throughout 1962 and 1963, as anticipated, one of the weapons would be monetary ease. Senator DOUGLAS. The first part of this question is this: Is it not apparent that we are going to fall very far short of $570 billion as GNP for calendar 1962? The average for the first half is a little less than 549. To reach 570 you would have to have an average of 590 for the second half. An average of 590, which would mean you would have to go well over 600 in the final quarter. Are not we going to fall very far short of 570 and should not we frankly admit that now? Dr. HELLER. We are certainly going to fall substantially short of $570 billion for the year. When I said earlier in response to your question that we have not formulated a new estimate, it is not to deny that we are going to fall substantially short of the $570 billion projec- tion. Senator DOUGLAS. You said if we do fall short the weapon should be monetary ease. Have we in practice had this monetary ease? PAGENO="0134" 124 POLICIES FOR FULL EMPLOYMENT Dr. HELLER. Senator, we have in part, although, as I noted in my statement, we have been inhibited with respect to short-term interest rates by balance-of-payments considerations. Most of our present long-term interest rates, however, are below those at the time of the trough in 1961, and in case after case~- Senator DOUGLAS. You expect them to be that just through the nor- mal cyclical process, interest rates fall in a period, of recession and. rise during a period of advan~ce. Dr. I{ELLER. If I may interrupt, that is what makes the comparison with 1959-60 relevant. Every one of the major interest rates today is below its level at the corresponding point in the recovery of 1959- 60. The reason for that in part is that the recovery this time has not been as strong as expected and the monetary ease that has been contin- ued is, therefore, greater than it would have been if the recovery had been more vigorous~ In a sense we have used continued monetary ease. Senator DOUGLAS. I want to concentrate our attention upon the de- velopments in May, June, and July of this year when, as you said, economic conditions began to turn down, and when according to all the classical principles, monetary ease should have been observed. On page 29 of your very excellent Economic Indicators, the first column gives the rate on 3-month Treasury bills on what is known as the short-time rate. In May that was 2.694. At the end of June it was 2.719. On July 21, it was 2.983. I have a release just issued by the Federal Reserve Board a few hours ago. It shows a slight fall, but it is still 2.874 as of August 4. This is an increase since the average in May of 28 points, or over 10 percent. So the short-term rate has gone up 10 percent. It is no- torious that this has been done by the Federal Reserve selling short- time Government bonds in the market which has depressed the price and raised the yield and consequently raised the short-time rate upon which the Reserve in the past has always placed such great emphasis. My figures are correct, are they not? Dr. HELLER. Yes, indeed, they are. I was just going to add the very latest figure which is 2.802. Senator DOUGLAS. When was that? Dr. HELLER. That isthe figure for the week of August 11. Senator DOUGLAS. Have we reached August 11 yet~? Dr. HELLER. No. Senator DOUGLAS. Is not this forecasting on a large scale? Dr. HELLER. These figures are reported as of the beginning of the week of the new issue, but they are reported as of the date at the end of the week, so we have it already. Senator DOUGLAS. Even so that is an increase of 21 points, or around 8 percent? Dr. HELLER. No, I believe that is an increase of 11 points, or 4 per- cent. Senator DOUGLAS. Has not the policy of the Federal Reserve in the last 3 months been to violate the historic principle that when reces- sion threatens-and I agree with you that it is not here; and the testi- mony this morning was pretty clear that there was no clear evidence that it was coming-Has not the action of the Federal Reserve in rais- ing interest rates flown in the face of the doctrine that the first PAGENO="0135" POLICIES FOR FULL EMPLOYMENT 125 thing you should do when storm signals begin to go up is to reduce interest rates? Dr. HELLER. Let me make a few comments on that. In January the 3-month Treasury bills was 2.746; now it is 2.802. Senator DOUGLAS. That is when you were prophesying we would have a GNP of $570 billion. Everything was fine at that time. Dr. HELLER. There had been a fall in the interim period and then a rise. Of much greater concern than the short-term rate-which is the essential one for stemming outflows of funds to foreign countries, funds that further aggravate our balance-of-payments and gold situa- tion-of much greater concern for economic expansion is the long-term rate. There I would certainly share your concern about the rise. Senator DOUGLAS. Let us get that into the record. In May that was 3.09, was it not? No, pardon me. It was 3.88, was it not? Dr. I-IELLER. Yes, that is the figure. Senator DOUGLAS. July 14, it was 4.03, which is an increase of 15 points and approximately under 4 percent. Dr. HELLER. Yes, and the latest figure was 4.04 for the week of August 4. Senator DOUGLAS. So that is slightly higher. You have had an increase both in the short-time rate and long-time rate. You yourself argued, and I thought very cogently, that the first thing you should do if it actually fell short of the prediction was to get a decrease in the interest rate. I know you do not have control over the interest rate, but we are trying to find out whether themonetary policy has really been correct. Dr. HELLER. As I indicated a moment ago, we have been concerned by the fact that the short-term rate increase has been matched by a rise of a similar number of basis points in the long-term rate, because it is the long-term rate that is most important for economic expansion. Senator DOUGLAS. I have always held with that in the past. The excuse is the one that you gave, namely, it is necessary in order to pre- vent the outward flow of gold. I want to read the comparative short- time rates for the European countries. Switzerland is supposed to be the rater and I think it is. The Swiss short-time rate is 2 percent. The Dutch, who are very thrifty have a short-time rate as of June of 2.32, or 21/3 percent. Germany, which has been held up to us as an example, has a short-time rate of 2.38. The only countries with higher short-time rates are France, which I do not think is a great deal of an international investor; Canada, which has just gotten into difficulties, and, therefore, is raising its rate to protect itself; and Great Britain which is the other gold exchange country. I want to suggest that these comparative rates indicate that the Federal Reserve has taken fright too quickly and is using an ex- cuse which is really not tenable. My time is up and with that I will stop. Chairman PATMAN. Congressman Curtis? Representative CURTIs. Thank you, Mr. Chairman. Following your statement, Dr. Heller, you are basing the basic theory on what has been referred to as the gap theory that you ad- vanced, I think it was a year ago. Dr. HELLER. March 6, 1961. PAGENO="0136" 126 POLICIES FOR FULL EMPLOYMENT Representative CURTIS. Let me ask this in reference to that. Inci-~ dentally, I might state that this is a theory with which many disagree and it is important to know there is this disagreement. Accepting the "gap theory" just for the sake of discussion here, it strikes me that really things are much worse off than you indicate because one of the two bases of the gap theory is unemployment figures, is that right? Dr. HELLER. Yes. Representative CURTIS. The unused labor force? Dr. HELLER. Unused labor force and unused industrial capacity. Representative CURTIS. I want to direct attention to the unused labor force because it really should not be the unemployment figure as much as it should be the percentage of the population from 14 to 65 or 14 up, which goes to make up the potential civilian labor force, am I not correct? Dr. HELLER. Yes. Representative CURTIS. The thing that disturbs me is that in our indicators-the ones I have here are from July, 1962-beginning in 1955, that our civilian labor force has continued to rise since World War II and it has risen during recessions along with the upturns, averaging almost around a million a year. We see that the civilian employment has been rising, but in June- and this is the last month that I have a comparison-in June of 1962, the civilian labor force was less than June 1961. Sixty-four million in June 1962, 74.286 million in June 1961, which is not only not an increase but is a decline. If you threw that into your gap theory, I suspect your gap is widening because you would really be adding a million more people on to the unemployed rolls. Dr. HELLER. May I comment on that comparison, Congressman Curtis? Representative CURTIS. Yes. Dr. IJELLER. There is so much month-to-month variability in the size of the labor force that it is safest to use quarterly averages when making comparisons. During the second quarter of this year, the civilian labor force was 60,000 higher than a year earlier. Over this same period, the Armed Forces were increased by some 350.000 persons. In order to take account of this, our comparisons should be based on the total labor force,which includes the Armed Forces. The over-the-year increase is thus 410,000. Next, since April of this year, labor force estimates have been constructed using information from the 1960 Census of Population. Previously, estimating weights from the 1950 census were utilized. This change has reduced estimates of the labor force by about 210,000. Correcting for this, we find an over-the-year increase of 620,000. This is a sizable increase, but it is still smaller than was expected on the basis of population growth and trends in labor force participa- tion. 1 think there are two reasons for this shortfall. First, the retirement rate has increased, partly in response to liberalized social security benefits. Second, and more important, has been the.continued slackness in the labor market. Total employment has increased by over 11/4 million in the past year, but about half of this increase has been due to recovery in manufacturiiig and to the rehiring of pre- viously laid-off workers. The expansion in new job opportunities has been rather modest. In particular, employment gains in services and PAGENO="0137" POLICIES FOR FULL EMPLOYMENT 127 trade, while substantial, have been much smaller than in earlier expan- sion periods. This has a particular relevance for labor force growth, since these industries absorb a high proportion of the women who enter the labor market. We would expect that at full employment, when more new job opportunities were being created, workers would enter the labor force to fill these jobs. Representative CURTIS. We have had that in previous recessions, and we do not have a similar decline. In fact, reading the figures from 1955, which I have in front of me, each year there has been a net increase. I was trying to see which is the smallest. Probably about from 1956 to 1957 where the increase was a little less than 400,000. It seems to me that is the figure, if you are going to use the gap theory. Just fo restate it, I think you have misconstrued what is going on here in our economy through dealing in economic aggregates. When we identify who the unemployed are, they are centered in the un- skilled, semiskilled, who through the rapid technological growth and through meaningful growth in our society cannot find jobs unless they get trained for the skills that are in demand. This is something that is inherent in a growing economy and should not be looked upon as a gap. It should be looked upon rather as something that must be met. The same thing, I would say, applies to industrial capacity. Again, when we grow rapidly we create more obsolescence; of what was capacity in 1960, though physically still in existence, it is not economic capacity in 1962. At any rate, I wanted to go on to another thing because this one base of your syllogism is the gap theory. The other is the theory of deficit financing. I am talking about your recommendations that in a period of already deficit financing we have a tax cut to stimulate the econ- omy which would create further deficits, and also at the same time increase rather than decrease Federal expenditures. Your second suggestion was a $900 million public works superimposed on the present expenditures in the budget. Am I not correct in describing that as a theory of deficit financing? Dr. HELLER. I want to make one small correction. The President's proposal in the public works area was a $600 million proposal. Representative Cuwris. I thought it was $900 million. Dr. HELLER. That was the figure that came out of the House Public WTorks Committee. Representative Cumns. At least it is the theory of deficit financing. Throughout your paper and your discussion here of the status of our economy, you are one of the few witnesses that has not referred to the important factor of business confidence. You recommend two new and untried theories, the gap theory and the theory of deficit financing, which certainly are not held to be sound by the business leaders in the private sector. Certainly a recommendation and pursuit of theories such as these, even if they were true, is not going to help business confidence, is it? Dr. HELLER. Mr. Curtis, we thought that in testifying as to the importance of profits and investment stimulants and stronger markets that we were in effect testifying on the factors which above all others create business confidence. PAGENO="0138" 128 POLICIES FOR FULL EMPLOYMENT Representative CURTIS. Do not you feel that Government policy is a very important. factor in business confidence? Dr. HErAER. Indeed it is. Representatjve Cuin~is. And that is what we are talking about here, Government policy. These are your policy recommendations. In fact, you worded them as such in your prepared statement. Dr. IIELIER, The policies for increasing markets, for stimulating investment through depreciation guideline revision and investment credits. Representative CURTIS. Those are the collaterals. But you ad- vanced three basic recommendations, two of which are the ones I have mentioned. One was tax cutting, the second was increased public works, and the third was what? Dr. HELLER. The unemployment compensation provisions. Representative CURTIS. Yes. Incidentally, all three of those, or at least two of the three, are al- most academic in August of 1962 in the tail end of this session of this Congress. Dr. HET~r~En. I think we should distinguish between the short-run stimulants for inadequate cyclical recovery, on the one hand, and the longer run bolstering of markets, and profits, and investment incen- fives, on the other. Perhaps in our testimony we did not make clear enough the distinctiop between these two in our thinking. The Presi- dent's three-ply program for sustained prosperity was designed to meet the problem of dips in economic activity, temporary inadequacies in the level of economic activity. But coupled with that there has to be ~t longer term program for removing the tax overburden, for stimulating consumer spending, and for stimulating business in- centives. Representative CURTIS. IJirder this when would you ever balance the budget, or better still, when, looking backward in our history, would you have ever balanced the bridget since `World War II? Fol- lowing your gap theory? Dr. I-TELLER. The budget has been balanced. There was essentially no gap except in very short periods from 1946 to about 1955. Representative Cuirrirs. We had the Korean war in there.. Dr. HELLER. During that period we had a substantial number of budget surpluses both on the conventional administrative budget and even a larger number on the cash budget. Representative CURTIS. in retrospect, you would approve of those balanced budgets? Dr. HELLER. Those surpluses were extremely important and neces- sary and a. desirable factor in moderating inflation and in stimulating investment. Represeitative CURTIS. Then the key question is this: 1962. which is predicated to beat all records in gross national product., which is the way you have been measuring your gap, in spite of the fact that it is that. way. and 1961 broke all records in gross national product., von do not feel that is a. year when you need to have a balanced budget? Dr. HET~Lmr. Because of the fact. that the economy is still oneratirg very substanit.aiiy below its trenienclous potential, a fact which would, I am sure, be recognized by a very great majority of private, business, and labor economists, as well as the great majority of Government economists. PAGENO="0139" POLICIES FOR FULL EMPLOYMENT 129 Representative CURTIS. I have been listening to them and interro- gatrng them to find why they felt that way. They do not all look at it that way, fortunately. Those who hold your view, I honestly think, are not looking at the indicators that really measure economic growth. Chairman PATMAN. Congressman Reuss? Representative REUSS. Mr. Chairman, Chairman Heller and mem- bers of the Council, I want to commend you for responding once again to the mandate of the 1946 Employment Act, directing the Council to send up not only an annual report but supplementary reports at such times as they may be advisable. You did so last year, and I thought your decision most appropriate. I thoroughly agree that a new re- port is advisable at this time, and I am delighted you have given us this very comprehensive document. I want to discuss with you the monetary policy which appears to be :in effect today. In the last 8 weeks, at a time when there has been justifiable concern about the economy, the Federal Reserve Board has markedly decreased the free reserves in the banking system, and this has resulted in an increase in both short-term and long-term interest rates, has it not? Dr. HELLER. Yes, it has. Representative REUSS. The Treasury has also within the last few days issued a long-term bond with a maximum legal permissible cou- pon of 41/4 percent. That is also a fact, is it not? Dr. HELLER. Yes. Representative REUSS. If it were not for so-called balance of pay- ments considerations, it would be indefensible, would it not, to tighten the supply and increase the cost of money at this time? Dr. HELLER. In the light of economic conditions today and eco- nomic prospects, yes. Representative REUSS. So let us look at the validity of the balance of payments argument for doing this. You would agree, would you not, that one, speculation, and two, the needs of trade, are a very im- portant cause of the movement between countries of short-term capital funds? Dr. HELLER. Yes. Representative REUSS. Would you say that these causes are more important than, or at least equally important as, differentials in in- terest rates? Dr. HELLER. The answer to t.hat question varies from period to period. At one time, as in late 1960, when there was a speculative run, no feasible amount of change in interest rates could have stemmed the flow. At other times, however, a very substantial part of the short- run flow is responsive to interest rates. Representative REUSS. In the last 8 weeks were interest rate differ- entials between the major trading nations such as to have justified an apparent attempt to raise U.S. interest rates? Dr. HELLER. As Senator Douglas pointed out, in some countries, yes, and in some countries, no. Representative REUSS. Weren't Canada and the TJnited Kingdom theonly major countries with interest rates higher than ours? Dr. HELLER. Canada raised its short-term rate to about 5 percent, and the U.K. had come down to just under 4 percent. Neverthe- PAGENO="0140" 130 POLICIES FOR FULL EMPLOYMENT less there was still an incentive even with the differential for funds to move out in response to these interest rates. Representative REUSS. Were the interest rate differentials, after adjusting for exchange risks and forward cover, such in the last 8 weeks as to require a different policy on the part of this country? Dr. HELLER. I lack an intimate detailed knowledge of these move- ments, but I am under the impression that there were some pressures on the dollar to which this was at least in part a response. While I am not qualified to give you a very detailed answer on the movements of forward cover and interest rates, I do know that there was an in- centive to move funds overseas, particularly to the United Kingdom. Representative REUSS. Does the Council of Economic Advisers~ make an independent judgment as to whether a given interest rate differential is a major risk for our balance of payments, or do you accept the judgment of the Federal Reserve System? If your answer is that you make an independent judgment, have you made one in the last 8 weeks, and does it accord with that of the Federal Reserve? And if it does not, have you let them know? Dr. HELLER. I would put our situation this way: We make a. judg- ment based on information that is supplied by the Treasury and by the Federal Reserve.. But as far as the policy implications are con- cerned, we, of course, form our own counsel, and discuss these matters with the Treasury, with the Federal Reserve Board, and with the President in periodic meetings. Representative REUSS. Of course, if frail man should err in t.his, the consequences could be most serious, could t.hey not? If we raised our interest rate structure when it was not necessary for balance-of- payments reasons, we would have injured our domestic growth pros- pects, needlessly. And if domestic stagnation results in a large involuntary deficit, perhaps made even larger by a tax designed to undo the effects of tight money, we might in fact increase our balance-of-payments prob- lems. Foreign central banks could become more alarmed with such a large budget deficit than from seeing modest quantities of short-term capital move around. Dr. HELLER. I think that any tightening that goes beyond what is required for progress and stabilization on the balance-of-payments and gold front is a heavy price to pay, and an unnecessary price to pay, particularly when it hits long-term rates. We are concerned, and have been concerned, with the recent tightening to which both you and Senator Douglas have referred, with the question whether it meets felt and actual needs, with the question of whether it might not be nullified by rising interest rates in some of the other countries, and with the quest.ion of whether it would not be possible to differ- entiate a little bit more between the rise in short-term rates and that in long-term rates. These concerns of ours have been expressed in our discussions within the administration and with the Federal Reserve Board. Representative REUSS. Putting to one side the question of whether we have in fact gone astray in the last 8 weeks in raising interest rates, would you agree that interest rates higher than those we have today are likely to harm our domestic situation and are of doubtful value for our balance-of-payments situation? PAGENO="0141" POLICIES FOR FULL EMPLOYMENT 131 Dr. HELLER. I feel that, given the present economic outlook, this is a time to be very careful that interest rates not be raised one basis point more, or credit tightened one dollar more, than is absolutely required by the international payment situation. I think that this requires continued vigilance in the current economic situation. Representative REUSS. Thank you. Chairman PATMAN. Senator Javits ? Senator JAvIT5. Mr. Chairman, would you turn to your statement. I call your attention to the sentence which reads: The most recent evidence on economic activity, though mixed, offers cause for concern. I ask you, concern about what? Dr. HELLER. Concern about the full utilization of resources in the economy and about the pace of further expansion. Senator JAvIT5. Does it offer concern that we may be heading into another recession? Dr. HELLER. When we tried to sum u~ our view on the outlook we said that we cannot rule out the alternative possibility that the recent slowdown in the expansion represents advanced warning of an eco- riomic decline. That is one alternative that has to be taken into account in the formulation of policy and in the watching of the indicators. Senator JAVITS. When you use the word "decline," is that the same meaning as my word "recession" or is it a different meaning? Dr. HELLER. In a sense, "recession" means a receding from the pre- vious levels achieved in the economy; and I suppose in this case "de- cline" is a euphemism for "recession." Senator JAvIT5. It is a fact, is it not, that you have omitted one factor which is a sign of danger, and that is the diminution of inven- tory accumulation in the second quarter of 1962. Is not that correct? Dr. HELLER. We specifically covered the $3.4 million rate of in- ventory accumulation in our statement. Senator JAvIT5. Except it is not at that particular point, is that correct? That is an additional factor. Dr. HELLER. That is an additional factor and we pointed to it. Senator JAVITS. Now, may I ask you this question? Is there a con- nection between your statement that a program to improve the rate of utilization of our resources and the rate of growth of our economy must include the even more fundamental measures of tax reduction and tax reform-is there a connection between that statement and the statement that we have just been discussing that there is cause for con- cern? In other words, is tax reduction a measure which is designed to relieve us, if we can be relieved, of this case for concern? Dr. HELLER. If further developments in the economy, Senator, con- firm the rather more pessimistic possibilities, the two are very much related. But our statement to which you refer has both a short- and long-run orientation. I think we are confronting, as the 5 years of unsatisfactory economic performance indicate, a longer term problem of inadequate expansion and continued underutilization of our re- sources which calls for tax reçluction and tax reform, in any event. As we noted in the list of considerations concerning the size, timing, and composition of tax reduction there is also a shorter term ques- PAGENO="0142" 132 POLICIES FOR FULL EMPLOYMENT tion of the need that may exist for overcoming temporary deficiencies in consumer demand. Senator JAVITS. As a matter of fact, you say no decision has been made on the size, composition, and timing of a recommended tax re- duction. I call that an agonizing indecisiveness on the part of the President. One of my colleagues took a special exception to that- Senator Proxmire of Wisconsin. What do you call it? Dr. HELn~R. Senator, I am not as good a phrasemaker; but I would like to point out that the President has, after all, taken a decision which I believe represents a decisiveness with respect to tax reduc- tion that has not been seen for many many years. He has said that he will propose a tax reduction effective January 1, i~963. In other words, there is a decision not only to cut taxes, but explicitly to cut corporate and individual income taxes by an across-the-board reduc- tion-and, indeed, a net reduction in the sense that the reduction in rates would not be offset by restoring the base. Senator JAVITS. Then, are not you giving us the very narrow choice as to whether we shall give the President the power to reduce or whether we shall reduce ourselves. Is not that the choice you are giving us? What you want is the power for the President to reduce. I say we should reduce ourselves. So the choice is do we give the President the power to reduce or do we reduce ourselves? Dr. HELLER. I think that observation directs itself to a somewhat different problem; namely, the standby tax-cutting authority. The President's request was for authority to cut up to 5 points from the individual income tax rates for a period of 6 months. There, I think~ your comment is more directly applicable than to the other point of a more permanent tax cut to take effect on January 1, 1963, which the President is going to propose. Senator JAVITS. It is fair to say, is it not, that the decision to cut * taxes has already been made in the sense that either we will cut them now, or the President is going to recommend some other scheme * for cutting them as of January 1. Dr. HELLER. In `that sense, yes, it is. Senator JAVITS. The decision is made in that regard, is it not, really? Dr. HELLER. Yes, it is. - Senator JAVITS. Mr. Chairman, may I reserve the balance of my time so I can vote? Chairman PATMAN. Dr. Heller, I would like to know about the basic premise on which you `are proceeding. Is our problem that the rate of savings is too low or the rate of consumption too low? Dr. HELLER. I think we have to look at two aspects of that. One is the aspect of the question that relates to an underemployed econ- omy where there is a fair amount. of slack, in which the primary prob- lem is that the level of total demand is `too low. Chairman PATMAN. How is that related to the present situation? Dr. HELLER. The level both of consumer demand and investment demand are too low to make full use of the labor, machinery, plant, and equipment that are available in the economy. Our problem at the present time is not an inadequate level of savings. PAGENO="0143" POLICIES FOR FULL EMPLOYMENT 133 Chairman PATMAN. But isn't the ftmdamental problem the fact that consumption is too Tow? Dr. HELLER. Consumption and investment demand are too low. Chairman PATMAN. The personal income `tax cut which the Presi- dent has mentioned has been described as "across the hoard." Does that mean you reduce each tax rate by the same number of per- centage points? Dr. 1{ELLER. In saying that. he would recommend an across-the- board reduction in rates, Mr. Chairman, it leaves the question open whether it simply means a reduction in every bracket or a percentage point bracket in every bracket or a perëentage reduction in liabilities. I would say that statement of the President does not rule out any of several alternative ways of accomplishing the objective. I believe what he is saying, in effect, is that~ he wants to see reductions from top to bottom. Chairman PATMAN. If we increase the exemption, say, from $600 to about. $900, or $1,000, income tax payers in each category would get the benefit of it., would they not? Dr. HELLER. That would apply a tax reduction to all taxpayers. Chairman PATMAN. Even the 91-percent bracket would be bene- fited to the same extent. Dr. HELLER. Taxpayers in the 91-percent bracket would get 91 percent of $300, if the exemption were raised to $900. Chairman PATMAN. So that, would have an across-the-board effect, too, wouldn't it? Dr. HELLER. I believe the President spoke of across-the-board re- ductions in rates. Chairman PATMAN. I believe he did. If we had an across-the- board tax cut, that would increase disposable income of families in the high income brackets a great deal more than those at the low level of the scale; if you felt that our basic problem is one of an inadequate rate of savings, I could understand that kind of proposal. But if you think that the problem is underconsumption, as you have stated, then I should think you would want to make the largest cuts in the low-income group to keep things even. In other words, an across-the-board cut would tilt the income distribution in favor of the high income families. Do you have any estimates of the different income classes as to how much of the family income goes into consumption and how much goes into savings, Dr. Heller? Dr. HELLER. I do not believe we have those at hand. Those are dif- ficult to come by. We will try to find what there is available and pre- sent it for the record. Chairman PATMAN. Will you please insert, the information in con- nection with the revision of your remarks when you get your transcript? Dr. HELLER. I would be happy to. (The' information is as follows:) Data on `consumption expenditure or saving by income bracket are not avail- able for any year subsequent to 1955. The following data for 1950 are based upon a BLS-Wharton School study and show current saving as a percentage of after-tax money income. The unit is the urban family. PAGENO="0144" 134 POLICIES FOR FULL EMPLOYMENT Annual after-tax money income ~ Saving as percent of after-tax income Annual after-tax money income * Saving as percent of after-tax income Under $1,000 $1,000 to $1,999 $2,000 to $2,999 $3,000 to $3,999 $4,000 to $4,999 -81. 7 -6. 2 -1.7 2. 4 4. 5 $5,000 to $5,999 $6,000 to $7,499 $7,500 to $9,999 $10,000 and over 6. 5 10. 0 16.3 30. 7 Source: Friend and Schor, "Who Saves," Review of Economics and Statistics, May 1959, p. 232. Data on consumption expenditure by income bracket for 1955 are available from a study by Life magazine, but the income concept is before taxes, and con- sumption expenditure does not include gifts and contributions, educational ex- penditures, or expenditures away from home on vacation. Since average income by bracket is not known, percentages could not be calculated. The unit in this case is the household, not the family. Annual household income before taxes Averase * consump- tion of goods and services Annual household income before taxes Average consump- tion of goods and services Under $2,000 $2,000 to $2,999 $3,000 to $3,999 $4,000 to $4,999 $1, 933 2, 924 3,839 4,363 $5,000 to $6,999 $7,000 to $9,999 $10,000 or more $5, 016 6,063 7, 946 Source: Life Study of Consumer Expenditures, conducted for Life by Alfred Politz Research, 1:nc., New York, 1957, vol. 1, p. 17. Chairman PATMAN. Have you had any estimates made to show a given amount of stimulus, how much reduction of taxes would be in- volved and how it would be distributed under each of the alternative methods: raising the exemption, making the cut in the first income tax bracket, and making the cut across the board? Dr. HELLER. We have made some comparisons to see what kinds of reductions would be involved for any given loss of revenue. For that purpose we have prepared a table of five different tax proposals all of which would reduce total tax liability by approximately $6 billion. It is not intended as anything more than an example. It does not sug- gest that $6 billion is the figure we are talking about. This table could be used to construct comparison for any other level of tax reduction. [This table is inserted into the record below.] Chairman PATMAN. If we had an across-the-board cut in taxes, which would change the income distribution in favor of the top bracket income receivers, wouldn't we have a worse fiscal structure after the period of deficit is over? In other words, wouldn't you, in the long run, increase the troubles which the tax cut is intended to cure? Dr. HELLER. It is extremely hard to answer a question like that, Mr. Chairman, without having a more or less explicit proposal concerning the relationship of proposed rates in the high brackets* and the low brackets. Chairman PATMAN. I will ask you about one other issue that was raised in your testimony. You stated that during this economic re- covery, there has been a compelling need for general monetary ease. I repeat that. You say there has been a compelling need for general monetary ease as part of an expansionary economic program for full employment and adequate utilization of our resources. What can the President and the present administration do about monetary ease at this time under present laws and practices? PAGENO="0145" POLICIES FOR FULL EMPLOYMENT 135 Dr. HELLER. As several members of the committee have pointed out, the administration's possibilities for creating ease are limited since the primary instrument of monetary management and policy is the Federal Reserve Board. Chairman PATMAN. Over which you have no control. Dr. HELLER. Over which there is no legal control, as such. There is an informal administrative coordination and cooperation in which the administration tries to develop, in concert with the chairman of the Federal Reserve Board, an approach to our economic policy problems. This is a matter of persuasion and cooperation rather than a mat- ter of dictation. Senator PROXMIRE. I would like at this time to read a letter which Chairman Patman has just received from Ewan Clague on the busi- ness of the interrogation by Congressman Curtis and myself this morning, and our concern over the statistic "Open Employment" on page 9 of the Economic Indicators, showing that the total labor force, including Armed Forces, between June 1961 and June 1962 remained almost stationary. You have already been questioned on this, I be- lieve, Dr. Heller. Dr. HULLER. Yes, sir. Senator PRoxMIi~. And responded to it. But the fact that this was the first timein many years, and some concern was expressed that there may be a statistical error or some statistical mistake, I would like to read this letter. (The letter referred to follows:) U.S. DEPARTMENT OF LABOR, BUREAU OF LABOR STATISTICS, Washington, D.C., August 8, 1962. The Honorable WRIGHT PATMAN, Chairman, Joint Economic Committee, U.S. Congress, Washington, D.C. DEAR CHAIRMAN PATMAN Since mid-1961, the over-the-year growth in the labor force has appeared to be slowing down. Evidence of this is provided by the monthly survey of the labor force, conducted by the Bureau of the Census for the Bureau of Labor Statistics. On the average during the first half of 1962, the proportion of the population in the labor force in almost every age group was slightly below that for the comparable period of the year 1961. The only significant exceptions were men and women 18 to 19 years of age and women 45 to 64 years of age. Somewhat the same picture is seen in comparing the second half of 1961 with the same period in 1960. There is no reason to believe that these declines are due to the operation of the survey. There was no change in the sample areas included in the monthly survey, in the methods of interviewing, or in the quality-control methods used by the supervisory staff. No revisions in the concepts and definitions of the labor force, employment, and unemployment have been made. The only new element in the statistics is the introduction of data from the 1960 Census of Population into the estimation procedure to replace those from the 1950 census. This change was made in April 1962 when the census material became available. The effect was to reduce employment and the civilian labor force by about 200,000; no changes occurred in the percent distributions within age groups or in labor force or unemployment rates by age. The revision and its effects were fully described in the monthly report on the labor force for April 1962. In each subsequent month, our statements about year-over-year labor force growth always make allowance for this revision. I am enclosing a copy of the monthly report on the labor force for April 1962 which contains a statement on the revision in the estimation procedure due to the 1960 census figures. Sincerely yours, EwAN CLAGUE, Commissioner of Labor Statistics. S7869 O-62------lO PAGENO="0146" 136 POLICIES FOR FULL EMPLOYMENT USDL - 5210 U. S. DEPARTMENT OF LABOR BES, Tel. 961 - 2916 BLS, Tel. 961 - 2634 THE EMPLOYMENT SITUATION: APRIL 1962 NOTE: Beginning with the figures for April 1962 information from the 1960 Census of Population replaces that from the 1950 Census in the estima- tion procedures for the labor force survey. The monthly and annual changes in the labor force data quoted in this release are based on the old April figures, which are comparable with pre- viously published data. The differences between the old and new data are small (see page 5-1 in attached Monthly Report on the Labor Force). Factory employment and hours of work showed continued strong improve- ment in April, Secretary of Labor Arthur J. Goldberg announced today. With most manufacturing industries reporting better- than- seasonal developments during the month, jobs in this sector rose by 80, 000 instead of showing the small decline usual at this time of year. Construction employment expanded sharply during the month after the usual spring pickup had been delayed by bad weather in March. Trade employment conl4nued to show better-than- seasonal improvement for the fourth consecutive month Altogether nonfarm payroll employment at 54. 7 million was up 675, 000 from March to April, or a quarter of a million more than seasonally. With the gains of the past few months, manufacturing employment has returned to within 200, 000 of the level in May 1960, the prerecession peak in. general business activity, while trade is now significantly above that level. FOR RELEASE: 12 Noon, Tuesday May 15, 1962 PAGENO="0147" POLICIES FOR FULL EMPLOYMENT 137 THE EMPLOYMENT SITUATION May 15, 1962 Page 2 The factory workweek continued to improve in April, and at 40. 4 hours was at a level which has not been exceeded for this month since 1953. Overtime hours in manufacturing edged up to 2. 7 hours, the highest level for April since data became available in 1956. As announced on May 9, unemployment declined seasonally by 400, 000 in April, and at 3. 9 million was 1. 0 million lower than a year earlier. The seasonally adjusted rate of unemployment of 5. 5 percent was virtually unchanged from the preceding 2 months but was well below the 6. 9 percent of a year earlier. State insured unemployment declined by 400, 000 in mid-April to 1. 9 million. Total employment moved seasonally higher by 700, 000 to 66. 8 million in April. Nonagricultural employment (including the self-employed, unpaid family workers, and domestics) rose by 450, 000 to a record for April of 61. 9 million, an increase over the year of 1. 2 million. Agricultural employment increased by 250, 000 from March and was virtually the same as a year earlier in April at 5. 0 million. The number of workers on part time for economic reasons declined by 100, 000, somewhat more than seasonal, to 2. 2 million in April, some 800, 000 less than at the same time in1961. The total labor force, including the Armed Forces, rose about seasonally again in April to 73. 7 million, and was 650, 000 higher than a year earlier. Characteristics of the Unethployed Age and Sex. Nearly all of the April decline in unemployment was among adult men, reflecting the spring pickup in outdoor activity. While the unem- ployment rate for this group has shown mainly seasonal improvement since January, both their number and rate of unemploymentwere substantially under April 1961 levels, Joblessness among women and teenagers was unchanged over the. month. PAGENO="0148" 138 POLICIES FOR FULL EMPLOYMENT THE EMPLOYMENT SITUATION May 15, 1962 Page 3 * Duration of Unemployment. The reduction in unemployme~nt in April was primarily among those who had been out of work from ito 3 months (5 to 14 weeks) about in line with seasonal expectations, as was the lack of change in the number of long-term unemployed (of 15 or more weeks duration). Workers who had been seeking work for 27 weeks or more numbered 700, 000 in April, unchanged from March, but 300, 000 less than the recession high in July 1961. However, the number in this group was still 300, 000 higher than before the recession. New Workers. Among the unemployed in April were 450, 000 persons seeking their first jobs, some 80 percent of whom were teenagers, Inexperienced workers have found itincreasingly difficult to find jobs in recent years. This April, they accounted for 12 percent of total unemployment compared with 7 percent at the trough of the 1958 recession. PAGENO="0149" POLICIES FOR FULL EMPLOYMENT 139 EMPLOYMENT AND UNEMPLOYMENT SUMMARY (In thousands) - Apr. 1962 Mar. 1962 Apr. .1961 Labor fore. statl~tJ.ci - Total labor force, including Armed Forces...,.... 73,654 73,582 73,216 Civilian labor force-. 70,769 70,697 70,696 Employed - total 66,824 66,316 65,734 Agriculture 4,961 * 4,782 5,000 Nonagricultural industries 61,863 61,533. 60,734 14-19 years, both sexes 4,089 4,062 3,871 20 years and over, males 37,716 37,455 37,235 20 years and over, females 20,058 20,016 19,627 Unemployed - total 3,946 4,382 4,962 14-19 years, both sexes 748 718 778 20 years and over, males 2,115 2,458 2,773 20 years and over, females 1,084 1,205 1,41]. Seasonally adjusted unemployment rate 5.5 5.5 6.9 Long-term unemployed: 15 weeks or more 1,483 1,485 2,128 27 weeks or more 719 734 923 Nonagricultural workers on part-time for economic reason, - total 2,22]. 2,336 2,978 Usually work full-time 1,050 1,110 1,466 Usually work parc-time 1,171 1,226 1,512 Payroll employment statistics2 Employees on nonagricultural payrolls - total 54,699 54,025 53,171 Manufacturing 16,598 16,518 15,904 Durable goods 9,396 9,333 8,836 Nondurable goods 7,202 7,185 7,068 Mining 644 640 657 Contract construction 2,563 2,323 2,619 Transportation and public utilities 3,909 3,88]. 3,870 Wholesale and retail trade 11,406 1L,214 11,162 Finance, Insurance, and real estate 2,773 2,755 2,724 Service and.miscellaneous 7,670 7,572 7,448 Government 9,136 9,122 8,787 Average weekly hours of production workers. in manufacturing industries Gross, - . -. 40.4 40.3 39.3 Ot,ertlme - - , .` -. .. 2.7 2.6 2.1 Unemployment iniutunce ~tatlstlcs (State Program~) Initial claIms, week tzldlng: March 17 April 15 26]. 270 364 March' 24 April 22 253 255 328 28 March 31 , April 29 244 244 312 - April 7 May 6 252 308 330 Insured unemployment, week ending: pgl~3.ar TEC' Regular TEC~ Rular~JE03 14 March 17 April 15 1,872 234 2,271 310 2,838 415 21 March 24 April 22 1,803 210 2,149 306 2,724 608 March 31 April 29 1,727 178 2,035 300 2,610 653 iJ Calonclar week ending noar~et 15th of month, a~' Payroll period ondi:ig nearcet 15th of month, ~/ Temporary )`~tendc~1 Unoinp1ny.~irs~t Coinponaution irograino, begInning Api~il 1961. - PAGENO="0150" PAGENO="0151" POLICIES FOR FULL EMPLOYMENT 141 April 1962 in onthly report on THE LABOR FORCE employment . unemployment o hours and earnings UNITED STATES DEPARTMENT OF LABOR Arthur J. Coldherg. Secretary Issued May 1962 PAGENO="0152" 142 POLICIES FOR FULL EMPLOYMENT U.S. DEPARTMENT OF LABOR Arthur J Goldberg Secretary Bureau of Labor Statistics Ewan Clague, Commissipner with the cooperation of the Bureau of Employment Security Robert C. Goodwin, Administrator This report combines The Monthly Report on the Labor Force previously issued by the Bureau of the Census and the Employment, Hours, and Earnings release previously issued by the Bureau of Labor Statistics. In addition, statistics and analysis relating to insured unemployment have been provided by the Bureau of Employment Security. The Bureau of the Census collects and tabulates for the Bureau of Labor Statistics the labor force data based on household interviews, shown in this report. A description of the manner in which the various statis- tics are collected and what they represent is provided in the Explanatory Notes. The Monthly Report on the Labor Force is prepared in the Bureau of Labor statistics, Division of Manpower and Employment statistics. Harold Goldstein, Chief. PAGENO="0153" POLICIES FOR FULL EMPLOYMENT 143 THE MONTHLY REPORT ON THE LABOR FORCE; APRIL 1962 Note: Beginning with the figures for April 1962, information from the 1960 Census of Population replaces that from the 1950 Census in the estimation procedures for the labor force survey. The monthly and annual changes in the labor force data quoted in this release are based on the old April figures, which are comparable with previously published data. The differences between the old and new data are small (see page S- 1). Factory employment and hours of work showed continued strong improve- ment in April. With most manufacturing industries reporting better-than- seasonal developments during the month, jobs in this sector rose by 80, 000 instead of showing the small decline usual at this time of year. Construction employment expanded sharply during the month after the usual spring pickup had been delayed by bad weather in March. Trade employment continued to show better-than- seasonal improvement for the fourth consecutive month. Altogether, nonfarm payroll employment at 54. 7 million was up 675, 000 from March to April, or a quarter of a million more than seasonally. With the gains of the past few months, manufacturing employment has returned to within 200, 000 of the level in May 1960, the prerecession peak in general business activity, while trade is now significantly above that level. The factory workweek continued to improve in April, and at 40. 4 hours was at a level which has not been exceeded for this month since 1953. Overtime hours in manufacturing edged up to 2. 7 hours, the highest level for April since data became available in 1956. As announced on May 9, unemployment declined seasonally by 400, 000 in April, and at 3. 9 million was 1. 0 million lower than a year earlier. The seasonally adjusted rate of unemployment of 5. 5 percent was virtually unchanged from the preceding 2 months but was well below the 6. 9 percent of a year earlier. State insured unemployment declined by 400, 000 in mid-April to 1. 9 million. Total employment moved seasonally higher by 700, 000 to 66. 8 million in April. Nonagricultural employment (including the self-employed, unpaid family workers, and domestics) rose by 450, 000 to a record for April of 61. 9 million, an increase over the year of I. Zmillion. Agricultural employment increased by 250, 000 from March and was virtually the same as a year earlier in April at 5. 0 million. The number (f workers on part time for economic reasons declined by 100, 000, somewhat mom' than seasonal, to 2. 2 million in April, some 800, 000 less than at the same time in 1961. The total labor force, including the Armed Forces, rose about seasonally again in April to 73. 7 million, and was 650, 000 higher than a year earlier. PAGENO="0154" 144 POLICIES FOR FULL EMPLOYMENT TRENDS IN EMPLOYMENT AND UNEMPLOYMENT July 1918 to date (ti~I atl(I M'USOI)flIIV fl(1jtI~!I((I) - 1955 1956 1957 195R 1959 1960 1961 J.s,,d .~ f*n~ p~ç~s: StM~ ~ ~ ~p~ssfl.. I*, F~d,~sI .p1.y.... ,,~s. ~ ~~lt,.sd ~..t~,(RRe)*~d i~p.'.,v p~g~*s I. Js~y 1~$O. d~t~ ~ AI.,k~ .~d H*~*iL PAGENO="0155" POLICIES FOR FULL EMPLOYMENT 145 Nonfarm Payroll Employment Nonfarm payroll employment rose sharply by 675, 000 to an April record of 54. 7 million. The total was 1. 5 million higher than the depressed level of a year ago and 530, 000 higher (seasonally adjusted) than before the beginning of the business downturn in May 1960. Better-than-seasonal gains were widespread in manufacturing industries, while construction employment regained its previous month's loss. Smaller increases, which were also better than seasonal, occurred in trade, transportation and public utilities, and State and local government. Employment in manufacturing rose by 80, 000 to 16. 6 million; it usually declines in April. The gains were spread among virtually every manufacturing industry, in both consumer and producer goods. Employment in transportation equipment, which usually shows a seasonal decline in April, held its employment level as automobile sales reached their highest point since September 1955. The fabricated metals, electrical equipment, and machinery industries increased significantly on a seasonally adjusted basis, as did primary metals and the stone, clay, and glass industries. In the soft-goods manufacturing industries, the greatest strength was shown in apparel where jobs in April were cut substantially less than in the same month in previous years. The largest part of the April job increase was seasonal and occurred i~ other than manufacturing industries. The increase of 240, 000 in construction brought seasonally adjusted employment up to the level of February 1962 and December 1961 after weather affected declines in January and March 1962. The job pickup in transportation and public utilities is the third consecutive monthly increase whereas there had been virtually no improvement during the last half of 1961 and a decline at the turn of the year. Trade has pièked up 100, 000 workers (seasonally adjusted) since January, and has now risen significantly beyond its May 1960 level for the first time. Half of the 1.6 million jobs gained during the recovery period from February 1961 have been in manufacturing, concentrated in the five durable goods industries which accounted for the major part of the recession loss. These industries (primary metals, fabricated metals, electrical equipment, transportation equipment, and machinery) have increased an average of 10 pe rcenl over their recession lows, although machinery has shown much less of a gain than the others. In nondurable goods employment, the increases averaged only 2-1/2 percent during the upswing, but these industries suffered far less loss during the recession. Electrical equipment alone among the major manufacturing industries has risen substantially beyond prerecession levels after allowance for seasonal* change. (See Table A.) The other half of the 1.6 million job increase since February 1961 was in trade, service, government, and finance. Among these, only trade shows any decline during the recession, and this decline was small. On the other hand, employment in service and government continued steadily upward without interruption during the recession, as it had in these industries throughout the postwar period. In other nonmanufacturing industries, mining and construction are the only ones showing losses (totaling 75,000) since the latest recession low. PAGENO="0156" 146 POLICIES FOR FULL EMPLOYMENT EMPLOYMENT CHANGES IN SELECTED INDUSTRIES May 1960 to February 1961, and February 1961 to April1962 (Seasonally Adlusted( Thousands 0 100 200 300 400 500 600 700 I I I I ~ I State and Local Government i _____________________ W/////A GAIN II _____________________ LOSS Rncnsu~Pn~iud Finance and Service 0 Mcy 960 - Fnbcu~y 961 I //~`~~~/,//////////////j Rncc~.~y Pn,icd H //~///////////////////J ~ rnb~u~y 1961 - ~p~ii 1962 Metal and Metal-Using Durable Goods Manufacturing* II ~////////////////7////W/////////~//////////////////////Z~½~ All 0th r Durable Goods Manufacturing Nondu able Goods Manufacturing I,____ Whole ale and Retail Trade Construction - Transportation and Public Utilities Minng~ Net.: Chung.. to ApiI 1962 ckulctnd II t,un polieicu~y dut, PAGENO="0157" POLICIES FOR FULL EMPLOYMENT 147 Table A. &~ployment Changes in Nonfarm Industries in Post-World War II Businesa Cycles (Seasonally adjusted, in thousands) recession Change tj~ha~~ from trough level tyou~h After 14 months 1960-62 May 1960 Feb. 196]. Anril 1962 )~J Total nonfarm industries 54,584 -1,099 +l,62'7 Manufacturing 16,985 -1,023 +852 Durable goods 9,608 -.811 +669 Nondurable goods 7,377 -212 +183 Manufacturing workweek (hours)... 40.1 -0.8 +1.5 Construction, transportation, and mining 7,686 -332 55 Trade 11,442 -146 +186 Finance and service 9,996 +195 +245 Government 8,475 +20'7 +399 1957-59 July 1957 ~ June 1959 Total nonfarm industries 53,077 -2,176 +2, 878 Manufacturing 17,240 -1,478 +1,234 Durable goods 9,902 -1,197 +962 Nondurable goods 7,338 -281 +272 Manufacturing workweek (hours).. 39.9 -1.3 +1.9 Construction, transportation, and mining 8,008 -555 +330 Trade 10,922 -318 +548 Finance and service 9,255 +17 +425 Government 7,652 +158 +341 l953~55 July 1953 Aua. 1954 Oct. 1955 Total nonfarm industries 50,449 -1,7].,]. +2,61'l Manufacturing 17,782 -1,764 +1,098 Durable goods 10,275 -1,391 +832 Nondurable goods 7,507 -373 +266 Manufacturing workweek (hours).. 40.7 -1.0 +1.2 Construction, transportation, and mining 7,764 -332 +371 Trade . 10,265 -53 4454 Finance and service 8,037 +244 +487 Government . 6,601 +194 +207 1948-50 2/ ~jp~~i.94~ Oct. 1949 Dec. 1950 Total nonfarm industries 45,138 -2,289 +3,961 Manufacturing 15,534 -1,587 +2,157 Durable goods 8,311 -1,374 +1,850 Nondurable goods 7,223 -213 +307 Manufacturing workweek (hours).. 39.8 -0.3 +1.4 Construction, transportation, and mining 7,408 -778 +937 Trade 9,339 -104 +299 Finance and service 7,088 +81 +244 Government 5,769 +99 +324 2/ Preliminary ~/ Both job losses and gains during the 1948-50 cycle were exaggerated by nationwide strikes in coal and steel and the subsequent return of the workers on strike. PAGENO="0158" 148 POLICIES FOR FULL EMPLOYMENT CHANGES IN NONFARM PAYROLL EMPLOYMENT IN 3 POSTWAR BUSINESS CYCLES (Seasonally adjusted) Employment Change Vrom Prerecession Peak - (In thousands) Months From Prerecession Peak 8~~I~rIs~ In Jao~ry 1910 d~ls I~I~d. Abrks .~d H~sh PAGENO="0159" POLICIES FOR FULL EMPLOYMENT 149 Increases in the number of nonproduction workers have contributed to the gains in manufacturing employment in recent months. The employment of these workers, who perform the clerical, administrative, sales, and professional work in manufacturing, tended to remain fairly steady at 4. 2 milli on during the period of recession (when hundreds of thousands of production workers were being laid off) and during the early period of recovery. Since the fall of 1961, however, there has been a resumption of growth in their employment; since September nonproduction workers have contributed about one- sixth of the gain in manufacturing employment on a seasonally adjusted basis. Hours and Earning~ The factory workweek, at 40. 4 hours, has not been exceeded in any April since 1953. Better-than- seasonal workweek developments were registered by every major industry except lumber, which reported no change after reaching a very high level in March. Notable gains in the durables sector were registered in fabricated metals, electrical equipment, transportation equip- ment, and furniture. In the soft-goods sector, apparel and textiles shows the most significant improvement. Overtime hours averaged 2. 7 in April compared to 2. 6 in March, and 2. 5 in February. A year ago, factory employees worked 2.1 hours overtime. At $96. 56, weekly earnings of manu- facturing production workers increased 65 cents from March to April, regaining the all-time high level of December 1961. Compared to a year ago, weekly earnings are $5.78 or 6-1/2 percent higher. Hourly earnings at $2. 39 are 1 cent higher than last month and 8 cents higher than April 1961. Total Employment Total employment continued its regular spring expansion with a seasonal increase of 700, 000 to an April record of 66. 8 million. Total nonagricultural employment (including the self-employed, unpaid family workers and domestics) rose seasonally by 450, 000 between March andApril, and at 61. 9 million, was also at a record high for April. Agricultural employment rose by 250, 000 over the month to 5. 0 million. This increase was less than usual for April. Agricultural employment was at the same level as a year ago, but the number of farm workers in April 1961 was held down by adverse weather. FACTORY lOII'LUYME\T AM) HOURS OF WORK (S.asonally Adjusted) AVIRAGE 50us$ `75 1961 PAGENO="0160" 150 !~xplanatory notes to chart: POLICIES FOR FULL EMPLOYMENT 4.0 3.0 2.0 1.0 Labor force time lost represents the man-hours lost by the unemployed and those on part time for economic reasons, as a percent of total man-hours potentially available to the civilian labor force. Man-hours lost are computed by assuming the unemployed lost 37.5 hours a week, and that those on part time for economic reasons lost the difference between 37.5 and the time they actually worked. Man-hours potentially available (the base for the rate) are obtained by adding: (1) Man-hours actually worked (2) Man-hours that could have been worked by employed persons with a job but not at work, assuming a 37.5 hour workweek (3) Man-hours lost. Unemployment rate, experienced wage and salary workers, is based on unemployment and labor force figures that exclude those who never worked, self-employed and unpaid fsmily workers. All wage and salary workers are represented, including those in agriculture, domestic service, government, and all other nonf arm industries. Unemployment rate, all civilian workers, is the standard seasonally adjusted rate of unemployment. Unemploytnent rate, married men, represents the number of unemployed married men as a percent of all married men in the civilian labor force (employed plus unemployed). These figures exclude married men living apart from their wives. The rates for 1955 and 1956 are based on pre-1957 definitions of unemployment and employment. NOrE: For a more detailed discussion of the time-lost measure, see Technical Note ~ !S~~ Alternative Thdexes of Unemploy- ment" in the Monthly Labor Review, February 1962, pp. .167 if. Percent SELECTED MEASURES OF UNEMPLOYMENT AND PART-TIME EMPLOYMENT 1955 to date (Seasonally adjusted) Percent 0.0 9.0 8.0 7.0 6.0 Labor force time lost through 9.0 - unemployment and port-time work ~ 8.0 ~ Unemployment rote. ~ married len 2.1 1955 1956 1957 1958 1959 1960 1961 1962 1963 PAGENO="0161" POLICIES FOR FULL EMPLOYMENT 151 Full- and Part-time Employment. The number of nonfarm workers on full-time schedules rose seasonally in April by 550, 000 to 50. 8 million, with virtually all of the increase occurring among men. The 35. 2 million men with full-time jobs this April also accounted for nearly all the 1. 3 million increase in full-time work since April a year ago; however, relatively few women had been cut back from full- to part-time work during the recession. The number of nonfarm workers on part time for economic reasons dropped by 100, 000 after increasing in both February and March. At 2. 2 million in April, the number of such part-time workers was at about its January level and about 800, 000 below its year ago level. The over-the-year decline was almost evenly divided between persons who had been cut back from full-time to part-time work and persons usually working part time because full-time work was not available. (See Table B.) Characteristics of the Unemployed Age and Sex. Mainly because of the spring pickup in outdoor activities, the number of uriimployed adult men fell seasonally in April by 350, 000, accounting for four-fifths of the decline in total unemployment. After seasonal adjustment, however, their unexx~loyment rate remained virtually unchanged over the month at 4. 6 percent. Following a substantial decline between August 1961 and January 1962, the unemployment rate for adult men has shown no further improvement. Nevertheless, at 2. 1 million this April, the number of unemployed adult men was 650, 000 less than in April 1961 and their unemployment rate was well below the 6. 0 percent of a year ago. No significant changes have occurred recently in unemployment among women and teecagers. However, in both number and rate, unemployment among adult women was considerably below the high levels of a year ago. At 750, 000, the number of unemployed 14 to 19 year-olds accounted for less than one-fifth of total unemployment, but their rate of unemployment was two and one-half times greater than the overall rate. There was no change in the number of unemployed teenagers over the year. Duration of Unemployment. Virtually all of the reduction in unemployment was among persons who had been jobless for less than 15 weeks. Their number fell seasonally in April by 400, 000 to 2. 5 million with persons out of work for more than 4 weeks accounting for most of the decline. The number of persons unemployed for more than 15 weeks was unchanged at 1. 5 million, but no seasonal change was expected. Among those looking for work for 15 weeks or longer were 700, 000 persons who had been looking for work for over 26 weeks, about the same number as in March. The number of very long-term unemployed was 200, 000 below its year-ago level. While there has been virtually no change in the number of very long-term unemployed since the beginning of the year, this group was increasing steadily throughout the first half of 1961, reaching a recession high of about 1 million in July, several months after the trough in economic activity. After 14 months of recovery the number of very long-term jobless is 300, 000 higher than its pre- recession levels. Although this pattern of lagging recovery also followed the 1958 trough in business activity, very long-term unemployment is currently some 450, 000 higher than in the months prior to the 1957-58 recession. 87569 O_-62----11 PAGENO="0162" 152 POLICIES. FOR FULL EMPLOYMENT Industry of Last Job. Unemployment rate s in durable and nondurable goods manufacturing, mining, and construction were below their year-ago level this April, and in durable goods manufacturing they were also below the level in April 1960 before the recession began. In transportation, trade, and finance and service, unemployment rates while down over the year, were above those of April 1960. In every major industry group, unemployment rates were still well above those registered under the high employment conditions of April 1957. New Workers. Among the unemployed in April were 450, 000 persons looking for their first jobs, about the same number as a year ago. Virtually all of these inexperienced unemployed were under 25 years of age and four-fifths of them were between 14 and 19 years of age. Over the past 4 years, the total number of 14-24 year-olds in the population has increased by 17 percent. Partly because of the tendency for young people to remain in school longer, the number of 14-24 year-olds in the labor force has increased by only 12 percent. In con- trast, the number of unemployed young people seeking their first job has increased by 30 percent, two and one-half times greater than the rate of their labor force increase. All of this increase in the inexperienced unemployed has been among teenagers; there has even been a slight decline in the number of unemployed new workers 20 years of age and over. In April 1958, the trough of the 1958 recession, new workers accounted for 7 percent of the total unemployed. This April, they accounted for 12 percent. The increase in the number of unemployed new workers has been greatest at the two extremes in terms of duration of unemployment. Both the very short-term unemployed (1 to 4 weeks) and the very long-term unemployed (27 weeks or more) have increased by 50 percent over the past 4 years. In April 1962, nearly half of the inexperienced unemployed had been looking for work for less than a month, but 1 out of every 6 had been searching for his first job for over half a year. Insured Unemployment The numbe.r of insured jobless under State programs dropped by nearly one-fifth (400, 000) to 1. 9 million between March and April. Preliminary data indicate that the~ number of persons exhausting their regular State benefits edged down from 170, 000 in March to an estimated 165, 000 in April. In addition to the insured unemployed under the regular State programs, some 234, 000 persons who had exhausted their State benefit rights were insured under the Temporary Extended Unemployment Compensation program (TEC) in April. In March the total was 310, 000. The sharp over-the-month decline was due to the "phase-out" provision of the TEC Act. Under this provision, eligibility for TEC benefits after March 31 is limited to qualified claimants who had been in compensable status under the TEC program on or before that date. All but three States reported a decline in insured unemployment under the regular State programs over the month.~ The reductions amounted to 25, 000 or more in five States--California (51, 000), New York (43, 000), Pennsylvania (34, 000), Michigan (26, 000), and Illinois (25, 000). A large part of these declines reflected continuing seasonal expansions in outdoor work, and a pre-Easter. pickup in trade. California also noted recalls in food proce ssing and in fabricated metals plants, . while Michigan reported increased activity in the auto industry. PAGENO="0163" POLICIES FOR PULL EMPLOYMENT 153 The national rate of insured unemployment (not seasonally adjusted) was 4. 6 percent in April c~ompared with 5. 6 percent in March and 7. 0 percent a year ago. Five State s~-Alaska, Arkansas, Maine, North Dakota, and West Virginia-- had rates in excess of 7.0 percentthis April. However, the rates in all of these States except Maine were below those for March. In Maine, the start of a new benefit year on April 1 caused the rate to rise. Among the larger industrial States, the rates were between 5. 0 and 6. 0 percent in California, Massachusetts, Michigan, New Jersey, and Pennsylvania, and below 4. 0 percent in Illinois, Indiana, Texas, and Wisconsin. Labor Force The labor force (including the Armed Forces) rose seasonally over the month by 300, 000 to 73. 7 million, despite the small increase in agricultural employment. About 650, 000 workers have been added to the labor force since April 1961 and over 1. 5 million workers since April 1960. Table B~. Nonfarm Workers on Full-time and Part-.tii~ Schedules (Thousands of persona) Work schedules 1 -~ h i~61 Total nonfara employment With a job but not at work.... it work: 61,863 ~1,822 61,533 i,929 60,734 1,W1 On full-time schedules j/... On pert-time schedules Economic reasons Usua].ly full time Usually part time Other reasons 50,807 9,234 2,221 1,050 1,171 7,013 50,250 9,356 2,336 1,110 1,226 7,020 49,553 9,370 2,978 1,466 1,512 6,392 j/ Includes those who (a) actually worked 35 hours or more during the survey week, and those who (b) usually work full time but worked 1-34 hours during the survey week because of noneconomic reasons (bad weather, illness, holidays, etc.). PAGENO="0164" 154 POLICIES FOR FULL EMPLOYMENT Revision in Estimation Procedure Beginning with the figures for April 1962, information from the 1960 Census of Population replaces that from the 1950 Census in the estimation pro- cedures for the labor force sample survey. The effects of the change are shown in the tables on the following pages presenting data on population and employment status on both the old and the new basis for April. Most of the differences between the old and the new labor force estimates are small and well within the normal range of sampling error. Population information from the decennial census is used in two stages of the estimation procedure for the sample survey in order to improve, the reliability of the results. Since labor force activity is highly correlated with such characteristics as age, color, urban-rural residence, and sex, the sampling variability of the estimates can be reduced if the sample population is brought into line with the known distributions of the total population by these characteristics. (See U. S. Bureau of the Census. Current Population Reports, "Concepts and Methods Used in the Current Employment and Unemployment Statistics Prepared by the Bureau of the Census," Series P. 23, No. 5,for detailed explanation.) The first stage in the estimation process takes into account differences between the color and urban-rural residence distribution of the population in the sample counties and that of the total population in each of the four major regions of the country at the time of the census. These adjustment ratios remain constant until another census is taken or until changes are made in the counties in the sample. The second stage adjustment takes account of current differences between the distribution of the sample population by age, color, and sex and that of the Nation as a whole. Each month, the Census Bureau prepares current independent estimates of the noninstitutional population by age, color, and sex by carrying forward the most recent census data to take account of the subsequent aging of the population, mortality, and migration between the United States and other countries. These are used as controls for the sample results for the month. In effect, the sample returns determine the percentage of the population within each age-color- sex group which is employed, unemployed, etc. The absolute numbers are derived by applying these percentages to the independent population figures. The timing of the change-over to the 1960 Census material was determined by the date of completion of the tabulations of the necessary Census information for all counties. These re suits became available in time for the processing of the April 1962 survey. In order to measure the effect of the change to 1960 Census data, the survey resultswere also tabulated using 1950 data. Since the new population figures show a somewhat different age distribution than the old, the age distribution of the labor force and the employed will differ slightly. However, there is no effect on percent distributions within age groups, or on labor force or unemployment rates by age. The effect on comparability with data prior to April 1962 is so minor that no revisions of earlier statistics will be made. Users who wish to make allowances can do so on the basis of the data shown in the following tables. PAGENO="0165" Co I.', Co to ~ O1~p~ o ~ BOO 00 ~0 tD~ Cf i ~ ~ to 00 aa * 000 0000 if * H 0 C) Co Co Cf I.'.. cP I.'. ci 0~ Co B C) 00 ~0 0' `.~ `.~ 7') H `JO `.7' `.30 `JO `.7' 0) `~ Cf Cf Cf Cf Cf Cf 0 0 0 0 0 0 -.3 a~ `Jo O"-oo ~- `.30 ~- ¼o) s-'..) 7') `.~) 7') H 7') H H H ~`JoCo O'Jo~'- O'Jo7'- O'.JO4~- O'Jo.~- 0 O).~'- 0~~P---) 00' P'03' ~$0' ~7') ~ Co `DO ~`0Co Co~-'0m-.DCo~HCo HHOO `Va: "~: °V~: `~: ~: ~__h:~1 0'. ~o ~- `..j ~) H ~JO `JO ~JO `Jo `JO 0) `4 Cf Cf Cf Cf Cf Cf 0 0 0 0 0 0 -`3 0'. 0"Jo 0"Jo ~- `Jo ~- `.o3 ~- `.o) 7')'..) 7') H 7') 1-' H H o ~Jo Co 0 `Jo -. 0 `Jo ~`- 0 `Jo ~- C) `Jo ~- 0 0) ~- O'~- -.3 `4 CftO CfCf'4 CfCf°4 CfCf'4 CfCf'4 CfB'4 B P''4 CD 000 00 CD 00 CD 00 000 CD ODCD B P~ B B B ~0 0' 0".7O ~1 `.7' ~- 01 ~. ¼.) P1 ¼o) C'.) 7') 0000 0Co~'0Co~'0Co.~'.0Co~HCoHHCo * * * * ~ ~°~: ~: °f~: ~`4: °~: ~: i -1 3- Co 0 7 7' Co 3 -~ C) H ~ ~ ~-~f-' ~. ~ 0) ¼o 7' -.3 1- r'~ oa-a'o `.~ 0) ~- `.~ 0) -.30' a~ ~- H `Jo 0' 0) ~- ~7-. H `Jo 0) ¼.o HO' -.3 ¼~ 0) H ~ ¼.) 7' -.3 `Jo 7' H 3 HO `0 0 0 `.~ H .7'- ~ H `.0 ~- `Jo 0 0' `Jo H `.0.7'- ¼ H ¼o~ ¼oJ 0' 7' `Jo 0) OH H H -~ 0) 0 0' -.3 7' -.3 0 0 `Jo 0' .0 o H 7' ¼~ -~ ¼o, 0) H -.3 H 0) ~ -~ .0 7' 0000 ~-. ¼o -~ 00)0) 0 00)0) `.00) -.3 `Jo `.0)0) `.~o `.Jo CD ~- 03' 0 `Jo 0'H 0)7') 0 ¼o3 ~ -v ~ 5. 7') 0) 0)7'- `.0) H -.3 .0 0 ¼. ¼o3 0) ~- ¼.) CD -~ 0' -3 `Jo 7') 0' ¼o. -.3 0 7'- H `Jo 0) ¼oJ H `Jo -.3 7') ¼.) -0 7') -.0 ~- ¼.) -.3 0.7'- I-' -.3 )~ 7'.O a~ 0' `Jo H `000 `JO 0 `Jo ~`- 0' HO) CDO'0 H 7' ¼. ¼.o ~- 0) ~- 7' 0' 0' 0-30' H 0)03' H 0)07' 7' `Jo 0' H 7') `Jo 7') .3 HO) H H 7'.) .0 ~`- ¼~ `Jo 0 ~Jo `Jo `0 ~- 7') 0 7') .0 7') H `Jo 0' ~- 0 ~`- H `Jo .0 0' `Jo H .0 0 -N 0'0 0'¼o) .0 H H 7') I-' 0' H ~ ~.o'.~4 ~ -.~ I o ~ ¼.) 7') `.0) `Jo -.3 ¼o~ 0) `Jo .0 ~¼.) `JO ~- ~- 0) `Jo -.37') -.3 -3 7') 0' 0) 0 0 H-.3 ~o'0 J~ B Co Cf ~. 0 Co H H ¼. 7' 7' `Jo 7') 7' `Jo 7') H ~- 7') H ¼~o H H 7') 7')'..) 0'7'- `Jo -.0 \7' `-7' `Jo ~ .0 ~- H `Jo H H `.70.0 7''0 7'i `Jo 0) ¼o3'0 0' `JO H 0)00' `.~7 `.0 OJo ¼o.O'0 0 07') ¼.) ) ".7 `.7' `.Jo H 0~N 0' H H `.3030 `.o `Jo 0 `Jo 0' -3 -3 7 04'. ¼o~ 030'.) H 0 7') 7') `Jo -3 0' 0) `Jo -`30 -.7.0 0"Jo `Jo .D'Jo .7'. 0'.~) `Jo ¼~ H - -.3 `. H `Jo H 0' 0' 0 0' 0.3.0 H 1-' 0' 0' 03' 7') `Jo -37') O)'0 -3 ¼oJ 0".0 C"Jo H ¼. H -30-3 7') 0 `Jo `Jo 00)03.00-0 H -.3 C)) 7' ~JO -.70' 0 0'¼o H `3 `0 Z f' ~ H mh~'37' 87' 0'0)~0O"JoH0)00¼.3~~ ¼.O-.0 H O~3 -3-.7Jo H-3~-'.7'OC'.)--3'.0H¼7oO'O 0' ~3 `0 0 H ci H Cl) 0 t-4 ~H'..)1~J'.~3fl~HH7'.) I'.~~I ~ 0'¼.)~¼.JH&'. I HI I~I 11111 `Jo `JO 0 `Jo ~- 0 -3 7')'0 H ~ `.0)'0 7') 0' CJ"0 0"J0 CY"-O `JO 0 `.7 `-3 ¼.) 0 007') 0-0)0)00)7'---) 7' -.3 ~Cf PAGENO="0166" 156 POLICIES FOR FULL EMPLOYMENT Etnployinent and Unemployment, by Age and Sex, April 1962 On New and Old Basis (Thousj~'4~~ nersons 14 gears of a~e and over) T~no1~Q~ ~nL Age and Sex ~ ~ ~ ~ Old ______ Old New~ - Total 4,961 5,048 61,863 61,979 3,946 3,952 Male 4,258 4,329 39,925 39,925 2,534 2,535 14 to 19 years .. 486 504 2,209 2,251 420 427 20 to 24 years 307 318 3,397 3,445 363 371 25 to 34 years 583 600 8,844 8,929 440 41÷3 35 to 44 years 748 755 9,899 9,796 471 462 45 to 54 years 842 865 8,380 8,412 427 427 55 to 64 years 756 765 5,505 5,478 297 295 65 years and over 538 520 1,690 1,614 117 110 Female 703 719 21,938 22,054 1,411 1,416 14 to 19 years' 51 52 1,880 1,893 328 331 20 to 24 years 25 25 2,454 2,467 194 195 25 to 34 years 110 112 3,667 3,668 273 273 35 to 44 years 161 164 5,134 5,110 282 278 45 to 54 years 159 166 4,943 5,058 225 232 55 to 64 years 158 161 2,990 3,024 74 74 65 years and over 39 39 867 834 36 33 1l9~ Population Census data used in estimation procedure. 21950 Population Census data used in estimation procedure. April 1962 on old basis shown for comparative purposes ox~1y. PAGENO="0167" n~o~) ~ ¶ ~ a ;~ ~ o~ ~ T~)t~ 0 O%0 -~ 1~) ~ *~* ~~*-4 P) 0 ~ 0~ 0~ o a 3 :~Q Fi ~ hi ll~ D I ~, ~ ~ ~O I-~ N F~\o ~`0 ~J 0) ~ r C ~J2 C : ~d 0) ~%JI 0\-~ ~ 0) I-'-4 rO'J~ 0 0 ~ e~ 0 g PAGENO="0168" to $ 00100 l~1 10 ,o -o ~ 1010 I~ I-' to It) ~ `000-0 to'fl ~`Oto 100 00to-0 10\fl O'Jl I. C ~J2 0 0 g 001) `0 -~ to 00W 10 10 -1 1.0101~ 10 `0 to ~ ~ 10 ~_ !_ ~O ;4 I~ ~ ~ 4 0 0 ~t 1.1W 0~01 a~to~o~ 0 01~ .1~ ..o'0 to O1.P~ 10 .1 01 10-I 0 ~1 )~cf &t~~ `Ototo'~)W~ ~ to~010t~ (00 100 OW 0'Wt0 0 t)'.O -4'Jl\0 %J(1.fl1.J1 0)1-' .10)'J1 `~. ~ ~ -o ~-n i-"o c-i-' 0 ~o 0)t~ 00000)000) 00'0 ~0 c-U) 10 I 0~lt) `0 -~ 1.) OW U) 1-' 10 -1 1010101.010 10 to ~ ~ 10 ~0~0 ~ 100r ~0-4 II) ~) 10 10-1 ~` ~ r. PAGENO="0169" F ~ j 0 ~3Il ~ ~ ~ : ~ x - U U O~4~ S~ ~ ;~ ~`! ~ ~ ~. ~i d ~d p ~ ~ ~ q-----: -~ ~ ~ i]1i ~ ;~ ~ - - r~ ~0.0 M~1 H H \fl HHH ~ H H HH i~ t~ :~ E ~ ~ H H ~0 HH~ ~ H H H V~ HH a~ ~ ~ H C ~J2 C fl:F~ PAGENO="0170" 0 02 0 t~j ~I-',-~ ~~8~'8 ~ C\ -~ ~ O\~ ~u, O'O C~ O~ a~ ~ ~ ~8 C~ t-~ ~-vi 0 ~C0 IC fO~O~CO -~ ~ I~F-q-~) ~ IC I-~I-~P) 8~g~ IC ~IC i-~,-~I~ ~ i ~1 IC I-" oI~ ~ 0 (73w ~~-J -iI~ a, i-'i-' to ~: ~ - g I II) ~~ICICICICICICICI-'I-'~ g~g~ ~ PAGENO="0171" POLICIES FOR FULL EMPLOYMENT 161 Table 10. Employed person., by typo Of industry, clas, of work.., and sex April 19& (Thousands of persons 1~ of ads and over) Class of worker Total Male Female Class ot worker Total Male Female Total employed . 66,82)4 1ii~,183 22,6(41 Nonagrtcultural industries.... 61,863 39,925 21,938 Wage and sal1r7 workers..... 5(#,750 3)#,879 19,812 £griculture. (#,961 (4,258 703 In private households 2,586 29(4 2,292 Wsge and salary worker..... 1,1467 1,3(43 12)# Governneot workers 8,629 5,1141 3,1188 Self-employed workers. 2,763 2,619 1(414 Other 1#3,535 29,1411(4 114,091 Unpaid faxily workers. 731 297 ~#3(4 Self-employed workere. 6,)#6(4 (#,966 1,1498 Unpaid fsmily workers...... 9~9 80 568_ ltlot cortpletely comparable with data for previous periods. (See footnote 1, table 1.) Table 11. Selected unemployment data f and It ~ (thou- sands) 19 distri- bution `~i (thou- sands) Ratet distri- Rats* bution DURATION Total unemployed Less than 5 weeks 5 to 14 weeks 15 to 25 weeks 57 weeks and over. Average duration (weeks)... AGE AND SEX Total unemployed Male 14 to 24 year.. 25 years and ever. Female 14 to 24 years 25 year, and over. MARITAL STATUS AN)) SEX Male Single Married, wife present Other marital atatus, Female Single Married, husband present... Othdr marital status. . COLOR AND SEX White Male Female Nonwhite Male Female 3,9(#6 1,527 936 79# 719 j~ - Setst 5,6 5,l# 10.9 (4.14 5.9 10.6 I#.7 5.1# 11,1 3.9 10.3 5.9 7.5 5.1 6.1 (#.8 l#.7 5.0 12.1 12.1 12.0 100.0 38.7 23.7 19,14 18.2 - Percent distri- bution 100,0 O#.2 19.8 114.14 35.8 13.2 22.5 61#.2 2i~6 35,9 6.7 * 35.8 10.2 17.7 7.9 76.3 (#9,9 26.3 23.7 11.3 9.5 (4,962 1,600 1,23)4 1,205 923 J~j~ Ratet 7.0 7.0 11#.5 5.6 7.1 12,3 5.7 7.0 lI#.2 5.1 10.9 7.1 8.0 6.5 7.5 ~ 6.3 6.3 6.14 13,0 1.3.5 12.1 INDUSTRY Total unemployed~ Experienced wage and ~lary workers. Agriculture. Nonagricultural industries. Mining, forestry, fisheries.... Construction Manufacturing Durable goods Nondurable goods Transportation and public utilities. Wholesale and retail trade Finance, insurance, and real estate Service industries. Public administration OCCUPATION Total unemployed Professional, technical, a~d kindred workers Farmers and fare managers. Managers, officials, and propri- store, except farm. Clerical and kindred workers. Sales workers. Craftsmen, foree.n4 and kiudred workers. Operatives and kindred worker,,.... Private household workers. Service workers, except private household Farm laborers and foremen Laborers, except farm and mine..... ((0 previous work experience. 5.6 5.6 9,1 5.5 8.8 1)4.1 5.5 5.14 5.6 ~ 1#.7 6.Ii 3.0 (#,O 2.6 5.6 1.5 *I# 1.5 3.8 3,14 5.6 7,14 5.3 6.7 5.14 13.8 - 100.0 85.2 3.7 81.5 1.5 13.6 25.0 13.7 11.3 5.3 17.6 2.1 1(4.1 2.3 100.0 3.2 .3 2.9 10.1 3.9 13.0 23.8 3.3 li.1# 2,7 13.7 11.8 7,0 7.3 lOsS 7.2 lI#.2 17.9 8.3 9.6 6.7 5.1# 7,I# )#.2 (4.7 2.3 7,0 1.7 .1 2.2 14.6 14.3 7.7 10.3 6.3 7s3 6,9 17.14 - , 1~Not completely comparable with data for previous periods. (See footnote 1, table 1.) 5Percent of civilian labor force in each category who were unemployed. Inoludee self-employed, unpaid feodIy workers, sod persons without previous yost experience, not shown separately. 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The household survey gives an unduplicated count of individuals who are employed or unemployed and detailed information on their personal characteristics such as age, sex, color, and marital status. The payroll reports give detailed estimates of nonagricultural employment, hours and earnings, by industry and geographic locality. Data from the unemployment insurance systems yield geographic detail onthe total number of workers dra~sring unemployment compensation under State unemployment insurance programs. These three series require different definitions, con- cepts, and methods of measurement. Because of this and because of sampling variability, response or reporting errors, and administrative factors, month-to-month changes shown by the series may differ, Following is a brief description of each series. For more detail, see Employment and Earnings of the Bureau of Labor Statistics and publications of the Bureau of Employment Security. The sample survey of households, collected and tabulated by the Bureau of the Census, U.S. Department of Commerce, for the Bureau of Labor Statistics, provides a comprehensive measure of the labor force, 1. e.,, the total number of persons 14 years of age and over who are ~employed or unemployed. The information is obtained from a scientifically selected sample of about 35,000 interviewed households in1333 areas throughout the country and is based on the activity or status reported by surveyed persons for the calendar week ending nearest the 15th day of the month. The sample survey of employers provides estimates of the number of employees on the payrolls in nonagricultural establishments, by industry. Statistics on employment of production or nonsuper- visory workers, average weekly hours and average hourly and weekly earnings are also available for a large number of industries. The figures are based on reports from a sample of establishments employing approximately 25 million workers. The employee figures include all persons who received pay from nonagricultural establishments during the payroll period ending nearest the 15th of the month. Administrative statistics of unemployment insurance systems furnish a complete count of insured unemployment among the two-thirds of the Nation1s labor force covered by unemployment insurance programi'~- Weekly reports, by State, are issued on the number of initial claims, the volume and rate of insured unemployment under State unemployment insurance programs, and the volumes under the programs of unemployment compensation for Federal employees, for veterans, and for cx- service- men, These statistics are published by the Bureau of Employment Security, U. S. Department of Labor in"Unemployment Insurance Claims," Concepts and Definitions £mployment Data The employed total from the household survey includes all wage and salary workers and self- employed perso~ts who worked at all during the survey week or who had jobs or businesses from which they were temporarily absent because of illness, vacation, industrial dispute, or various other reasons, regardless of whether pay was received. It also includes unpaid workers in family- operated enterprises who worked 15 or more hours during the survey week. Employed persons include those working in agriculture, or in nonagricultural industries; those holding more than one job are counted only once and are classified according to the job at which they worked the great- est number of hours during the survey week. Payroll employment from the employer survey includes nonf arm wage and salary workers who received pay for any part of the pay period. Persons on paid sick leave, paid holiday, or paid vacation are included, but those on leave without pay for the entire `payroll period are excluded. PAGENO="0177" POLICIES FOR FULL EMPLOYMENT 167 Persons on the payroll of more than one establishment during the period are counted each time reported. Self-employed persons, unpaid family workers, and domestics are excluded. Because these payroll data are based upon records of a relatively large sample of establish- ments, they provide industry information in considerable detail which cannot be obtained with equal accuracy from a survey of households. The household survey, on the other hand, furnishes de- tail on personal characteristics of the labor force. Unemployment Data The unemployed total from the household survey includes all jobless persons who were looking for work, regardless of whether or not they were eligible for unemployment insurance, Also counted as unemployed are persons waiting to be called back to jobs from which they had been laid off; those scheduled to start new wage or salary jobs within 30 days (except students); and those who would have been looking for work except that they were temporarily ill or believed no work was avail- able in their line of work or in the community. Insured unemployment represents the number of persons reporting a week of unemploymentunder an unemployment insurance program. It includes some persons who are working part time who would be counted as employed in the payroll and household surveys. Excluded are persons who have exhausted their benefit rights; new workers who have not earned rights to unemployment insurance; and persons losing jobs not covered by unemployment insurance systems (agriculture, State and local government, domestic service, self-employment, unpaid family w o r k, nonprofit organizations, and firms below a minimum size). The rate of insured unemployment is the num- ber of insured unemployed expressed as a percentage of average covered employment in a 12-month period ending 6 to 8 months prior to the week of reference. Initial claims are notices filed by those losing jobs covered by an unemployment insurance program that they are starting periods of unemployment. A claimant who continues to be unemployed a full week is then counted in the insured unemployment figure. Hours of Work Average weekly hours of work from the employer survey are available for detailed industries in manufacturing and for selected nonmanufacturing industries. The data relate to production or nonsupervisory workers and measure the total number of hours for which pay was received. The hours of work from the household survey include all hours worked (paid or unpaid) in farm and nonfarm employment as reported by individuals. The total number of hours worked by persons holding more than one job is credited to the activity at which they worked the most hours. Statistical Reliability Household Survey Since the data from the household survey are based on a sample, they may differ from the figures that would have been obtained if it were possible to take a complete census using the same schedules, enumerators, and procedures. The standard error is primarily a measure of sampling variability, that is, the variations that might occur by chance because only a sample of the population i s surveyed. The chances a r e about two out of three that an estimate from the sample would differ from a complete census by less than the standard error. The chances are about 19 out of 20 that the difference would be less than twice the standard error, The following table shows the average standard error for the major employment status cate- gories, computed from data for 12 recent months. Estimates of change derived from the survey are also subject to sampling variability. The standard error of change for consecutive months is also shown. The standard errors of level are acceptable approximations of the standard errors 8786i~ O-fJ;2-----'12 PAGENO="0178" 168 POLICIES FOR FULL EMPLOYMENT of year-to-year change. For more details on statistical reliability, see Employment and Earnings of the Bureau of Labor Statistics. -- Average standard error of major employment status categoriee (In thousands) Employment status ~_- Labor force and total employment Agriculture Nonagricultural employment Unemployment ._ .._.. ._ ,*,,~ .._._ ,,~** ...~... *,,~ ...*~ Average standard error of-- Monthly, level Month-to- ~ n~ionths only) 250 200 - 300 100 180 120 180 100 -~ Employer Survey This survey is designed primarily to measure month-to-month changes in employment, as indi- cated by a sample of empl&~ers who report in successive pairs of months. The estimated employ- ment levels are adjusted periodically to benchmarks obtained from a variety of sources, the most important of which are' records of employment in establishments covered by State unemployment insurance laws. These data are compiled by State agencies under the direction of the Bureau of Employment Security. The e,ctent of adjustments needed to make the monthly series conform with the benchmarks provides a check on the accuracy of the estimates. Significant causes of difference between the benchmarks and estimates include changes in indus - trial classification of individual establishments, as well as sampling and response errors. The follow- ing table presents a comparison of ~,~griculturalpaYrOll employment estimates for industry divi- sions for March 1959. This comparison relates to the series published prior to conversion to the 1957 Standard Industrial Classification, and reflects only those differences which would result from a normal benchmark adjustment. However, apart from sampling and related problems, the March 1959 benchmark levels actually used for the series on the 1957 SIC were affected by 1) additions to employment amounting to 1670. 000 (an increase of 1;3 percent in the total estimate) for certain cate- gories not adequately represented before, and 2) shifts between industry divisions in accordance with the new SIC, as described in the article in the November 1961 issue of Employment and Earni~~g~. Comparison of nonagricultural payroll employment estimates with March 1959 benchmarks, by industry division Industry division Employment e stimate In thousands As percentage of benchmark TOTAL Mining Contract construction Manufacturing Transportation and pulilic utilities Whole sale and retail trade Finance, insurance, and real estate Service and miscellaneous Government 51,093 ``~*~ 689 2,435 15,995 3, 883 11, 134 2.393 6, 409 8,155 96. 1 95.1 99.1 100. 3 100. 8 98.8 98. 6 100.0 PAGENO="0179" POLICIES FOR FULL EMPLOYMENT 169 Representative CURTIS. Would the gentleman yield at that point? Senator PROXMIRE. I would be happy to yield. Representative CURTIS. I got the figures for January 1961, Febru- ary and March, before this revision census data, and we show a similar decline before that element entered in. I don't know the significance, but it does show a 100,000 decline. I think your point on armed serv- ices is well taken from the standpoint that they had increased about 300,000, but we still get back to the basic thing of a decline of the labor force in relation to our total population, which I think bears on this economic gap theory. Senator PRox1~intE. I would like to say this is a neglected area of our whole economic approach. There has been laudatory emphasis on the demand aspects of the situation, but I think too little emphasis on the supply part of the employment equation. As lanalyze your statement, and I think it is a very, very fine one, there is an indication that you feel that the main problem is unem- ployment. There are other problems of growth and so forth, but unemployment is certainly a nagging and real and vital problem. It is possible that we can. solve this problem entirely in the area of increasing effective demand. I wonder if we can really do so. I can see nothing wrong at all with working constructively on reducing the size of the labor force because I think we can do so without re- ducing our standard of living and providing greater values for our people. I am thinking particularly in two areas. One you mentioned, the earlier retirement age and social security from 65 to 62 made a real contribution. Why isn't this good? If people want to retire, can re- tire earlier, open up jobs for other people, I think this is fine. Another possibility which has not been developed is to keep our young people in school longer. In the first panel discussion we had here it was emphasized that the most serious problem of unemploy- ment is the people who are young and just entering the labor force. If they can be kept in school, and their remaining in school can be dovetailed with an effective and aggressive vocational program, then you solve the problem of diminishing unemployment and have them at constructive work so when they do enter the labor force they can make a substantial contribution, and a job will be more readily available. I might conclude this statement with one point, and that is that if it were not for the social securiy system we have today, and did not have in the thirties, we would today have not ~½ percent of our work force out of work, but probably 14 or 15 percent of our work force out of work, because the 13 or 14 million people on social security, most of them, would have to work so that they would have the income to stay alive. Therefore, it would seem to me that a constructive and limited extension of social security may be another constructive way to cope with this economic problem rather than try to do it entirely with fiscal measures which can take us into a deeper and deeper na- tional debt and aggravate our problems in that direction. Dr. HELLER. We have been very much concerned about the supply side, particularly the employment problem. We have stressed in earlier testimony and in the annual report of the Council that, side by side with attention to expanding demand and expanding rates of investment and modernization which release labor, it is extremely PAGENO="0180" 170 POLICIES FOR FULL EMPLOYMENT important to improve the mobility and the skill structure of the labor force. You are suggesting with respect to education and vocational train- ing, that these work at two ends of the problem. First, such training takes people off the labor market for the time being, and second, it upgrades the skills and education and knowledge of these individuals. I couldn't agree more with your suggestion. It is true, of course, that increased training costs money. An ex- pansion in the Federal budget and in State and local budgets would be necessary to provide this higher level and longer period of training. The same is true of social security as well. If we were to make limited and modest advances in the provision of social security for the aged, that, too, would require revisions that cost money. I am not saying that the increased budgetary costs makes your pro- posals undesirable. We have to balance the costs against the benefits. But it does run into some problems on the budgetary side that have to be considered. Senator PROXMIRE. In this connection I understand the reduction in retirement from 65 to 62 did not cost a significant amount because it was accompanied by a reduction in the pension to be received. Sim- ilarly, a reduction from 621o 60 might be accompanied by a reduction in the benefits to be received and it would be completely voluntary whether the people wanted to remain in the labor force and continue to work or whether they would prefer to retire and take a lower pension. At any rate, the dollar cost could be adjusted, I would think, so it would not be significant. Dr. HELLER. Yes. This whole question of how much of our advance in economic potential we take out in the form of increased leisure and how much we take out in the form of increased production is a very difficult one and depends a great deal on some of the basic philo- sophical goals of the society in which we live. To the extent that we put emphasis on growth for domestic fulfill- ment and international leadership, we are a little more reluctant to cut down on the size of the labor force and its growth than if we felt that we were at a stage where we were truly affluent and could afford the cost. I think this' administration has placed somewhat more emphasis on the maintenance of high rates of labor force participation and im- proved opportunities for education and training as a means to faster economic growth. Senator PROXMIRE. I think we can do both vigorously at the same time. The Senator from New York has 3 minutes remaining. Senator JAvITs. Thank you very much, Senator. Mr. Chairman, I have one other line of questioning which I shall make expeditious. I notice in the various things you laid out under the heading of policy actions you list entirely matters which are already before us. You don't list any measures other than those already before us. I just wondered whether you would, yourself, consider these actions as being everything that is needed, or what would be your attitude, for example, on the widespread view that we need some better mechanism in law for dealing with national strikes. We have just had a bill in- troduced by one of our colleagues which I didn't join in because I PAGENO="0181" POLICIES FOR FULL EMPLOYMENT 171 didn't like the way it was developed, but nonetheless it does seem to be a general feeling that strikes which affect the total national interest are beyond the reach of effective law. Would it come within the compass of your activities to include in your prescription as to what we ought to do with any such ideas? Dr. HELLER. As you know, Senator, we are primarily charged under the Employment Act of 1946 with problems and policy relating to economic stability, economic growth and price stability. We do not get as directly into problems of the kind you are raising. We certainly do not have a policy position on the matter you refer to that I could very usefully comment on at the present time. Senator JAVITS. Would the same be true as to how business ought to finance the worker in respect of the transition to automation? Dr. HELLER. This gets into the basic question of how best to stimu- late investment and modernization and to improve technology in the economy, and it is something on which the Council might naturally be consulted and concerned, although I would not say we have a specific program to lay before you. Senator JAVITS. You did not hesitate to prescribe what you thought should be guidelines for labor-management wage negotiations. Dr. HELLER. This is an area so directly related to wage and price levels in the economy, and to the whole question of the possible re- sumption of the wage-price spiral, that it is directly related to our responsibilities concerning maximum purchasing power which, as you know, we interpret to include concern with the maintenance of reason- able price stability. Senator JAvrrs. Would it be fair to say, therefore, and this is my last question because my time is up, that the policy actions which are specified are by no means an exclusive list as you see the needs of the economy to move it forward and avoid a recession? Dr. HELLER. That is correct. Senator JAVITS. Thank you. I thank my colleague. Senator PROXMIRE. I will ask a few questions and then defer to Congressman Reuss. I would like to go back to something we Democrats have been neglecting today, the monetary policy, and ask you a further question on it. Most of our fire has been directed at the Federal Reserve Board. I think Senator Douglas and Congressman Reuss did a marvelous job of laying the groundwork for the question I want to ask. Senator Douglas pointed out that traditionally, monetary policy has been to ease the situation when the expansion slowed down. All the evi- dence is that we have not done so this time. Congressman Reuss certainly documented it well. I am referring to a New York Times article on last Sunday which is headlined "Ken- iiedy Revises His Fiscal Goals," and frankly, this is one of the most alarming articles I have read as a Democrat and one who is deeply interested in economic policy. It reads in part: The interest of the Kennedy administration in a steady or even higher interest structure both short- and long-term was attested last week by the outcome of an $8,800 million financing operation, most of which was intended to refund matur- ing debt and the rest to raise about a billion dollars in new money. All of the money could have been raised readily at short term at a cost of 3i/2 percent. Still, the Treasury saw fit to borrow $1,095 million of the total on bonds due in PAGENO="0182" 172 POLICIES FOR FULL EMPLOYMENT 61/~ years at a cost of 4 percent, and $316 million on bonds due in 30 years at a cost of nearly 41/4 percent. I might say in this connection that. the administration expected to be able to sell $500 million worth of bonds, 4%, 30 years. They stood ready to sell $750 million of bonds and they could only sell $316 mil- lion, indicating the serious plight of our money market. The fact that interest rates have gone so high and risen so sharply, expectation of higher interest rates, is so apparent in the money market that they refused to buy the Treasury bonds at this very enticing rate. It goes on to say that the reason for the long-term borrowings at rates closely approaching the highest inc.urred by the Treasury in the postwar period is perhaps best summed up in the declaration by the Federal Reserve Bank of New York in January: As an objective of monetary policy, the defense of the international value of the dollar has come to occupy a position alongside of the goal of stable economic growth. You used some very strong words about. the importance of monetary ease for the domestic economy. Now I want to read briefly from what. Chairman Martin said to us in February. There is no invariable relationship between relative interest rates in various capital markets. While interest differentials can be an important factor iii movements of capital, there are others. He goes on to say what. they are. Capital movements are sometimes viewed in the narrow concept of short maturity. The differences that existed last year between money rates here and abroad on this kind of paper do not appear to have been a primary determinate of international movements of funds of this type. Under Secretary of th.e Treasury Roosa has written the same kind of thing. Mr. Gemmili, a top monetary economist with the Federal Reserve Board, has written similarly. As I understand, there has been no change in the forward cover premium. Chairman Martin indicated this to us 3 weeks ago when I asked him out this, so I just. can't see what all tile concern about tile international balance of payments situation is that would warrant a deliberate policy of raising long-term interest rates, and the evidence is overwhelming, as well as short-term interest rates. Dr. HELLER. As I believe I suggested in my response to earlier questions, the rise of about 20 basis points in tile long-term rate is a matter of very serious concern tO us, on the same general grounds as it is to you. It. has made the cost of long-term money more expensive and might have touched off expectations of further rises. As you suggest, such expectations might have had some impact on the rather modest amount-I think you sa.id $316 million-that the Treasury was able to borrow on long term. Senator PRox~rIRE. This is the Treasury Department policy determi- nation. This is not the Federal Reserve Board. Dr. HELLER. This is a source of concern to us as well as to you. I think in our consideration of tile interest rate and monetary spec- trum we should not! leave out of account that, contrary to the develop- ment you just pointed out, in some areas-suc.h as mortgage rates- PAGENO="0183" POLICIES FOR FULL EMPLOYMENT 173 there has been no increase. Indeed, there has been a decline since the beginning of the year in mortgage rates. Senator PROXMIIIE. The figures I have beei~ given show the conven- tional rates for mortgages in the last several months have bee~i very high. July, 5.90; October, 5.95; April, 5.95; July, 5.95. The all-time high was January 1960, 6.24, but that is very high. I hate to ask a question and run, but I will miss my rolicall unless I do go. Dr. HELLER. I was hoping Mr. Gordon could comment on this. Senator PROXMIRE. Would he defer that? I will be back in S minutes. Chairman PATMAN. Congressman Curtis? Representative CURTIS. I just wanted to piek up on that one little point on the labor force. I am reading now from table D, labor force participation rates by age and sex. I want to be sure what I am reading from now. This is the monthly report of the labor force. Labor force growth appears to be slowing down for reasons which are riot entirely clear. Second quarter 19C2 increased 600,000 over the year, wc~ about 400,000 short of what might have been expected on the hasi:s of past i:rends:. Most of the difference was among women 25 to 54 years of age who have accounted for such a large part of our expanding work force since World War II. Young penole. on the other hand, joined the work force in about the erpected numbers over the year. Shortage of job opportunities could not be the full explanation of the slowdown in growth. Over the year, the labor force partici~ pation of women 55 to 64 years of age has risen sharply as it ha~ in all rc~ent years. There is no evidence that jobs are available for them, but not for younger women. I just wanted to add that into this discussion because it does seem to me this becomes a very critical area of examination. In the gap theory that the Council is advancing, certainly this should be interjected. I say that again as one who doesn't agree with the gap theory as an ac- curate way of viewing our economy. Dr. HELLER. We recognize that many people remain outside the labor force when they are discouraged by the inadequate availability of job opportunities. Our estimate of potential output is, therefore, based on the expected normal size of the labor force at full employ- ment. On the other hand, actual output is affected only by persons actually employed, and not by persons either unemployed or outside of the labor force. The gap is obtained by subtracting actual from potential output, and our calculations of the size of the gap, there- fore, make an allowance for the response of the labor force to job opportunities. So on the question of what the economy is capable of at full employ- ment-which is really all we are talking about and what you identify `as the "gap theory"--we do take both the present labor force and the prospective labor force into our calculations. Representative CURTIS. If I am wrong, I want to be corrected. In your estimates, the gap has diminished in a year and a half. I would say that if the labor force were increasing at the same rate that it had been, roughly about a million a year, I suggest probably you have not closed at all. I don't know whether it would be that big, but it is a million more people in the unemployed sector, which would make a sizable difference. PAGENO="0184" 174 POLICIES FOR FULL EMPLOYMENT Dr. HEr4I~i. Mr. Congressman, the increase in the gross national product has been about $50 billion. We assume that approximately $30 billion of that has been keeping up with the growth in the. economy's potential and about $20 billion has been a narrowing of the gap. That calculated gap of $30 billion does not rest on the differ- ence between the present 5.3- or 5.4-percent unemployment rate and the so-called full employment rate of 4 percent; rather it does take into account the labor force that would be drawn into the economy at fuil employment, of course, not with perfect accuracy. Representative CuRTis. How can it if you use unemployment figures, because unemployment figures do not reveal these people who are not in the work force. Dr. HELLER. On the basis of previous experience of what happens to the growth of the labor force, as the economy approaches 4 percent unemployment, one can calculate approximately the additions to the labor force that high levels of economic activity will generate. Representative CTJRTIS. You don't have to use hypothetical figures. We can simply use the figures as of any month, such as the c~'vrcnt month of 1962, or take the year 1962 and compute if there had been the usual increase in the civilian labor force. It would be only in the one area. It would be in the unemployment area which would be roughly another million people there. That is not, in my judgment, taken into your computations on your gap theory of where you are in 1962. Dr. HELLER. This is, I guess, a difficult point on which to establish clear understanding. I want to state just once more, first, that the differential in the labor force projection and the actual is not really a million when we take account of the 350,000 increase in the Armed Forces and the 210,000 adjustment in the labor force figures in response to the 1960 census. Representative CURTIS. I think it is. I agree on the armed serv- ices. But again the armQd services are hardly a basis of referring to the private sector. Dr. HELLER. That takes potential labor force out of the private sector. I want to say secondly that we would not get as big an in- crease as $30 billion in our total output if we were to use only the people now in the labor force. In measuring the gap, we are calcu- lating an increment to that labor force from the sources you suggest. Representative CURTIS. Our employment actually has increased. That part is clear. Employment has increased each year. Dr. HELLER. That is correct. Representative CURTIS. It has increased from 1961 to 1962. But the area where there has not been an increase has been the civilian labor force. That consists of the employed people and the unemployed people. I was a.t first afraid that it might be a statistical error in our computation of the unemployed because this is something that has never happened in our recent history. This is new that our civilian labor force has not been increasing. Even in the three post-World War II recessions the civilian labor force increased. You are con- fronted with a new phenomena of decline in the civilian labor force which to me is highly significant and must be fitted in somewhere in the gap theory because it is perhaps even more ominous than those who are listed as "unemployed." Let me go on to one other area. It PAGENO="0185" POLICIES FOR FULL EMPLOYMENT 175 is `basic. But in your whole presentation of this deficit financing theory there is only one paragraph devoted to what I think is one of the great problems in deficit financing-debt management. I have asked other witnesses who have suggested this quickie tax cut to stimulate the economy-and I am using just the figure of $5 billion for convenience- we could use 10-that you cut taxes by $5 billion and thereby release that money to the private sector, but we~ have to sell $5 billion worth of bonds to the private sector and thereby we withdraw $5 billion from the private sector. Unless you want~ to use the banks of the Federal Reserve System to buy these bonds. In your paper you say, and this is the only reference I found to debt management, that- if budget deficits are incurred, the method of financing them must be carefully adapted to the prevailing economic circumstances. A careful balance must be struck between bank and nonbank financing, a balance which will not thwart or nullify the expansionary effect of budget measures in an economy with exces- sive unemployment and excess capacity, but will prudently shift Federal debts into nonbank hands as the economy comes close to or reaches full employment. As one who, sits on the Ways and Means Committee, that has to figure how we are going t.o market these bonds, all you are really saying is that we have a problem. I think any one who advocates deficit financing, particularly right now, should be ready to discuss the eco- nomic impact of having to market these bonds. May I relate it to one thing before I turn it over. In monetary policy we find that the discipline that has entered the picture is balance of payments. So we can't follow the monetary policy that otherwise we would. So I suggest with the Federal debt the size it is, and the problems that we already have in marketing that debt, I think just the rollover is around $90 billion next yea.r, what is the economic impact of superimposing another $5 billion on top of this tremendous amount we have in debt management. Dr. HELLER. I think you are putting your finger on a very important part of expansionary policy, and, indeed, on one of the key areas where monetary policy has to b~ coordinated with fiscal policy. Es- sentially, in response to the very type of concern and question that you have raised, what this paragraph says is that when the economy is in a slack condition, when there are underemployed resources and manpower, a budgetary deficit can lead to an expansion of employ- ment, production, incomes, and profits, without an increase in prices, and can do so even if it is bank financed. Representative CURTIS. That is the thesis. Dr. HELLER. This has been shown to be the case in past recessions when we have had deficits that were financed in large part by selling Government securities at the short end of the spectrum which were in large part placed in by the banking system. Representative CURTIS. That is the area for debate. I don't know that it has been shown. I am not willing to presume that is so. I want the debate to center around the question, Is the theory of deficit financing sound? Your presentation and the presentation of others who advanced this theory begs the question throughout that the economy will be stimulated. I think we need to examine into whether it will or not. I doubt if it has in the past. People point to the fact that in the thirties this theory didn't work out. That is countered PAGENO="0186" 176 POLICIES FOR FULL EMPLOYMENT by those who say, "Well, the deficits were not large enough, we did not spend enough." After all, when the expenditures of World War II came the economy did come back. However, I relate World War II result to the fact that we took 10 million young men and women and put them in uniform. That is where you got rid of your unemploy- ment situation. You had the war psychology and you had the forced savings in those periods with wage and price controls a~d a. lot of other disciplines which people put up with because our country was at war. This was dictatorship and I am certain our people will not put up with this kind of government domination in peacetime. I certainly don't believe that this deficit financing theory is one that can be accepted without its proponents coming forward with their working papers to prove it. I have sat through almost 2 weeks of Ways and Means Committee hearings and listened to all of this re- statement of this novel theory without anyone advancing it coming forward to establish it with their working papers. It is always pre- sented more or less as you do. that we all agree. Maybe the bulk of the economists in the universities agree but there are some of us who do not agree and do not understand it. Dr. HELLER. I think you are suggesting that a look at the statis- tical record over the years would be a useful exercise. Representative CURTIs. Partly that, and also whether or not the statistics really give us enough information of what really has been going on. Dr. HELLER. In our thinking about this problem we should also take into account the fact that in a period of economic expansion when there is still a considerable degree of unemployment and excess capacity, there is always substantial deficit financing by the private economy. Some of that deficit is covered by bank financingq some comes out of other sources. In terms of the principles involved this is really no different from the question of the impact of bank financing of Government deficits. Representative CURTIS. I must make one comment that we can come back to. This business of relating private financing to Government financing in my judgment is an unsound reference. Private financing puts up collateral either in the way of buildings or equities but Fed- eral financing doesn't. Dr. HELLER. May I make one comment on the statistics that Mr. Gordon has called to my attention? In financing the $12.9 billion deficit of fiscal year 1959, the banks absorbed about $10 billion of additional short-term securities. This was done without any increase, as you know, in the wholesale price level. We had a stable price level straight through. Renresent.a.tive CURTIS. I was critical at the time of what we did in 1959 and it was my own administration; we are still paying for it. Chairman PATMAN. Senator Pell. Senator PELL. Thank you, Mr. Chairman. Dr. Heller, just for the record, when you talk about the five quar- ters in which this growth has occurred, what exact period do we mean from the viewpoint of the calendar? Dr. HELLER. From the first quarter of 1961 to the second quarter of 1962, I believe. Senator PELL. You say since the heoinning of the current expan- sion in 1961. Does that mean from February 1 until April 30? PAGENO="0187" POLICIES FOR FULL EMPLOYMENT 177 Dr. HELLER. When we are dealing with quarterly figures, we use, in effect, the average for the first 3 months of 1961 compared with fig- ures for the second 3-month period of 1962. That is for quarterly figures. The monthly comparisons are based on February 1961, and run up the latest month for which data are available, usually June of 1962. Senator PELL. I found it a little confusing trying to discover the exact calendar period you were referring to in which this improve- ment occurred. Dr. HELLER. I am sorry. Some data are only available quarterly, some monthly. Of the latter, the latest available data are in some cases for May, some for June, and some for July. Senator PELL. In other words, our GNP has gone from 500.8 to 552 billion in the period from February 1 to April 30. Dr. HELLER. No. From the first quarter of 1961 to the second quarter of 1962. Senator PELL. What would be the calendar dates? Dr. HELLER. The calendar dates are the average for January, Feb- ruary, and March 1961 and the average for April, May, and June 1962. Senator PELL. Thank you very much. Dr. HELLER. We don't have GNP on a monthly basis, only quarterly. Senator PELL. In line with Senator Bush's question as to whether we have tried a reduction in tax before to ward off a recession or depression, I wonder if this same process has been tried in any foreign countries of which you are aware. Dr. HELLER. There is a flexible tax authority that is now available to the British Government. They have the authority to vary certain excise tax rates and employment taxes in response to the requirements of economic policy. So far they have used only one of those two, their consumption taxes, and they moved those up last summer in order to cut down the level of demand. Secondly, the Swedish authorities have an investment credit which is moved up and down. As I recall the operation of that, businesses are given a tax incentive to put a portion of their profits in escrow, so to speak, during boom times. Then, in slack times, they are allowed to use them for investment projects. So there have been some experiments here and there, but there is no precise parallel to what we are talking about. I might say, however, that the 1954 experience offers some parallel, `to be sure, not in the sense of a conscious, antirecessionary tax policy, but the effects are the same. Congress, as I recall, enacted a very quick cut of about $4 billion in the Korean war taxes. Then, in the longrun "tax overhaul," as it was called, there was added another billion and a half of income tax reduction. In other words, that gives us an experience that is quite relevant, although not in the sense of de- liberate congressional action to cut taxes for business cycle reasons. Senator PELL. If it is decided that a tax cut is a good idea-and I personally agree with Senator Douglas that it would not be right at this moment, although I am most certainly for an income tax cut- what kind of tax cut would you be inclined to consider as the most favorable or advisable? Would you incline to a cut in the lower bracket, or employing the withholding mechanism in which the with- holding `tax would be suspended for 21/2 to 3 months, would you PAGENO="0188" 178 POLICIES FOR FULL EMPLOYMENT divide the cut pretty equally between corporations and individuals, or perhaps astraight matter of points across the board? Dr. HELLER. As I indicated earlier, no decisions have been made. I do think as a general principle, however, if you were attempting to compensate for a. short-run deficiency of demand, a good part of your increase would have to go into personal income tax reductions. We have, however, side by side with this~ a longer run problem of invest- ment stimulus. We have corporate rates- Senator PELL. Forgive me for interrupting, but isn't the whole purpose of this current discussion to consider the short-run problem? Dr. HELLER. In talking about tax reduction any time from now on, it is necessary to take into account both the short-run cyclical considerations and the longer run reduction of the drag of taxes on the economy. Senator PELL. But when thought is given to makiiig a tax reduction in this session of Congress, I was under the impressi~n it should be considered primarily from the short-term viewpoint because the longer term problem will be taken care of in the next Congress in a general bill. Dr. HELLER. What I am saying is this: Given the background of the projected recommended tax cut for next year side by side with tax reform, it is impossible to discuss any 1962 tax reduction without relating it to what might happen in 1963. I should note, however, that apropos of your general comment on antirecessionary tax cuts, the President's request for standby authority proposed only reduc- tions in individual income tax rates of up to 5 points on an across- the-board basis. Senator PELL. If an immediate tax cut is approved, what would be your reaction to the~ idea of the withholding tax device for the reasons: No. 1, that since the lower income groups would get the principal bene- fit, the money would be more quickly pumped into the national econ- omy by virtue of the fact that this group is more likely to use it to immediately purchase consumer goods. Ar~I secondly, by using the withholding device the general public would not be really aware of having received the reduction. They would just have thicker pay envelopes. And when the time~ comes for the temporary cut to be ended, there would not be such an outcry. As Congressman Curtis pointed out, that might be balanced by the increase in the social security tax. At the same time when it came time for a permanent reduction you would have a little sugar with which to coat the general tax bill with which we. will be presented at that time. Dr. HELLER. The exact form in which you carry a short-run tax cut into effect is not preordained either by any administration or congressional decisions that have been made. I think this is some- thing where we still have a great deal to learn. I don't think we can necessarily say that any one method is necessarily best in every respect, and I believe the President has made that very clear in inviting Con- gress to suggest alternative approaches to temporary tax-cutting au- thority that might be substituted for his request. Senator PELL. Do you think the idea of suspending withholding for several months would be an effective device? Dr. HELLER. I think it is one of the devices that deserves considera- tion. I don't think I can go beyond that comment. PAGENO="0189" 0 B 0 B 00-0 (0 00 ~ 00 00000000000000000 CC ~ -~ 000 © CC -~ bOO o~ 00 00~ 00o~00oCo00b~00 ~ CC 000000 CC 0000000 ~ 0D~ B ~ CD Z .(D Coo 01 0 0 Co 0 01 CD 0 CD CD 0+ p `.1 Co. 001 p 00 0 B CD 001 Coo Co. 0 p 0000000000 (00000 0)00 000000000000000000000 ~ 0000 00(0 000000(0 00(0 00(000 (00000 0000 00CCC0000 000 -~ o~ 00000 0 B 0 0 00 p 00 0 0 B 0 B p L 0 0 (0. Co (0 -10 (0 00. 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CD Go CD CD CD Go I GoGoGoGoGo~Go CCCC b~ Co ~ GoCC CC Go Go C~ -ICC Go Go II CD 0 CD 0 CD 0 CD C' 0 E Go Go Go Go Go C-I b~ Go Go ~ C-ICC CC Go Go CC Go ~ Go `-CCC Go CC Go Go CC GoGoGoO~~O~Go CCCC Go Go ~ CC CC b~ CC Go Go Go Go CC Go Go Go Go ~C b~ Go ~ 1 CCCC Go Go CC Co Go t ~ Go bI `4 bI CC CC I. ~ ~ 0 Go C) Go ~ L~i ~ ci) Go ~ 0 ~ 9' Go 0 C) CD ~ CD CD -t Go CC Go Go b-I ~_-1~-I a ~~GoCCCC CD CD 0 CD 0 CD 0 CD Go Go GoD"CCGoGob~bIC-'GoGo CCCC CC b) Go CO ~ Co Go CC -~ ~ Go Go CC CC Go Gob) b) b-I b3 Go CC CC ~ Go CC Go CC Go Go Go Go Go ~rJ 0 C 0 CD Dl CD 0 CD CD CoGoGo~b)b)bIGoGoGoGo CCCC CC Co 0101 ~ Go `4CC b) CC Go Go Co ~ ~C) `4~-1GoGoCD) `4CC CC `4Go Go Go bIb) CJ* b) CC Go CC CC PAGENO="0191" POLICIES FOR FULL EMPLOYMENT 181 Chairman PATMAN. Thank you. Senator Douglas? Senator DOUGLAS. I want to pursue this question of whether it is necessary to increase interest rates in order to protect our gold supply. I think we brought out in previous questioning that the U.S. 3-month bill rate is about nine-tenths of 1 percent higher than the Swiss rate. The Swiss rate has remained steady for a long time. So difference in the interest rate in itself has thus not led to any major movement of funds from the United States to Switzerland. That is true, is it not? Dr. HELLER. That is right. Senator DOUGLAS. So far as the Dutch are concerned, the Dutch rate has fallen slightly in the last 2 months-the figure was 2.32 percent for June as compared to an American figure for June of 2.72 roughly. So they were four-tenths of 1 percent underneath the American rate. The West German rate for July was 2.38. The American rate for July was about 2.92. So you have an American rate which was almost six-tenths of 1 percent higher than the German rate. As far as interest rates are concerned, the American rate was thus already higher than in Netherlands and Germany. It. was not necessary therefore to raise the American rate still more. The three remaining countries in the Federal Reserve table are France, Canada, and the United Kingdom. I don't have figures for France more recent than April-then it was 3.91. Let us grant for the moment that the French rate is above the American rate. It is doubtful if there is important movement here as France does not have huge amounts on deposit in this country. So we come down to Canada and the United Kingdom. Mr. Johnson has prepared some charts that I think are noteworthy. The upper chart (p. 183) shows the comparison of Treasury bill rates. You will notice that the British rate came down very markedly in the past year. The New York rate was rising at the very time that the London rate was falling. There would thus not be any increased strain in this case upon our currency, since the differential between those two actually fell substantially during this time. But to get at the real costs of converting dollars into pounds one must consider also the arbitrage trend. If you add the arbitrage, with forward ex- change cover, to the New York rate you will see that, while the differ- ences in favor of London and in favor of New York are small and vary from time to time, at other times recently the London rate is only one-sixth of the 1 percent or less in preference of London over the New York dollar. I think it has been testified that where the differ- ence in net rates is less than one-quarter of 1 percent interest rate con- siderations do not enter. So if you allow for rates with forward arbitrage cover, there is really no material difference between London and New York. Then we come to Canada. Here there is a difference in Canada be- cause Canada has been facing a financial crisis. Their short-time rate has shot up very sharply. They are recently up to 51/2 percent or more. Chairman PATMAN. Would you like to add those charts to the record? - Senator DOUGLAS. Yes, I would. Chairman PATMAN. Without objection, it isso ordered. (The data referred to follow:) PAGENO="0192" 0 1920 1922 1924 1926 1928 1930 1932 YIELDS ON U. S. GOVERNMENT SECURITIES 0 6 -~ L~rj cli 0 2 0 6 MIW $WTl PAGENO="0193" 183 POLICIES FOR FULL EMPLOYMENT INT~R~T A~TRAOE, P~RW YORIt/LONDO~ Friday ligaros I I 3-MONTH TREASURY BILL RATES 1692011 For oosst por oooom \fV'~ 11190 DOLLAI Ii I II II II I I 0 RATE DIFFERENTIAL FORWARD EXCHANGE WITH COVER Ill 9*1102 09 [091109 ~ - II 1*1101 01 111W 110111 ~ ii ::::i::~~L:::: + 1959 0 5 1960 S I 9 5 S 1961 I a 1962 I 87869-~62--13 PAGENO="0194" 184 POLICIES FOR FULL EMPLOYMENT INTEREST ARBITRAGE, UNITED STATES/CANADA Thu~~d*y fig.~es THREE-MONTH TREASURY BILL PATES P., c.," p.' 4 + PATE DIFFERENTIAL AND FORWARD CANADIAN DOLLAR PATE DIFFERENTIAL WITH FORWARD EXCHANGE M J 1959 D B J S S B I S B B I S B 1960 1961 1962 PAGENO="0195" POLICIES FOR FULL EMPLOYMENT 185 + RATE DIFFERENTIAL WITH FORWARD EXCHANG I E COVER 1 I INCENTIVE: I jS~A I N FAVOR OF FRANkFURT ii pc~ IIETUE'ANE LOAN JATE ~ tI~.j f~ I %,I7~ I ` `6' FAVOR OF EURO-DOLLARS, LORDON_ I, II II I I I I 1 + 0 2 II S I N 3 S I B 3 $ 1960 1901 1902 Note: Special Iorward rote available to German commercial banks. INTEREST ARBITRAGE FOR GERMAN COMMERCIAL BANKS F~iday tiga,as 3.-MONTH RATES GERMAN INTERBANK LOANS AND LONDON EURO -DOLLAR DEPOSITS ________ ~.GREMA0 INTEREAHR LOAN RATF I', .1 `4 `I' \ I " _EUNO.C DLLAR Pa~ a.nt poe ocean 1L ~L .LL L~ LJ LJ L~L ~L~L L~ ~JJ~ I. I I RATE DIFFERENTIAL AND FORWARD DEUTSCHE SPERAD IN FAVOR OF FRANRFUNT: I ~ I_..t,,,~ GERMAN INTERIANE LOAN RATE CAMPAI~ ,,/\,,f "~ WITH LONDON EURO-DOLLAR RATE MARK ~\\ ,\ FORWARD RATE \ %,I \ ,~ I DISCOUNT I-) ~L -- ~ a ~c~_,/~/ ~\- ~r PAGENO="0196" 186 POLICIES FOR FULL EMPLOYMENT * SHORT.TE~M INTEREST ~1AT~S P.~ c,nt iess 1c~o * 3-.~~h fre~sury bill ~II ~~ept J~p~ ~ ~ d.p~sit ~t.) ~d ~ (3-,~~th d.posit ~4. 3,ath rote lee U. S. dollar d.pooiu in London. PAGENO="0197" POLICIES FOR FULL EMPLOYMENT 187 Senator DOUGLAS. The point I want to make is that only in the case of the United Kingdom and Canada do you have any real difference in rates. The difference between United Kingdom and United States is accounted for by the arbitrage cost. This does not account for the full difference in the case of Canada. But I can't believe that Can- ada, with a population of 20 million, subjects the American dollar to such great strain, particularly in view of the highly uncertain finan- cial situation of Canada. Both political parties concealed it during the election but it has come out after the election. I should think with the devaluation of the Canadian dollar down to 92 cents, whereas some time ago it was $1.05, that people would not be getting Canadian dollars in preference to American dollars. So, very frankly, I am puzzled by the claim that it is necessary to increase the domestic interest rate, both short term and long term, to meet the balance-of- payments problem. In view of these facts, we know the adverse effect which a higher interest rate has in dampening off business recovery. I hope this will not be regarded as libelous, but I heard a wag say the other day that a good new Chairman of the Federal Reserve Board would be worth a $10 billion tax cut. Dr. HELLER. I have heard it said that the Chairman of the Council is worth 50 points on the Dow-Jones. Senator DOtTGLAS. No; I think you are doing a fine job. I have a sneaky feeling that now you have become a Government official you feel an obligation to defend all policies of all branches of the Gov- ernment. Dr. HELLER. May I respond to two or three of the points you made? First, while the points you make are very well taken, and while it is extremely difficult to judge whether the exact degree of tightening that has occurred is really necessary to meet balance-of-payments and gold pressures, it is necessary to take into account that the so-called Euro-dollar market is offering rates of over 3½ percent in Europe and without any exchange risk, is perhaps attracting dollars on that ground. In other words, these are the dollars that are circulating, so to speak, and used from bank to bank and country to country in Europe, financed in effect with U.S. funds. Second, the U.S. dollar is at a forward discount against the Dutch guilder, against the Swiss franc, and against the German mark. This may not be a huge factor, but it does mean that U.S. rates have to be slightly higher than you have suggested to prevent a flow of funds. Senator DOUGLAS. Are Euro-dollars convertible into gold? Dr. HELLER. Euro-dollars which find their way into the hands of foreign central banks are convertible to gold. They are not convert- ible to gold in the hands of private individuals at the U.S. Treasury, but they also may cause some problem by being converted to gold in the London gold market. This is only an indirect gold-conversion problem. But we must include it if we are talking about the total withdrawal of funds or the total attraction of funds overseas. Senator DOUGLAS. So far as the Netherlands, Germany, Switzer- land are concerned-countries that are held up to us as the great examples-our interest rates are higher. If they are economical men they would not call their short-term deposits with us and put them on PAGENO="0198" 188 POLICIES FOR FULL EMPLOYMENT deposit in Zurich because our interest rates are above those in Switzer- land. Dr. }IIELLER. We have to consider not only discount rates and bill rates, but also a number of other short-term rates. For example, the local authorities in the United Kingdom surprisingly enough offer 4~/2 percent on 7-day money. There is a whole range of short-term rates that we have to take account of. I think that is a factor that has to be weighed in making this assessment. I am not suggesting, Senator Douglas, that the interest rate move- ments that have occurred are a kind of a categorical imperative in the light of international balance-of-payments considerations. That is a matter of judgment on which we are not prepared to reach any final conclusion here. However, I am prepared to suggest that, particularly at the long end, the increase in rates does not seem to make much of a contribution to the balance-of -payments problem. Senator DOUGLAS. Do you think there is any relationship between the fact that in May and June, as interest rates started to move up under the policy of the Federal Reserve, business activity started to move down. The Commerce Department publishes its series of busi- ness cycle indexes. Congressman Reuss introduced this into the record yesterday. It shows on page 5 that the index turned down in May and June and this is what in the past advocates of the tax cut brought forward. I raise the question whether there is any connection be- tween the fact that durable goods, hours per week, accession rate, and so forth turned down at the time interest rates turned up. Is it pos- sible that the second factor was the cause of the first? Dr. HELLER. We certainly cannot always know the precise cause- and-effect relationships. But it does seem that some of these things that have happened in recent months have occurred too fast or too soon to be directly relat.ed to the monetary tightening that has taken place very recently. The disappointing Commerce-SEC survey of plant and equipment investment plans came in March, well before this recent tightening. Inventory-sales ratios have been low for some time and cannot be directly related to that. Of course, it is possible that there might be some other results that are directly related to the recent tigthening, al- though I cannot think of any obvious ones. Chairman PATMAN. Congressman Reuss, you may proceed, sir. Representative REUSS. Dr. Heller, you have been defending the Federal Reserve for some time now. I am going to ask you t.o defend the State Department for a while. In your statement you pointed out that the proposed Trade Expansion Act could, by expanding our exports, not only help us from the standpoint of our balance of pay- ments but increase the demand for the output of our farms and fac- tories. 1 agree that it has that potential, and I am one of those who think that it is a very important potential. I want to ask, however, a question about it. Because my question necessarily is somewhat long, I wrote up the main points of the ques- tion and handed you a copy of it earlier. It reads as follows: Bearing in mind the following: 1. There is not in sight today any stimulant to demand comparable to automobiles in the 1920's or homes and appliances in the early 1950's. PAGENO="0199" POLICIES FOR FULL EMPLOYMENT 189 2. Western Europe, on the other hand, has a large pent-up demand for all sorts of household appliances-washers, driers, dishwashers- a potential $6 billion annual market, of which the United States could well aim at a $2 billion share. 3. Western Europe, with its over-full employment, is unlikely to be able to satisfy its domestic demand for consumer durable goods by its own production in the years immediately ahead. The United States has ample existing plant capacity. 4. A massive U.S. entry into the European market as soon as pos- sible would help diminish U.S. unemployment, and accelerate our growth rate. Reciprocal tariff reductions which would make this possible would also reduce or eliminate our payments deficits, since the probability for the short-term is that our trade surplus with Western Europe would increase. 5. From the European standpoint, accepting larger U.S. exports would enable European employers to grant wage increases without severe inflationary consequences, thus helping to bring United States and European wages more closely into line as well as improving the European standard of living. 6. The biggest single obstacle to our entering this vast export mar- ket is the high tariff wall-20 percent or more-of the Common Mar- ket and of other European countries on these household appliances. 7. The special bargaining authority of the Trade Expansion Act to permit the tariffs to be reduced to zero on commodities for which the United States and the Common Market account for 80 percent of world trade is now largely meaningless since aircraft is the only major category affected, until and unless the United Kingdom and other EFTA countries join the Common Market. A current guess is that the United Kingdom is unlikely to become a member of the Common Market until at least 1964. 8. If the Trade Expansion Act were amended so that we had the power to bargain European tariffs down to zero, independently of the United Kingdom's joining the Common Market, we could start vigorous bargaining immediately, with active negotiations to start in 6 months. This would provide no incentive for the United Kingdom to refrain from joining the Common Market, since its own independ- ent tariffs would have to be reduced. Why does not the administration recognize the realities of the situa- tion, amend the Trade Expansion Act, and move vigorously for lower tariffs to help us and the free world? Dr. HELLER. Mr. Reuss, may I make just one general comment and then turn this question over to Mr. Gordon, who has been working with the State Department. the White House staff, and the Commerce Department in the general area of the Trade Expansion Act? I hope your question does not imply that the American consumer is not a pretty ingenious fellow. We have certainly found over the years that when additional income is put into the hand of consumers, they are quite ca.pal)le of finding ways and means of putting it to good use to the tune of 92 to 94 percent of their incomes, year in and year out. I believe what you are stressing, however, is that there is apparent on the horizon no big, new, durable goods to take the lead in expan- sion; and you are suggesting that we do everything possible to exploit. PAGENO="0200" 190 POLICIES FOR FULL EMPLOYMENT the expanding European market in this area. I want to say that we surely agree with that objective and then ask Mr. Gordon to com- ment on the specific proposal. Representative REuss. And to corament on your comment before we hear Mr. Gordon, I agree with you about the propensity to spend of the American consumer. However, in order to have that 92 percent propensity to spend applied to a higher income total, you have to give a tax cut or otherwise increase income, which in the immediate period ahead would increase the deficit. I am looking, as you are, for additional and auxiliary or substitute methods which would stimulate the economy without increasing the deficit. Dr. HELLER. I think that clarifies any possible misunderstanding on that point. Mr. Goi~oN. Mr. Reuss, this is my first exposure to this proposal I think it is a very bold and stimulating idea which I presume has been discussed with the State Department. I didn't know that. Representative REuss. The State Department's position is that the United Kingdom's entry into the Common Market is so desperately important we should do anything, including cutting our own economic throat, to help force the issue. I don't see their logic. I wonder what you think of their economics. Dr. HELLER. That was not a direct quotation from the Sta.te Depart- ment? Representative REuss. No, it was an embroidery, but I defy you to produce from them any justification much different from what I have just said. Mr. GORDON. On the economics of the matter, I must say I would agree virtually completely with your premises. I think there un- questionably is a very substantial potential market for consumer dur- able goods in Western Europe. I think that the effect of this kind of action might well be attractive to European countries as a means of reducing inflationary pressures which some of them are now having considerable difficulty with. It would obviously have very beneficial effects for our balance of payments. So in the quite narrow economic analysis of the proposal, I must say it strikes me as very attractive. But it is clearly a proposal which has dimensions that go beyond the narrow economics. I think it is on this score that I would want to be somewhat reticent. As all of us know, the United Kingdom and the Common Market are presently engaged in negotiations. These negotiations apparently have reached a very delicate state. I would think that it might be argued, although I haven't had an opportunity to think it through, that a proposal of this kind at this stage would constitute a very disturbing element in the present delicate state of these negotiations. But if I can separate the appraisal of the economic effects from the political-diplomatic effects, I would certainly say that on economic grounds it is most attractive. Representative REuss. Thank you for your answer. I will ask just one more question on it. Don't you think that looking at the opportu- nities available to us to achieve our economic goals of maximum em- ployment, maximum growth and expansion of our exports so as to improve our balance of payments, this is one of the more promising opportunities that presents itself? PAGENO="0201" POLICIES FOR FULL EMPLOYMENT 191 Mr. GORDON. I think it is very promising, with one qualification with which I am sure you would agree. I think it would be a mistake to think that measures of this kind would have a very significant effect on the U.S. economy in the short run. Negotiations of the sort you propose-multilateral negotiations, quite complex international negotiations-invariably take a considerable period of time to com- plete. `So I think we ought to be realistic to expect that such nego- tiations, if we decide to enter them, would not have visible economic effects in the near future. Representative REUSS. It is equally true, is it not, that the sooner you equip yourself to start negotiations, the sooner you complete them? Mr. GORDON. Yes. Chairman PATMAN. Senator Proxmire? Senator PROXMIRE. The main thing I want to do, Dr. Heller, now that we have indicated that we are not wildly enthusiastic about the higher interest rates, I would like to relate that to the possibility of a tax cut. You indicate in your statement that taxes and savings would be drawing $14 or $15 billion too much, from the economy which would have to be offset by additional investment and Government expendi- tures for full employment to be attained. I presume this $14 to $15 billion indicates that a substantial tax cut would be necessary in order to correct this situation, but I presume it would be somewhat less than $14 to $15 billion, is that correct? Dr. JIELLER. Yes, it is, Senator. We would have to take into ac- count not only the initial impact of the tax cut itself, but the multiplied effects, and the impact on inventory investment, and on investment in plant and equipment and in housing. So these numbers were not meant to suggest in any way, shape, or manner the size of any tax cut. Senator PROXMIRE. Let me ask you about that multiplier. I won't say you have been quoted, but people have said that the economists on the Council of Economic Advisers indicate one specific multiplier; others say others. I understand from some competent economists that a tax cut of $10 billion would mean an increase in the GNP of $20 billion. Others say $25 billion. Would you have a rough estimate? Dr. HELLER. It is extremely difficult to tie oneself down to a specific estimate in the absence of test-tube evidence. As was pointed out earlier, a tax cut would show up primarily as an increase in disposable income, quite undifferentiated from any other source of increase in income. In other words, it would not appear to most people as a spe- cial kind of income, labeled "Cut in Tax Liabilities." For the most part, it would simply show up as an increase in take-home pay. That touches off spending and re-spending. Senator PROXMIRE. I understand the multiplier and I certainly agree. Dr. IJELLER. I am trying to get to a rough approximation of the magnitude, without suggesting that we are tied to any specific multi- plier figure. Very conservatively estimated, the multiplier effect as such might be one and a half to two times the initial tax cut when it works through the spending stream and on into an increase in GNP. Depending in part on the level of economic activity relative to capac- ity, there would be further magnification of the original figure, PAGENO="0202" 192 POLICIES FOR FULL EMPLOYMENT through the impact which the higher levels of consumption may have on investment in inventories and plant and equipment. Depending on the conditions in the economy and a number of variables that are terribly hard to tie down, that would increase the total impact from 11/2 or 2 to 21/2 or 3 times the size of the initial tax cut-and under very favorable circumstances, even more. It depends in large part on con- ditions that exist at the particular moment the tax cut is made, and in what direction you are moving-that is, whether the economy is expanding, leveling off, or declining. Senator PROXMIRE. It would vary on the kind of tax cut. For ex- ample, if you had an increase in exemptions or if you had further modification of depreciation or investment credit, would these have varying impacts in your judgment on the multiplier? If so, what kind of tax cut would have the greatest multiplier and which the least? Dr. HELLER. It makes some difference, certainly. But we must not exaggerate its amount. We know that, on the average, persons in low-income brackets spend their entire incomes, while in the highest brackets they save as much of their incomes as they spend. But some studies suggest that the amount spent of an additional dollar of income is not nearly so different across the range of incomes, or at least across the brackets that really account for the bulk of taxable incomes. Senator PRox~1nu~. But I think almost all of the proposals we have here, with maybe a couple of exceptions, there would be a much big- ger dollar tax cut with a bigger income. I was going to say if you have a person with a $5,000 income and you have a $4 billion tax cut for individuals, as I calculate it, he would get about a $2 week increase in income or something in that area; whereas a person with a $50,000 income would have a somewhat larger dollar benefit. Tinder these circumstances, while the. dollar differences might be somewhat the same, if you had the same dollar tax cut, you wouldn't have it. Therefore, the difference in spending would be quite marked. You see, I am trying to get at two things, frankly, and my time is limited, so I am going to have to cut short. The first thing I am getting at is that I am wondering even if a big tax cut. of $6 or $7 or even $10 billion is going to give consumers the kind of money in their pocket that is going to result in their buying a house or car or buying anything of that kind. That is No. 1. No. 2, which is somewhat unrelated but which is the whole point of what the chairman and Senator Douglas and Congressman Reuss and I have been arguing, if you do have a tax cut coupled with higher in- terest rates, is it not true you will have to have a much bigger tax cut to accomplish the same stimulation of the economy? Isn't it true that, whereas you might be able to achieve what you say you need to achieve ~ ~ 10 with a $7 billion or $8 billion tax cut, and the multiplier you have described, that if you have an increase in interest rates of the kind we have been reading about overwhelmingly in the news papers, and it seems to be in the cards on the basis of the Federal Reserve and Treasury policy, that you will need a 50-percent higher tax cut or maybe a 100-percent higher tax cut to achieve the same degree of stimulation? Dr. I-TELLER. Let me answer the second question first, because I think we can dispose of that very quickly. It is ~)erfectly true that if yOu PAGENO="0203" POLICIES FOR FULL EMPLOYMENT 193 had a tax cut and then proceeded to shrink private spending by the same amount by monetary policy, you would simply nullify the tax cut. Senator PROXMIRE. That is very important. If you have a tax cut a.nd if you sell bonds to the public to absorb all of the increase in monetary supply or the increase in funds that results from a tax cut, you say you would eliniinate much of the effect of the tax cut. Dr. HELLER. I think it is somewhat more complicated than that. If you sell bonds to the public, you will be in part activating idle funds, so that this would not go all the way to offset the effects of the tax cut. The proposition I was stating was one in which the method of financ- ing would increase interest rates so much as to cut back the amount of private spending by the full amount of the tax cut. Then you would nullify the tax cut. But this would be extremely hard to do and would require a highly restrictive monetary policy-one that actually reduced the money supply severely. Of course, it is true that for any given stimulus to the national product, the size of a tax cut would have to be greater the tighter the monetary policy. That is just arithmetic, and I am only too happy to underscore that arithmetical fact. Going back to the first question, concerning the impact of a tax cut. If we look at this hypothetical set of figures that we put to~ gether for a $6 billion cut in individual tax liabilities- Senator PROXMIRE. May I just interrupt to put something in the record? I want to put in the record here, Chairman Martin's reply to Chairman Patman on this very question wheii Chairman Patman asked him what we ought to do to stimulate the economy with a large deficit. Martin said: I will return to the simple statement I made earlier. In the event a decision is made which widens or further deepens the deficit we are already running, I want to put the Federal Reserve specifically on record this morning, if I have not already, that I think we must not finance the deficit by bank created funds. It should be financed by bona fide savings and not by writing up the funds on one or the other side of the bank's ledger. It would mean that the expansionary effect of the tax cut would be enormously reduced. Is my observation roughly correct? Dr. HELLER. As against other methods of financing that would ac- tivate bank funds and increase the money supply, there is not any question that this approach would be more restrictive, and would require a larger tax cut for any given result in employment and pro- duction. I believe, as Congressman Curtis mentioned earlier, that this is an area that requires a great deal of additional attention, partly because we don't know all the facts and partly because there is much misunder- standing and misuse of such terms as "real" saving, bank and non- bank funds, activating idle funds, and so forth. I would hope that our Council and this committee and others would continue to discuss this problem, because it is one of the critical areas of economic policy. Chairman PATMAN. Will you yield for a brief observation? Senator PROXMIRE. Yes. Chairman PATMAN. You are emphasizing bringing out of hiding some idle funds. Don't you think that the amount of such funds would be so small and so insignificant that they would not be a significant factor in our analysis of the monetary problem? PAGENO="0204" 194 POLICIES FOR FULL EMPLOYMENT Dr. HELLER. I am not in a very good position to judge that. I would hate to make a quantitative answer to something for which I don't have the underlying evidences before me. Representative CURTIS. You said liquidity was low. That would indicate not so much idle funds, would it not? Dr. HELLER. The extent of liquidity in the economy cannot be meas- ured entirely in terms of the money supply, as conventionally defined. Senator PROXMIRE. At any rate it would drive up interest rates, and in doing so, tend to reduce the accelerator principle? Dr. HELLER. It would drive up interest rates. It would reduce the attractiveness of holding inventories and making plant and equip- ment investment. Senator PROXMIRE. And the attractiveness of buying a house? Dr. ITELLER. Yes, sir; in the long term, there is no question about it. I would like now to come back for a moment to that earlier question about the stimulating effects of a tax cut, leaving aside monetary policy. The amounts that are involved in table 1-3, if you have it in front of you, are really not inconsequential. Take, for example, plan B, which is a 3 percentage point reduction in tax rates. Senator PROXMIRE. This is on an annual basis? Dr. HELLER. These are on an annual basis. Either plan B or plan C which is the chamber of commerce proposal, or plan D, which is the $200 increase in the per capita exemption-all involve some very ap- preciable tax savings. The fact that they might be distributed in small amounts from week to week doesn't mean they will not have a stimulative effect. They don't have to go into houses, TV sets, and so. forth, to have an expansionary effect on the economy. Finally, apropos of the distributional point, it is interesting that a one point across-the-board cut, as indicated in schedule B costs about. $2 billion of revenue. Senator PRoxi\rnu~. For $5,000 income that would be a $21-a-year tax cut and $63 for a 3-point cut. Dr. HELLER. That is right. For $1.3 billion of each $2 billion of the across-the-board cut would go to the first bracket. Most of the rest would go to the next few brackets. So that even if you had an across-the-board cut, the great bulk of the tax reduction would go to the first bracket-$1.3 out of each $2 billion-and the bulk of the re- mainder to the next few brackets above the first bracket. I think this is an important factor. Senator PROXMIRE. Mr. Gallup has conducted some studies and there have been some other studies conducted. The Wall Street Jour- nal had a survey, indicating that the people would not be inclined to spend the increased income received from the tax cut. While the propensity to spend is 92 to 94 percent of income, I wonder if there were not a psychologically adverse effect particularly if there was as much opposition as there is now to the tax cut. People might say this is a forerunner of trouble. Dr. HELLER. This gets one again into the psychological reaJm as you suggest. Past history does not support the results of Mr. Gallup's survey. I think Mr. Katona would have told you this morning that what people say they are going to do with an increase in income, particularly when they are full of good intentions about saving, is not very closely PAGENO="0205" POLICIES FOR FULL EMPLOYMENT 195 related to what they actually do with their increase in income when they get it. They are much more likely to spend it than they intended. Senator PROXMIRE. He indicated that, but certainly the record of past tax cuts is not very reassuring. The tax cut we had in 1926 was followed by a recession. In 1929 we know what happened after the tax cut. That was a major tax cut. We had the worst depression in history. The tax cut in 1948 was followed by a recession. It is true in 1954 and some other tax cuts were followed by an improvement in business conditions. There certainly is not anything automatic in the tax cut itself which can assure us that we will have an expansion in business as a result of the tax cut. I would say that on the basis of having had 9 years out of the past 40 in which we have had tax cuts and in 3 of those years we had a drop in business conditions and in some of those other years the effects were at best mixed, that is, business was improving anyway, I can't see that we have very good empirical evidence that a tax cut is going to be our solution. Dr. HELLER. I think we have very good empirical evidence that ad- ditions to income result in higher spending and higher investment. Senator PROXMIRE. Those tax cuts were additions to income. Dr. HELLER. It doesn't matter whether it comes from a tax reduc- tion or other sources. Senator PRoxMn~. Do we have any study that indicates what hap- pens when you cut taxes and increase interest rates which seems to be the plan? I know it is not your plan. Dr. HELLER. If that is the plan, I am not privy to it. I don't think we have any direct evidence on this point, although it would be interesting to check the 1954 experience when there was a very good economic expansion and a very quick restoration of Fed- eral revenues after a $71/2 billion tax cut. This occurred in a period when monetary ease ruled for quite some time, before tightening oc- curred in the later phases of expansion. Senator PROXMIRE. Certainly in 1954, wouldn't you agree, that the impact of the Korean war, although as in all our wars, with a great increase in Government expenditure, with the increase in the size of the Armed Forces, all that kind of thing, pent-up wartime demand of various kinds had a more serious impact perhaps than the tax reduc- tions did? Furthermore, there was a particular business investment gimmick there, a change in depreciation policies, that resulted in a great deal of the expansion being concentrated in investment by business plant and equipment. Dr. HELLER. In the early part of that recovery investment was not so much the initiating force. The investment surge developed later, particularly in the 1955-57 period. There was about $3 billion of individual income tax reduction at the beginning of 1954 and another $1 billion reduction of excise taxes, and then the $1.4 billion reductions from the overhaul of the income tax. The efforts of the latter were concentrated mainly on business, and perhaps primarily affected business investment. But overall the larger part of it, or at least half of it, was devoted to a reduction of income and excise taxes on consumers. Senator PRoxMu~i~. My time is up, Mr. Chairman. PAGENO="0206" 196 POLICIES FOR FULL EMPLOYMENT Chairman PATMAN. We have had you gentlemen here about 31/2 hours. That is quite a long time. I wonder if you would not be willing to answer any questions we might submit to you, Dr. Heller, if we get them to you in writing before you correct your transcript? Would you be willing to answer them in connection with the exam- ination and correction of your transcript? Dr. HELLER. We would be happy to do our best on that score, Mr. Chairman. Chairman PATMAN. You may submit anything that you think is germane or material. Chairman PATMAN. Before closing, I think Congressman Curtis has a question. Representative CTJImTIS. I have one question. I will have some others. On the questioning of Senator Proxmire on the 1954 cut, I think we are leaving out some factors. There was a $10 billion and more cut in Federal expenditures. Dr. 1-TELLER. Which preceded the tax reduction. Representative CtTRTIS. Yes, but it occurred right at the time. That was the basis on which we felt we could cut back in Federal revenue because it was not deficit financing that we were engaged in at the time. I was on the committee in writing it. We had the dividend credit there which took a great deal of the release of money and that was certainly in the investment area. In the consumer area, as far as the income tax cutting was concerned, which was increasing the exemption from $500 to $600, we at the same time increased the social security tax, as I was pointing out this morning, which took about a million out of the economy. Dr. HELLER. Yes, that is a point. Representative CtIRTIS. And almost equalized in the consumer area. I think if we examined into it, the only way that would have affected the consumer would have been below the billion dollar figure. Chairman PATMAN. Thank you, gentlemen, very much. We will submit the questions to you. Thursday morning we have Mr. Otto Eckstein, professor of eco~ nomics, Harvard University; Mr. McCracken of the University of Michigan; Mr. Pechman of the Brookings Institution. Without objection, the committee will stand in recess until 10 o'clock here in this room, tomorrow morning. (Whereupon, at 5 :35 p.m., the committee recessed, to reconvene at 10 a.m., Thursday, August 9, 1962.) PAGENO="0207" STATE OF THE ECONOMY AND POLICIES FOR FULL EMPLOYMENT THURSDAY, AUGUST 9, 1962 CONGRESS OF THE UNITED STATES, JOINT ECONOMIC COMMITTEE, Was/vington, D.C. The conimittee met at 10 a.m., pursuant to recess, in room AE-1, the Capitol, Hon. Wright Patman (chairman) presiding. Present: Representatives Patman, Reuss, and Thomas B. Curtis; Senators Douglas, Proxmire, Bush, and Javits. Also present: William Summers Johnson, executive director; John R. Stark, clerk; Hamilton D. Gewehr, research assistant. Chairman PATMAN. The committee will come to order. The committee continues hearings on the state of the economy and on improvements in policies to help achieve maximum employment, production and purchasing power. This morning we will consider fiscal policies in general and tax policies in particular. We have a very distinguished panel of experts on this subject, all of whom are old friends of the committee. Prof. Otto Eckstein, Har- vard University; Prof. Paul W. McCracken, University of Michigan; Dr. Joseph Pechman, director of economic studies, of the Brookings Institution. It is delightful to have you, gentlemen. Each of the panelists may make an opening statement if he has one, and then members of the committee will put questions to the panel under the 10-minute rule. Dr. Otto Eckstein, you may proceed in your own way. You have a prepared statement, I believe. STATEMENT OF OTTO ECKSTEIN, PROFESSOR OP ECONOMICS, HARVARD UNIVERSITY Mr. EOKSTEIN. Thank you, Mr. Chairman. It is a pleasure to be back with the committee. If the reports of usually well-informed reporters are correct, the prospect of a tax cut this year is fading. As has occurred repeatedly through the postwar period, the President and the Congress seem to lean to the view that a tax cut is either not necessary, or that the de- cision can wait a few more months, until short-term economic indi- cators cease to be mixed. The decision has now waited for over 4 years. In the meantime, we have progressively lowered our sights about the performance of our economy, satisfying ourselves with higher rates of unemployment, talking bravely about growth, but, in fact, accepting a rate of expan- 197 PAGENO="0208" 198 POLICIES FOR FULL EMPLOYMENT sion which is clearly below the normal rate which the ordinary in- crease in the labor force and in the stock of capital would produce. I believe I can best serve this committee and the formation of eco- nomic policy by talking about three things today. First, I shall re- port on some statistical analyses conducted in collaboration with Professor Duesenberry of my department and Professor Lintner of the Harvard Graudate School of Business Administration, about the general economic outlook and the effects of tax cuts. Second, I shall analyze some of the reasons for our hesitancy to act, and finally I shall give a few preliminary ideas which may be of relevance early in 1963 when we shall face the tax-cut problem again. PROJECTIONS Two projections were prepared, not as forecasts but to provide a realistic setting for the evaluation of a tax cut. We projected move- ments of the gross national product to the middle of 1963 on two assumptions. One, an optimistic set, under which business spends as much for investment in plant and equipment as it said it would spend before the stock market declined; residential construction continues to rise substantially to a rate of $25 billion a year and then remains at that level; net exports remain high; the increase in the outlays of State and local governments continues at the upper end of the rates of increase of recent years; and the Federal Government spends as much on goods and services as it announced in the recent budget. If all of these optimistic assumptions come true, an unlikely com- bination of events, gross national product might reach a level of $580 billion by the second quarter of 1963. We also prepared a set of projections making restrained pessimistic assumptions. In this set we assume that fixed investment by. busi- ness would begin to decline slightly after the middle of this year, and continue to decline at a moderate rate to the middle of 1963; resi- dential construction maintains current levels; net exports fall slightly; State and local governments increase outlays at a high rate but not quite as high as under the optimistic set, and the Federal Govern- ment again sticks pretty closely to its announced plans. This set of projections gives a gross national product of about $547 billion by the middle of 1963, which is slightly below the cur- rent level. To gain some perspective on these figures, it is useful to estimate that rates of unemployment that are likely to be associated with them. Even the optimistic projection produces no significant improvement in the unemployment rate below its current high level. Under the projection of restrained pessimism, unemployment rises above 7 per- cent by the middle of 1963. To see what difference a tax cut would make, we assumed that per- sonal taxes would be cut $4 billion and business taxes on the order of $2 billion or so, e.nough to raise business investment by $1 billion. By comparing the resultant GNP figures with the above projections, the net impact of a tax cut was estimated. We find that this $6 billion tax cut leads to an increase in GNP by the middle of 1963 of about $12 billion. If the tax cut is added to the optimistic projections, GNP might reach $592 billion. When added PAGENO="0209" POLICIES FOR FULL EMPLOYMENT 199 to the pessimistic projects, it results in a GNP of about $560 bil- lion. Thus, what we call the multiplier of the tax cut is about 2. It may also be of interest that of the $6 billion initial tax cut, some- thing like a third to a half would be recovered through the higher tax yields of improved economic activity. Let me add that we did not suggest that a $6 billion tax cut was the right amount. Larger tax cuts would have larger effects, of course, but we see no immediate reason to expect the resultant impact on the economy to be greater in a more than a proportionate manner. Thus, a $10 billion tax cut might improve GNP by about $20 billion, a $4 billion tax cut by $8 billion. What do tax cuts do to unemployment? The $6 billion tax cut would lower the rate of unemployment by about 0.6 percent, or 400,000 persons. The improvement in employment would be greater as the labor force returns closer to its normal rate of expansion. The single most interesting fact about these figures is this: even if the optimistic assumptions come true, that is, if the present supposedly "mixed bag of signals" resolves itself on the side of optimism, a tax cut would still be appropriate, since there is virtually no prospect of a real improvement in the unemployment situation. If the tax cut were enacted, even under these circumstances, the resultant rate of unemployment would still be above 4.5 percent, and therefore short of full employment. Thus, a tax cut would not be a mistake even if the optimists were correct and things turned out just as well as one could reasonably hope for. The risks of policy, there- fore, are not being run with regard to inflation, but recession and de- pression. For if things really go sour after this lengthy period of under-utilization of capacity and high unemployment and after the large decline in the stock market, no one can foresee just how the de- cline will occur and when and where it will stop. The prudent action, therefore, is a tax cut. REASONS FOE INACTION The diagnosis I have just presented is now held very widely both by economists and by business and labor leaders. It would take someone with a lot more understanding of the political process than I possess to explain the present dim outlook for action in the face of this agree- ment. Let me discuss a few of the more economic points, however. First, we are much too preoccupied with the ups and downs of reces- sions and expansions, and have lost sight of the longer-term trend of the economy in the process. It is indeed a fascinating sport to col- lect the straws in the wind every week about the immediate direction of movement of the economy. In fact, however, the business cycle per se has become extreme1y~ mild. Inventory movements, as the recent studies prepared for this committee showed, are a large part of the quick ups and downs of recession. As the economy has become more slack and supplies abun- dant, business has gotten more and more cautious in its inventory policies. The inventory movement of the 1960-61 recession was sub- stantially smaller than in the 1958 recession. Inventory buying dur- ing the present expansion was even more hand-to-mouth. Policies for fixed investment have also become more cautious and based on low assumptions of economic growth. These factors make recessions mild, 87869-~32----14 PAGENO="0210" 200 POLICIES FOR FULL EMPLOYMENT though one must mention on the other side that the stock market crash is a new factor which may worsen the prooess of decline when it next occurs. This mildness of recession militates against the use of fiscal policy. Decisions to pursue an expansionary fiscal policy have only come long after the signs of recession were clear, that is, when the inventory decumulation was fully underway and most statistics were declining sharply. A mild recession, even starting from a low point, does not produce unambiguous short-run indicators. Only a sharp recession does that. What is important about the present situation is not the direction of movement in any particular week, but the long-term output in relation to the capacity of the economy. Our concern about the direc- tion of movement has distracted us from the longer term deterioration of continued high unemployment and slow growth of the labor force, of low utilization of capital and squeezed profit margins, and of diminishing job opportunities in the face of a rapidly increasing number of young people entering the working age brackets. If we devoted as much attention to the measurement of the actual trends of the economy as compared to the potential trends as we do to the identification of business-cycle turning points, our fiscal policy might be different. Let me add I just received in the mail this committee's study of measurement of productive capacity, and I hope this marks a turning point in our focus of attention. BUDGET BALANCING Fear of deficits and the desire for an annually balanced budget is another major factor. This is not the place to rehearse all the pros and cons of the balanced budget, but let me point out two salient facts: first, if we really attempted to achieve an annually balanced budget in a deteriorating economic situation, it would plunge the country into depression.. Attempts to balance the budget by raising tax rates and cutting expenditures in the thirties were important contributory causes to the magnitude of that disaster. Second, the only valid reason for favoring an annually balanced budget is the pressure which this principle puts on the President and the Congress to resist the many pressure groups that always want the Government to spend more money. That argument is clearly irrele- vant in the present context. If there is objection to a high volume of spending, a tax cut is much more likely to place a check on expenditures growth than stumbling into recession. A. reduction in tax rates will force the Government to scrutinize expenditures more closely in the coming budget, while a recession, if recent history is any guide, will lead to a series of hasty new expenditure programs. LINKING THE TAX CUT TO AN IMMEDIATE EXPENDI1TTRE CUT Recently, the idea has been advanced that a tax cut should not be enacted unless expenditures are cut at the same time. As a point of political strategy, of using this opportunity to insist on expenditure reduction, it is not a point for me to juIge. But when the same PAGENO="0211" POLICIES FOR FULL EMPLOYMENT 201 point is offered by economists as policy advice, it must be judged on economic grounds. I do not doubt for a moment that the United States would be better off if certain lines of Government expenditures were substantially cut. I am also certain that my list would not be somebody else's list. 1~Te all have our own preferences about Govern- ment expenditures. But I fail to see any logical connection between the desirability of a tax cut which would permit business and consumer demand in the economy to grow in line with potential supply, and the necessity of reduction of Government expenditure programs as a precondition. I cannot see why a sound tax policy has to await reform of the agriculture program, of veterans' benefits, of urban renewal, of wel- fare programs, of subsidiaries of business, of defense, or space, or foreign aid, or whatever programs are in the minds of the economists advocating this view. As a matter of general economic policy, the argument is clearly upside down. If expenditures were really cut- even foolish expenditures-this would be a reduction in purchasing power which would have to be offset by further tax cuts. The deficit that would be associated with a policy of joint expenditure and tax reduction would have to be larger than a deficit from a tax cut alone to achieve any given degree of improvement in output and employ- ment. RELATION TO MONETARY POLICY Concern has also been expressed that the additional deficit which would result from a tax cut would force up interest rates, which might defeat the purpose of the tax cut. No doubt, a few more billions of deficit that have to be financed by borrowing will add to the demand for funds, and other things being equal, would have some impact on interest rates. However, I do not believe that this increase in the deficit would in fact be decisive about the trends of interest rates in the coming months. I would not judge the situation heavily on the experience of 1958 and 1959 when a record cash deficit was financed while the money supply shrank, and when interest rates did, of course, reach record levels. This time, the deficit presumably would be smaller and the money supply would be allowed to increase at some modest rate. Of course, the authorities will have to pass a judgment on the appropriate monetary policy in the coming year and on the methods of financing the deficit. But it is my belief that these decisions will be less influ- enced by the increment in the deficit that can be attributed to the tax cut than by our international monetary position weighed against the volume of unemployment. TAX POLICY IN 1963 Let us begin to look ahead to the next moment of decision early in 1963, when, presumably, some tax cut will be made in connection with tax reform. It is now much too early to reach definitive con- clusions about proper policy at that date; however, a few simple ideas might prove useful. First, the tax changes at that time must deal both with long-run and with short-run problems. PAGENO="0212" 202 POLICIES FOR FULL EMPLOYMENT On the one hand, if economic growth really is a serious objective of policy, the tax system should be further changed in a manner de- signed to raise the fraction of our gross national product which is invested. On the other hand, consumer purchasing power must also be stimulated. In practical terms, this means that the tax cut must somehow be divided between reduction of upper bracket rates of personal and of business taxes and reduction in the lower bracket personal taxes. We have already had `a liberalization of depreciation allowances which will save business about $2 billion a year. The investment credit which may be enacted in this session would add at least an- other billion-plus to business tax relief. Thus, these two measures alone would reduce corporation income tax payments by $3 to $4 billion, thereby increasing the supply of investible funds. If further substantial relief is given in business taxation, while `at the same time lack of growth of consumer pur- chasing power keeps the demand for final products relatively low, there is little chance that the additional savings being made available will in fact be invested. Thus, `a tax cut which only adds to savings may very well do more harm than good in dealing with the central economic problem of our day, which is the short fall of demand below potential supply. On the other side, increased international competition and the need for high long-term growth to meet our obligations requires us to take some additional steps toward raising the fraction of GNP which is invested. The `Congress would be well `advised to take with a large grain of salt any advice which would confine the emphasis of a tax cut either to business investment alone or just to consumption. Obviously some balance is the right answer, and `what that `balance is will depend on the circumstances at that time. The higher `the rate of unemploy- ment, the more weight will have to be given to the short-run stim- ulation of demand, which is best accomplished by stimulating consumption. Let me add at this point, that in `the event that an extensive tax reform bill is going to be tied to a tax cut, it might `be wise for the Treasury to get an immediate effect out of such a policy by reducing the withholding tax schedule effective January 1. As I understand it, they have some administrative discretion about the amount of withholding which they insist on from the `first of the year. If, in fact, it is going to be a tax bill which is debated well into the fall, if it is to have any economic impact as far as the short- run problem is concerned, it would be too late. I believe they have discretion to reduce withholding earlier, presumably on t'he `assump- tion that the final tax bill would contain a tax rate cut. In conclusion, the history of tax `policy reveals one lesson very clearly: most of the time there are reasons for not engaging in a positive tax policy, or for at least deferring the decision over and over again. Our tax system is choking off the growth of the economy. The longer we delay its regearing, the more it costs us in terms of lost output, lost wages and profits, a permanently shrunk workweek, a resistance to technological change, permanently lost capital forma- tion and just plain human suffering. PAGENO="0213" POLICIES FOR FULL EMPLOYMENT 203 Chairman PATMAN. Thank you very much, sir. Our next witness will be Professor McCracken, of the TJmversity of Michigan. Professor, we are glad to have you. STATEMENT OP PAUL W. MCCRACKEN, PROPESSOR OP ECONOMICS, UNIVERSITY OP MICHIGAN Mr. MCCRACKEN. Thauk you, Mr. Chairman. First I want to say I very greatly appreciate this opportunity to appear before the committee as it considers the implications of cur- rent business conditions for fiscal policy. I do have a prepared statement, but I am going to read excerpts only since the full statement is somewhat long. Chairman PATMAN. You may proceed as you desire. Representative REuss. Mr. Chairman, I wonder if Dr. McCracken would be good enough from time to time to tell us about what page of his prepared statement he is reading from. Mr. MCCRACKEN. Yes, I shall. Clearly the first question to pose is this: Does the evidence indicate that the economic situation presently needs to be strengthened in a fundamental way? Obviously there are reassuring aspects in the evidence that we have at hand. And certainly we would all agree that we need to avoid being "nervous Nellies," irrationally rushing into major policy changes each time we get a little bad news or have a little bad luck. On the other hand, three considerations suggest to me that the economy does need strengthening in a very fundamental way. First, there is the fact that the economy has for some years been operating somewhat below par. This has been widely recognized and discussed and needs no further elaboration here. The work of this committee has done a great deal, I think, to provide the statistical underpinning for documenting this problem. Second, the current cyclical expansion, beginning after February 1961, has turned out to be the weakest since the First World War. The facts can be usefully summarized something like this. The data in table I of my prepared statement show the gains in eight measures of business activity during the first 16 months of each cyclical expansion since World War I. If data were fully available for the entire period, it would be possible to make 64 comparisons of the current cyclical expansion with these others. For each of eight measures of business activity, post-1961 gains could be compared with that during the eight other cyclical expansions. Since, for the earlier period, some data are not available, only 55 such comparisons can actually be made. it is interesting to note that in 48 of the 55 the comparison is un- favorable to the economic performance since early last year; in 6 there is a favorable comparison; and in one case it turns out to be a tie. There can hardly be any question, therefore, that this is a candi- date for the weakest recovery since World War I. Third, we are beginning to wonder if the present expansion will turn out to be not only the weakest but also one of the shortest in the postwar period. We must, of course, beware of attaching excessive importance to very current data. On the other hand, some facts are undeniably disturbing. PAGENO="0214" 204 POLICIES FOR FULL EMPLOYMENT The gain in business activity during June, the last month at the moment for which a full statistical picture is available, was roughly one-third the average monthly gain since the present expansion got underway. There is also some evidence in the data on table II of a slowing down in the rate of the expansion throughout the second quarter. (P. 5 of my statement.) Finally, leading indicators generally have not been looking strong for some time. New orders for durable goods have been declining since the first of the year, and the June fall was particularly sharp. The length of the workweek moved downward in May and June. In fact, the most recent data available for the 30 leading indicators in Business Cycle Developments show 18 declining and 12 rising. Lead- ing indicators can be affected by capricious developments, and in any case the length of the leads is often quite variable. It would be difficult, however, to give the present pattern a very optimistic inter- pretation. If this review of the current economic situation is realistic, we clearly face more than the problem of an off 1 or 2 months in the inevitably irregular pattern of cyclical expansion. It is more accurate to say that we confront an uncertain short-run business outlook fol- lowing upon a particularly weak cyclical expansion, all of this super- imposed upon an economic performance that has been subpar for some years. What is our problem? There are, broadly speaking, two possi- bilities. People are either disinclined to spend their purchasing power, or there is a shortage of purchasing power. In one respect there may be a lessened inclination to spend. Consumer attitudes have never regained the levels of buoyancy reached in 1955, and there has been some deterioration since the events of April and May. And the evidence is clear that changes in consumer attitudes do influence the level of spending. There is also some concern about the possibility that wants have been saturated. There are persuasive reasons for believing that this problem of saturation of wants is not the core of the present situa- tion, and on page 7 of my testimony I have a couple of paragraphs summarizing the rather substantial body of evidence on this that comes from the work of the Survey Research Center at the University of Michigan. Continuing at the top of page 8-the evidence suggests to me that the problem is a shortage of purchasing power. Since the low quarter of 1961, private incomes after taxes (disposable income plus corporate profits after taxes), have increased $32.7 billion, but private demand for output has increased $35.9 billion. Thus private demand has increased $1.21 for each dollar. This is less than the $1.32 in the corresponding period after 1958 or the $1.54 after 1954. But it is still true, in the five quarters following the low point last year, that private demand for goods and services increased more rapidly than income after taxes. It is, I think, increasingly clear that the economic policies of Gov- ernment have been making a substantial contribution to the economy's shortage of purchasing power in recent years. At times the monetary authorities clearly have stepped too hard on the brake pedal-for example, in 1957 and again in 1959. It is equally clear to me that PAGENO="0215" POLICIES FOR FULL EMPLOYMENT 205 monetary policy has not impeded economic expansion for roughly 21/2 years. The reserve position of banks has been easy-and this continues to be true in spite of the slightly recent tightening. Com- mercial banks are eager to expand their loans, in contrast to the loaned-up banking sentiment in 1957 and 1959. Bank credit has in- creased 8½ percent during the last year. Reflecting this, interest rates, contrary to the expectation of many experienced market ob- servers earlier this year, have remained relatively low. Bond yields are only slightly above those of the low point of the recession early last year. Whatever quarrels we may have with the Federal Reserve about the details, the evidence does not seem to me to support the view that monetary policy has had very much to do with the current sluggishness of the economy. Nor does the recent slightly less easy credit policy yet constitute much threat to further expansion. The principal drag has come from the tax side of Government fiscal operations. For years we have pointed with gratification to the stabilizing effect of our tax structure as a major defense against a recession. (Top of p. 10.) Chairman PATMAN. I assume you will put your whole statement in the record? Mr. MCCRACKEN. I would like to. Chairman PATMAN. That will be done. Senator PROXMIRE. I hesitate to interrupt, but I would appreciate it if Dr. McCracken would define "money supply" for us. Mr. MCCRACKEN. Yes, sir, that is a good point, Senator. My defini- tion of the money supply here would include time deposits. I suspect that is the point of your question. I continue at the top of page 10. That total cash receipts of gov- ernment (Federal, State and local) have absorbed a large and growing proportion of the national income is well enough known, though the quantitative magnitudes are not always fully appreciated. The ratio of Government cash receipts (on a national income basis) to national income rose from 26.6 percent in 1948 to 33.9 percent in 1960, and it is probably about 34½ percent right now. Now let us look more closely at the last year and one-half to see how this works out cyclically. Chairman PATMAN. I would like to have one clarification here. You say "ratio of Government cash receipts." You mean all govern- ments, Federal, State and local political subdivisions? Mr. MCCRACKEN. That is correct. And on a national income basis. Let us now look more closely at the last year and one-half to see how this works out cyclically. From the low first quarter of 1961 to the second quarter of 1962 private incomes before taxes (personal income plus corporate profits) increased $45 bilhioi~. Government receipts, however, absorbed almost 44 percent. Now the sluggishness of the present recovery and the one in 1958 to 1960 begins to look a little less mysterious. The tax structure, by absorbing 40 to 45 percent of the rise in private incomes, left a gain in incomes after taxes so moderate that, with no special elements of strength present, we could not get an expansion in private demand vigorous enough to carry the economy back to reasonably full employ- ment. Now if the neutral position of the budget, where revenues and out- lays are equal, is at full employment, we should theoretically find it PAGENO="0216" 206 POLICIES FOR FULL EMPLOYMENT possible to avoid persistent unemployment, though a tax structure absorbing such large and growing proportions of income increases would still have adverse implications for economic growth. If, how- ever, this neutral budgetary position is at a level of business activity considerably below what would constitute reasonably full employ- ment, we have also a short-run problem. The fiscal drag would make full employment difficult to attain, which would cause a short fall in revenue, which would make the budget look bad, which might make us disinclined to take needed tax action, and so forth. This, I think, is not an unfair characteriza- tion of the present situation. In the January report the Council of Economic Advisers estimated that at reasonably full employment, the present tax structure would produce a Federal surplus of perhaps $8 billion this year (on a na- tional income basis), with this full employment surplus approaching something like $10 billion `by the first half of calendar 1963. In short, the budget now moves from a neutral to a restrictive position substantially before the economy reaches reasonably full employment, and with Government receipts siphoning off 40 percent of the addition to income, it has been very difficult to get the needed thrust of in- creased private demand. If this diagnosis is correct, what does it suggest for fiscal policy? It means three things. First, the tax structure should be lowered so that the budget does not begin to exert a brake on the economy quite so far below reasonably fully employment. Second, the tax structure now absorbs too large a proportion of increases in the national income. Third, we must slow down the tendency for Federal Government re- ceipts to absorb a growing proportion of the national income. Most of my time has been consumed in an endeavor to establish the case that the fiscal operations of Government are an important source of our present economic problem, and vigorous fiscal action must play a major role in this problem. This leaves little time to spell out the specifics. This is not, I think, particularly fatal, be- cause it seems to me there is a rather surprising consensus on what the tax actions ought to be if they can be undertaken. First of all, budgetary procedures should be modified so that we give more explicit attention to this question: How rapidly should Federal expenditures grow in the years ahead? The excellent work on expenditures at both ends of Pennsylvania Avenue does an effec- tive, and I think unappreciated, job of sifting out waste and unessen- tiality in the technical sense. It is less well designed to tell us whether these individually well-considered prograius add. up to more than ought to be spent in the aggregate. The ratio of Federal budget cash outlays t.o GNP in fiscal year 1962 was 2.1 percentage points above that of fiscal 1960. Thus, if the rate of increase of Federal cash outlays had been limited to the rate of increase of GNP, Federal outlays last year would have been $12 billion less. This growth has reduced the scope of otherwise desirable incentive-promoting tax reductions. It is not unreasonable to expect from the administration an explicit declaration of its longer range policy with respect to total outlays. And the Congress should reexamine its own procedures to see if more PAGENO="0217" POLICIES FOR FULL EMPLOYMENT 207 explicit attention can be given to the total on the expenditure side of each year's budget. Second, the economic situation would benefit from tax actions now that would reduce the level of the structure and move it in the direction of a better system. As I mentioned, fortunately, there is a rather surprisingly narrow range of disagreement on what the elements of such a package might be-some reduction in the corporate income tax and some reduction in the personal income tax. The total package should be such that the resulting tax structure would still produce enough revenues comfortably to cover expenditures at reasonably full employment. On this basis, something like $7 billion would probably be the outside limit of any tax reduction at this time. The action should not be quickie or temporary in character. We should capi- talize on the substantial current consensus in order to move toward a better basic pattern of Federal taxes. Third, I would, myself, support the proposal that the President be given limited power to alter certain tax rates. This could be hedged with adequate safeguards, limited as to amount and perhaps requiring that the President transmit to the Congress a full report setting forth reasons for his actions. Without this authority, each recession pro- duces inexorable pressures to do something on the expenditure side which, history suggests, will be moving expenditures to a substantially higher level. This proposal, in other words, would be a step toward fiscal con- servatism. In the long run it would make for a less rapid increase for expenditures and more elbow room on the tax side for further needed reform. One further question. Would tax reduction and reform now be apt to worsen further the already somewhat nervous position of the dollar internationally? This is possible. If the resulting expansion sets in motion an accelerated rise in our cost-price level, and if we insist that the monetary authorities adhere to unrealistically low interest rates, and if needed improven'ients in profits were seemingly interpreted as evidence of malevolence, the dollar could quickly be in real trouble. And it must be stated flatly that such trouble would then be deserved. If, however, we manage our affairs carefully, there is good reason to think that the international position of the dollar would not be worsened by tax reform and reduction now, and it might well be strengthened. The resulting higher level of national income would, of course, tend to increase imports and that would enlarge the deficit in our international balance of payments. There are, however, forces that would work the other way. The more active demand for funds would produce higher interest rates in the U.S. money and capital markets. The invigorated pace of economic activity would enlarge the opportunities for more profitable investment of capital in the domestic economy, reducing the incentives to seek investment outlets abroad. The innovational activity that accompanies a more lively pace of economic expansion should, in time, have some favorable effects on U.S. exports. Since in the U.S. economy imports are relatively small and the international capital outflow is relatively large, there is at least an even chance that policies proposed here woud help to narrow the deficit in our balance of payments. PAGENO="0218" 208 POLICIES FOE FULL EMPLOYMENT Now, there does, of course, remain the potentially adverse effect on psychology and confidence in the dollar both here and abroad. My own view would be that if the tangible, concrete, objective factors can be expected to be at least neutral and possibly helpful, then we ought to be able to manage that. In conclusion, the becalmed state of the economy at present-com- ing on the heels of a particularly weak cyclical expansion superim- Dosed on a protracted period of less than reasonably full employ- ment-strongly suggests to me that the economy needs strengthening in a fundamental way, and it also suggests that within reasonable limits this can be done without courting the risk of a disorderly expansion. The basic problem is the shortage of income and purchasing power, but this deficiency must be remedied in ways that do not increase costs per unit of output and do not produce monetary conditions which would further weaken the dollar. This calls for tax adjustments that lower and otherwise improve the structure. The magnitude of the reduction should still leave us with a tax structure whose revenues would cover expenditures when productive resources are being utilized reasonably fully. Such actions need not weaken the dollar interna- tionally, and there is an even chance they might strengthen it. In fact, we are fortunate that what is needed to step up the pace of job creation and economic expansion at home could also add strength to the dollar internationally; namely, a more innovative and prosper- ous and profitable economy. Chairman PAThIAN. Thank you. (The full statement is as follows:) TESTIMONY OF PAuI~ W. MCCRACKEN, PROFESSOR OF BUSINESS CONDITIONS, SCHOOL OF BUSINESS ADMINISTRATION, UNIVERSITY OF MICHIGAN I Mr. Chairman, I greatly appreciate the opportunity to appear before this committee to consider the implications of current business conditions for eco- nomic policy. Clearly the first question to pose is this: Does the evidence mdi- cate that the economic situation needs to be strengthened in a fundamental way? The situation is not, of course, without its hopeful aspects. Even if this cyclical expansion were to be a bit on the short side, business cycle history suggests that economic conditions should continue to improve for several months yet~ By the end of this year the present expansion would still be of only 22 months' dura- tion. Only one upswing since World War I (November 1927, to August 129) was shorter than this. Moreover, we know that the course of any upswing is irregular, with fiat months and air pockets occasionally developing. The fact is that in recent months the economy has been bombarded with an unusual run of bad luck-such as the steel price donnybrook, the stock market break, and recurring nervousness about the international position of the dollar. Good economic policy clearly requires that we not be "nervous Nellies," rashly pro- posing major changes each time a cluster of bad news or bad luck comes along. Three considerations suggest that the economy does need strengthening in a fundamental way. First, there is the fact that the economy has for some years been operating somewhat below par. This has been widely recognized and dis- cussed. In his study for this committee (published in 1960) Mr. Knowles esti- mated for each year from 1909 to date the output that would have represented reasonably full utilization of the Nation's productive resources. In 9 of the 15 years from 1947 to 1961, output was below par (including all years since 1957). By contrast in the 17 years from 1909 to 1929 (excluding the years 1917-20) the PAGENO="0219" POLICIES FOR FULL EMPLOYMENT 209 record was notably better. "Full employment" years in those two decades out- numbered those when output was subpar by about 2 to 1. Interpretations of this experience will differ, but one conclusion is clear. The economy for several years has had an evident lack of bounce and steam. Our current problem is more than just one of those normal momentary air pockets in a cyclical expansion. Second, the current cyclical expansion (beginning after February 19G1) has turned out to be the weakest since the First World War. During the 16 months from February 1961 to June 1962, nonagricultural employment gained 3.6 percent. The average employment gain in the first 16 months of the eight other cyclical ex- pansions since World War I was 11.3 percent, and even following the hardly dis- cernible recession of 1927 employment increased 7.6 percent. The improvement in industrial production this time has been less than in any of the other cyclical expansions since the First World War. The same is true for gross national product. The gain in retail sales has been slightly greater than that following July 1921, and November 1927, but it falls considerably short of those after the other six recessions. The facts can usefully be summarized something like this. The data in table I show the gains in eight measures of business activity during the first 16 months of each cyclical expansion since World War I. If data were fully available it would be possible to make 64 comparisons of the current cyclical expansion with others-for each of eight measures of business activity comparing the post-1961 gain with that during the eight other cyclical expansions. Since for earlier periods some data are not available, only 55 such comparisons can be made. In 48 of these 55 the comparison is unfavorable to the performance since early last year, in ~El there is a favorable comparison, and in one case it is a tie. That the current cyclical expansion has been a particularly weak and sluggish one is quite evident from these facts. It is the Nation's poorest performance In four decades, and probably one of the poorest in our history. It is, of course, true that expansions after very mild recessions (such as the one in 1960-61) tend to be on the mild side, but the current expansion is weak even relative to that following the 1927 recession. Third, we are beginning to wonder if the present expansion will turn out to be not only the weakest but also one of the shortest in the postwar period. We must beware of attaching excessive importance to very current data. On the other hand, certain facts are undeniably disturbing. The gain in business activity during June (the last month at the moment for which data are fully available) was about one-third the average monthly gain since the present expansion got underway. There is also some evidence in the data in table II of a slowing down in the expansion throughout the second quarter. Moreover, it is clear that business sentiment has been adversely affected by events in recent months. The stock market break has bad a substantial effect on the thinking of both business people and consumers. Many businessmen were alarmed by the inferences they drew from the ad- ministration's handling of the steel price dispute, even though they did not support the actions of the steel industry. It would be reasonable to expect that an already anemic expansion would at least not be helped by the adverse cumulative effect of these more or less fortuitous developments. Finally, leading indicators generally have not been looking strong for some time. New orders for durable goods have been declining since January, and the June fall was fairly sharp. The length of the workweek moved downward in May and again in June. In fact, the most recent data available for the 30 leading indicators in Business Cycle Developments show 18 of them de- clining and 12 rising. Leading indicators are, of course, difficult to interpret. They can be affected by capricious developments, and in any case the length of the leads is quite variable. It would be difficult, however, to give their present pattern a very optimistic interpretation. If this review of the current economic situation is realistic, we clearly face more than the problem of an off 1 or 2 months in the inevitably somewhat ir- regular path of a cyclical expansion. It is more accurate to say that we con- front an uncertain short-run business outlook following upon a particularly weak cyclical expansion-all of this superimposed upon an economic performance that has been subpar for some years. PAGENO="0220" 210 POLICIES FOR FULL EMPLOYMENT TABLE 1.-Percentage increase in 8 measures of business activity during the 1st 16 months of cyclical ecopansions since World War I Indicator After recession ending- July 1921 July 1924 No- vember 1927 March 1933 June 1938 October 1949 August 1954 April 1958 Feb. ruary 1961 Number of employees in nonagricultural establish- ments Unemployment rate, total (inverted) Index of Industrial produc- tion Gross national product in current dollars (Q)2 Gross national product in 1954 dollars (Q)3 Bank debits outside New York City, 343 center&____ Personal income Sales of retail stores +21. 6 (1) +50.0 (1) (1) +11. 3 +21. 0 +4. 5 +11.4 (1) +27- 5 +16. 2 (1) +19.3 +12. 6 +6.9 +7. 6 (1) +18.4 +11. 8 (1) +13.0 +10.2 +5.4 +18.2 +35- 0 +34.5 +23. 5 (1) +22. 5 +26. 5 +20.0 +9.4 +29.2 +47- 7 +12.0 (1) +13. 7 +10.8 +18.9 +11.0 +123. 7 +30. 7 +23. 7 +13. 2 +29. 7 +21. 1 +22. 1 +6. 1 +43.0 +17.2 +13.0 +9. 8 +16-2 +11. 5 +11.3 +4.8 +38. 7 +18. 9 +10. 4 +9. 8 +16. 0 +8.5 +10.6 +3.6 +26.6 +15.4 +10.2 +7. 7 +16.0 +9.0 +6.5 1 Not available. 2 5 quarters. 4 quarters. Source: Business Cycle Developments. July 1962, p. 57. T&nrsi 11.-Monthly changes in selected measures of business activity (seasonally adjusted) 1962 (1) Nonagricul- tural em- ployment (2) Industrial production (3) Personal income (4) Retail sales (5) January February March April May June February 1961-June 1062 average -58 +339 +128 +359 +11 +43 +121 -1.3 +1.3 +. 9 +1. 1 +. 7 +. 3 +1.0 -$1.7 +3.2 +2.6 +2.4 +1.4 +. 7 +2.3 +$9 +129 +302 +338 -117 -431 +80 Source: Col. 2, BLS estimates of nonagricultural workers on payrolls (in thousands); col. 3, percentage points for the FEB index of industrial production; col. 4, Department of Commerce (in bifflons); col. 5, Department of Commerce (in millions). II What is our problem? There are, broadly speaking, two possibilities. People are either disinclined to spend their purchasing power, or there is a shortage of purchasing power. In one respect there may be a lessened inclination to spend. Consumer attitudes have never regained the levels of buoyancy that were reached in 1955, and there has been some deterioration since events of April and May. And the evidence is clear from work at the University of Michigan's Survey Research Center that changes in consumer attitudes do influence the level of spending. There is also some concern about the possibility that wants have simply been s'aturated. This argument has taken many forms-ranging from that of the affluent society to the fear that consumers are so fully in debt that the further expansion of credit necessary to sustain vigorous prosperity can- not take place. There are persuasive reasons, however, for believing that the problem is not primarily saturation of wants. Research evidence is fairly clear on this point. The simple fact is that as levels of living rise, levels of aspiration rise also. The achievement of one scale of living sets the stage for the desire to stage an assault on the next. Periodically during the last decade the University of Michigan's Survey Research Center has probed people about their needs and whether they would like to make special expenditures in the coming year. In their 1962 mono- graph the center summarizes the evidence as follows: PAGENO="0221" POLICIES FOR FULL EMPLOYMENT 211 "1. Today, as they did 10 years ago, the great majority of American people express wishes and desires for consumer goods. This is true in all income groups. Those who do not express such wishes are most commonly old * * * or poor * * *~ The proportion having no wishes and desires has not increased in the last 10 years. Being well stocked with goods, or having made large expendi- tures recently, does not make for `needlessness.' "2. The kinds of things desired have changed substantially in the postwar period. Desires for summer houses, boats, travel, and various hobby expendi- tures have increased in frequency. At the same time, desires for automobiles have not diminished in frequency (partly as the result of an increase in desires for second cars). Because people have a great many wants and desires, they feel they must economize and shop carefully. (There was, therefore, a change in the kind of automobile desired.)" 1 The evidence suggests to me that the problem is a shortage of purchasing power. Since the low quarter of 1901 private incomes after taxes (disposable personal income plus corporate profits after taxes) have increased $32.7 billion but private demand for output has increased $39.5 billion. Thus private demand has increased $1.21 for each dollar increase in private incomes after taxes. This is less than the $1.32 in the corresponding period after 1958, or the $1.54 after 1954, but it is still true that in the five quarters following the low point last year private demand for goods and services has increased more rapidly than incomes after taxes. To some a shortage of purchasing power is synonymous with the need to ac- celerate the rise in wage rates. This approach would, of course, be self-defeating because it would also raise costs of production and, therefore, prices. And if the price line were held, the resulting deterioration in profits would give us a more acute case of the economic anemia we were trying to cure. On this our ex- perience of the last several years is quite clear. The fact that costs per unit of output rose more rapidly than prices after the mid-1950's, with the consequent sharp decline in profits per unit of output, unquestionably played a major role in the sluggish performance of the economy in that period. TABLE III.-Indecoes of corporate income and output in manufacturing [1955=100] Year (1) Output (2) Employment costs (3) Profits (4) Per unit of output Employment costs (5) Profits (6) 1955 1956 1957 1958 1959 1960 1961 100. 0 102. 9 103.3 96. 5 109. 0 112.0 112. 5 100.0 107.9 112.9 108. 9 119. 0 123.5 124.0 100. 0 94. 0 91.6 73. 2 101. 5 96.0 94. 0 100.0 105.0 109.0 112. 8 109. 1 110.1 110. 1 100.0 91.5 88.7 75.9 93.2 85.6 83. 5 Source: Column (2), Federal Reserve Index; columns (3) and (4), basic data from Department of Com- merce; column (5), column 3 divided by column 2; column (6), column 4 divided by column 2. It is, I think, increasingly clear that the economic policies of Government have been making a substantial contribution to the economy's shortage of pur- chasing power in recent years. At times the monOtary authorities clearly have stepped too hard on the brake pedal, e.g., in 1957 and again in 1959. It is equally clear, however, that monetary policy has not impeded economic expansion for roughly 21/2 years. The reserve position of the banks has been easy. Com- mercial banks are eager to expand their loans, in contrast to the "loaned-up" banking sentiment in the tight-reserve eras of 1957 and 1959. Bank credit has increased 81/a percent in the last year. Reflecting this, interest rates (contrary to the expectation of many experienced market observers early this year) have remained relatively low. Bond yields are only slightly above those at the low point of the recession early last year. Whatever quarrels we may have with 1 George Katona, Charles A. Lininger, James N. Morgan, and Eva Mueller, "1~61 Survey of Consumer Finances" (University of Michigan, Survey Research Center, 1962), p. 98. PAGENO="0222" 212 POLICIES FOR FULL EMPLOYMENT the Federal Reserve about details, the evidence does not support the view that monetary policy has had much to do with the current sluggishness of the economy. The principal drag has come from the tax side of Government fiscal operations. For years we have pointed with gratification to the stabilizing effect of our tax structure as a major defense in a recession. The large volume of tax collections relative to national income and the tax structure's progressive nature have meant that much of the decline in incomes has been at the expense of the tax collector. Incomes after taxes tended to stay put-to be stabilized. We are all familiar with this story. For some curious reason we have not seemed to perceive fully the implications of this for expansion, even though we usually recited the right words. The fact is, however, that a tax structure which stabilizes incomes after taxes during a recession also "stabilizes" them in an expansion, i.e., it retards their expansion. That total cash receipts of government (Federal, State, and local) have absorbed a large and growing proportion of the national income is well enough known, though the quantitative magnitudes are not always appreciated. The ratio of Government cash receipts (on a national income basis) to national income rose from 26.6 percent in 1948 to 33.9 percent in 1960, and it is probably about 341/a percent now. T.&Bus IV.-Government receipts and gross `national product at postwar cyclical peaks [Dollar amounts in billions] Year National income Government receipts ~ Amount Percent National income 1948 1953 $223. 5 305.6 366.9 415. 5 1 457.0 $59.2 94.9 116.3 141.0 1 158.0 26.6 31.1 31.8 33. 9 1 34. 6 1957 1960 1962-2d quarter 1 Estimated. Source: Basic data from the Department of Commerce. T~&nns v.-clhange in private incomes before tacces and Government receipts 5 quarters after recession lows [Dollaramounts:lnbillions] ` 1958-59 1961-62 Private incomes $49. 6 $20. 5 41.4 $16. 5 33. 3 $45. 0 $19. 6 43. 5 $15. 7 34. 5 Total Government receipts As percent change, private income Federal Government receipts As percent change, private income Sources: Basic data from Department of Commerce. Let us now look more closely at the last year and one-half to see how this works out cyclically. From the low first quarter of 1961 to the second quarter of 1962 private incomes before taxes (personal income plus corporate profits and the inventory valuation adjustment) increased $45 billion. Government receipts, however, absorbed 44 percent of this increase. Now the sluggishness of the present recovery, and the one in 1958-GO, begins to look less mysterious. The tax structure, by absorbing 40-45 percent of the rise in private incomes, left a gain in incomes after taxes so moderate that (with no special elements of strength present) we could not get an expansion in private demand vigorous enough to carry the economy back to reasonably full employment. If the neutral position of the budget (where revenues and outlays are equal) is at full employment, we should theoretically find it possible to avoid persistent unemployment-though a tax structure absorbing such a large proportion of PAGENO="0223" POLICIES FOR FULL EMPLOYMENT 213 increments to national income would still have important adverse implications for economic growth. If, however, this neutral budgetary position is at a level of business activity considerably below what would constitute reasonably full employment, we have also a short-run problem. The fiscal drag would make full employment difficult to attain, which would cause a short fall in revenue, which would make the budget look bad, which might make us disinclined to take needed tax action,, etc. This is not an unfair characterization of the present situation. In their January report the Council of Economic Advisers estimated that at reasonably full employment the present tax structure would produce a surplus (on a na- tional income accounts basis) of perhaps $8 billion this year, with this full employment surplus approaching $10 billion by the first hatf of calendar 1963. In short, the budget now moves from a neutral to a restrictive position substan- tially before the economy reaches reasonably full employment, and with govern- ment receipts siphoning off over 40 percent of additions to income, it has been very difficult to get the needed thrust of increased private demand. III If this diagnosis is correct, what does it suggest for fiscal policy? It means, I think, three things. First, the tax structure should be lowered so that the budget does not begin to exert a brake on the economy quite so far below reason- ably full employment. Second, the tax structure now absorbs too large a pro- portion of increases in the national income. Third, we must slow down the tendency for the Federal Government's receipts to absorb a growing proportion of the national income secularly. Most of my time has been consumed in an endeavor to establish the case that the fiscal operations of Government are an important source of our present economic problem, and that vigorous fiscal action must play a major role in any program to deal with the problem. This leaves little time to spell out specifics. Even so, it may be useful to indicate briefly the nature of a fiscal program that might contribute to a stronger economy. First, budgetary procedures should be modified so that we give more explicit attention to this question: How rapidly should Federal expenditures grow in the years ahead? The excellent work on expenditures at both ends of Pennsyl- vania Avenue does an effective and, I think, underappreciated job of sifting out waste and unessentiality in the technical sense. It is less well designed to tell us whether these individually well-considered programs add up to more than ought to be spent in the aggregate. The ratio of Federal budget cash outlays to GNP in fiscal 1962 was 2.1 percentage points above that of fiscal 1956. Thus, if the rate of increase of Federal outlays had been limited to the rate of increase of GNP, Federal cash outlays last year would have been $12 billion less. This inevitably has reduced the scope for otherwise desirable incentive-promoting tax reductions. It is not unreasonable to expect from the administration an ex- plicit declaration of its longer range policy with respect to total outlays; and the Congress should reexamine its own procedures to see if more explicit attention can be given to the total on the expenditure side of each year's budget. TABLE VI.-Ratio of Federal cash budget outlays to gross national product [In percent] Fiscal year 1956 Fiscal year 1960 Fiscal year 1962 National defense Others 10. 0 7.8 9.3 9. 8 g. ~ 10.4 Total 17.8 19.1 19.9 Second, the economic situation would benefit from tax actions now that would reduce the level of the structure and move it in the direction of a better system. Fortunately, there is considerable agreement about what would constitute such a package-a reduction of three to five points in the corporate income tax; a cut- off of the personal income tax at around a 65-percent top rate, with reductions of perhaps two percentage points back down through the normal tax; and a rationalization of our motley array of excise taxes (which could be done with PAGENO="0224" 214 POLICIES FOR FULL EMPLOYMENT no loss of revenue). The total package should be such that the resulting tax structure would produce enough revenues comfortably to cover expenditures at reasonably full employment. On this basis something like $7 billion should probably be the outside limit of any tax reductions at this time. The action should not be "quickie" or temporary in character . We should capitalize on the substantial current concensus about what ought to be done to move toward a better basic pattern of Federal taxes. Third, I would myself support the proposal that the President be given limited power to alter certain tax rates. This could be hedged with adequate safe- guards-limited as to amount, and perhaps requiring that the President transmit to the Congress a full report setting forth reasons for his actions. Without this each recession produces inexorable pressures to "do something" on the expend- ture side which, history suggests, will be moving expenditures to a substan- tially higher level. This proposal would, in short, be a step toward fiscal con- servatism. In the long run it would make for a less rapid increase in expendi- tures and more "elbow room" on the tax side for further needed reforms. Iv One further question: Would tax reduction and reform now be apt to worsen further the already somewhat nervous position of the dollar internationally? This is possible. If the resulting expansion sets in motion an accelerated rise in our cost-price level, and if we insist that the monetary authorities adhere to unrealistically low interest rates, and if neded improvement in profits were seem- ingly interpreted as evidence of entrepreneurial malevolence, the dollar could quickly be in real trouble. And, it must be stated flatly, such trouble would then be thoroughly deserved. If, however, we manage our affairs carefully, there is good reason to think that the international position of the dollar would not be worsened by tax reform and reduction now, and it might well be strengthened. The resulting higher level of national income would, of course, tend to increase imports and that would enlarge the deficit in our international balance of payments. There are, however, forces that would work the other way. The more active demand for funds would produce higher interest rates in the U.S. capital markets. The invigorated pace of economic activity would enlarge the opportunities for more profitable investment of capital in the domestic economy, reducing Incentives to seek investment outlets abroad. And the innovational activity that accom- panies a more lively pace of economic expansion should in time have some favor- able effect on U.S. exports. Since in the U.S. economy imports are relatively small and the international capital outflow is relatively large, there is at least an even chance that policies proposed here would help to narrow the balance-of- payments deficit. There does remain the potentially adverse effect on confidence in the dollar, internationally and domestically, of tax action now. If, however, the tangible, concrete, objective forces can reasonably be expected to beat least neutral and probably favorable, and if we give evidence of capacity to manage sensibly such things as monetary and wage-cost-price policies, we can probably deal with the psychological aspects of the problem. CONCLUSION The becalmed state of the economy at present, coming on the heels of a par- ticularly weak cyclical expansion superimposed on a protracted period of less than reasonably full employment, strongly suggests that the economy needs strengthening in a fundamental way; and it also suggests that within reasonable limits this can be done without courting the risk of a disorderly economic ex- pansion. The basic problem is a shortage of income and purchasing power, but this deficiency must be remedied in ways that do not increase costs per unit of output and that do not produce monetary conditions which would further weaken the dollar. This calls for tax adjustments that lower and otherwise improve the structure. flhe magnitude of the reduction should still leave us with a tax structure whose revenues would cover expenditures when productive re- sources are being utilized reasonably fully. Such action need not weaken the dollar internationally, and there is an even chance that it might strengthen it. In fact, we are fortunate that what is needed to step up the pace of job cr~ation and economic expansion at home could also add strength to the dollar internationally-a more innovative, more pros- perous, and more profitable economy. PAGENO="0225" POLICIES FOR FuLL EMPLOYMENT 215 Chairman PATMAN. Our next witness will be Dr. Joseph A. Pech- man, director of economic studies at the Brookings Institution. We are glad to have you, sir. You may proceed in your own way. STATEMENT OP JOSEPH A. PECHMAN, DIRECTOR. OP ECONOMIC STUDIES, THE BROOKINGS INSTITUTION Dr. PECHMAN. Thank you, Mr. Chairman. I am happy to have this opportunity to appear before the Joint Economic Committee to discuss the economic situation and its fiscal policy implications. In this statement, I propose to review the economic outlook, try to ex- plain why the expansion seems to be p.etering out, and suggest policies that might be adopted to restore our economic momentum. The views I shall express are my own and do not necessarily reflect those of the trustees, officers, or other staff members of the Brookings Institution. Since I agree with practically all of what my two friends said before me, you might call my statement "Variations on the Eckstein-Mc- Cracken Theme by Pechman." THE ECONOMIC OtTLOOK There is no question that the economic expansion which began early last year has been disappointing. Perhaps the most telling figure- certainly the one which should concern us most-is the rate of unem- ployment. In July, the unemployed were 5.3 percent of the labor force, after adjustment for seasonal variation. This is a much poorer performance than those of the first two postwar recoveries, and roughly similar to the unsatisfactory 1958-60 performance. At the same stage in the cycle, unemployment was 3.4 percent in the 1949-53 expansion and 4 percent in the 1954-57; it was 5.6 percent in the same stage of the 1958-60 expansion, but this figure was unusu- ally high at the time because of the prolonged steel strike. The dis- tressing fact about the unemployment situation is that it will get worse if the economy rises by anything less than about $7 billion per quarter at an annual rate. It is not difficult to demonstrate that the expansion is not only disappointing, but also tl1at it has lost most of its momentum. In the first place, the difference between actual GNP and potential GNP at an unemployment rate of 4 percent has remained at about $30 bil- lion during the past 9 months. Second, GNP in real terms rose at an annual rate of 8.6 percent in the first three quarters of the expansion; in the last two quarters, the rise has been at the rate of 3.2 percent. Third, gains in employment, personal income, and industrial pro- duction have slowed down almost to a creep. In June, employment rose only one-tenth of 1 percent; personal income, two-tenths of 1 per- cent; and industrial production, three-tenths of 1 percent. Fourth, retail sales fell in May and June. The drop was particu- larly steep in June, perhaps reflecting the impact of the sharp break in the stock market. Although sales appear to have increased again in July, they will probably turn out to be lower than the peak reached in April. Thus, none of the broad indicators of business activity suggests that the economy is going anywhere very fast. But the gloomy cvi- 87S69-62------15 PAGENO="0226" 216 POLICIES FOR FULL EMPLOYMENT dencë on the business outlook comes from the leading indicators. Manufacturers' sales have exceeded new orders since March. This means that order backlogs are going down and, imless the trend is reversed very soon, production is bound to fall. Inventory investment declined sharply in the second quarter of the year, suggesting that businessmen are already anticipating a slow- down in demand. The decline in inventory investment is not all di~e to the unusual steel situation; other industries are also exhibiting the same tendency. Fortunately, fixed investment-particularly construc- tion-has continued to rise, but new orders of firms manufacturing machinery and equipment have been sliding off since January. This implies a weakening of investment demand and is perhaps the most disturbing sign of all. I am not trying to suggest that a downturn in business activity in the near future is a certainty. We have had slowdowns before with- out experiencing a recession. The two most recent cases were 1951 and 1956-but, in both cases, there were good reasons for the pickup. In 1951, defense expenditures continued to rise rapidly as the Korean war continued. In 1956, private investment remained strong and defense orders rose sharply while industry generally was operat- ing close to capacity. Today, Federal expenditures are still rising, but at a declining rate; excess capacity at current rates of output is widespread; and there are no signs of a strong upward movement any- where in the private economy. We have had a good year in autos and housing, but these industries are hardly likely to go much higher with personal incomes leveling off. Inventory investment will continue to decline unless retail sales pick up, and the latter is not likely to happen unless incomes go up faster. Profits are already falling, even though some specific companies have reported record earnings for the first half of the year. With the large amount of excess capacity throughout industry, it is hard to believe that we are about to see a significant increase in investment demand. (The more liberal depreciation allowances will certainly be helpful and so would the investment credit if it were enacted, but their effect probably will not be immediate.) In brief, the situation looks more like mid-1957 than 1951 or 1956. Then, as now, inventory accumulation was low, manufacturers' new orders were declining, and order backlogs were going down. With- out implying a forecast for this year, I simply record the historical fact that the peak of that cycle was reached in July 1957. WHAT WENT WRONG? Since proper diagnosis is an essential prerequisite to prescription, it is important to explain the premature slowdown in the rate of ex- pansion. Until the turn of the year, the recovery was going along on schedule. There were differences of opinion over the outlook, but practically all informed observers expected the rise to continue vigor- ously at least until midyear. In this situation, the administration submitted a budget for fiscal year 1963 that would be roughly in balance if the 1962 GNP turned out to be $570 billion. It is to be noted that the balanced budget was PAGENO="0227" POLICIES FOR FULL EMPLOYMENT 217 expected to materialize only if, given the projected Government spending and taxing programs, demand in the private economy would be large enough to produce a total GNP of $570 billion. Developments in 1962 clearly indicate that Government fiscal policy is too restrictive to permit the economy to achieve the projected levels of output. The degree of restriction can perhaps be fully appreciated if the figures used in the budget are translated to a full employment basis (which is ordinarily defined as employment of 96 percent of the labor force.) At full employment and projected levels of Govern- nient spending, the administrative budget surplus would probably amount to about $4 billion in fiscal year 1963. When translated into the more economically meaningful national income budget, this is equivalent to a surplus of about $8 billion. Full employment will not be reached this year because private demand is not strong enough to permit the Government to drain off that amount from the private economy. In fact, as events have turned out, private demand is not even strong enough to permit the Government to plan on a budget which would be barely balanced at a 1962 GNP $15 to $20 billion short of full employment. It is noteworthy that the original budget estimates for every one of the past 5 years projected some surplus, yet deficits were actually realized in 4 out of these 5 years. As the following table shows, the original estimates for the 5 years aggregate to a cumulative surplus of $8.1 billion, but the period ended with a cumulative net deficit of $24.2 billion. This sad record was due primarily to the reduced receipts from levels of business activity that turned out to be substantially lower than those estimated. (The table referred to follows:) Comparison of original budget estimates with actual results, fiscal years 1958-62 [Billions of dollarsj Fiscal year Administrative budget surplus (+) or deficit (-) Original estimates Actual 1958 1959 1960 1961 1962 Total +1.8 +5 +.1 +4.2 +1.5 +8.1 -2.8 -12.4 +1.2 -3.9 -6.3 -24.2 The so-called "squeeze" on corporate profits is principally a re- flection of this lackluster performance of the economy. Recent re- search by econometricians has indicated that the brunt of a short fall in the gross national product below full employment potential is felt by corporate profits. The short fall of profits below the level it would reach at full employment will amount to at least $8 billion in 1962 alone. Even larger amounts were lost in several recent years. We cannot allow this to continue much longer. A prolonged period of disappointing profits inevitably reduces investment incentives and retards the Nation's economic growth. PAGENO="0228" 218 POLICIES FOR FULL EMPLOYMENT The United States cannot hope to approach the growth rates ex- perienced in Europe and Japan during the last decade without a higher rate of investment~ and we will not achieve a higher rate of investment unless businessmen expect growing markets for their products. The lesson to be learned from the economic record of recent years in this country is that planning for a surplus, without regard to the strength of private demand, may very well produce unsatisfactory rates of employment and output and create deficits besides. When demand is strong and appears to be pressing hard on available re- sources, a surplus may be essential to insure balanced growth and sta- bility in the general level of prices. But when demand is recovering from a recession and when unem- ployment is still large and capacity still greatly underutilized, too vigorous a movement toward a surplus may repress the recovery and prevent the growth in output and income upon which the expansion of Government revenues was predicated. In short, efforts to reduce the deficit too quickly are likely to be self- defeating. Does this mean that the United States is doomed to have deficits for an indefinite period? The answer to this question cannot be given with any degree of certainty by responsible economists, simply because we do not know the strength of private demand out of the incomes that would be generated at full employment. It is my own view that, at full employment, demand would be strong enough to require a surplus in order to prevent prices from rising, and that a full employment level of activity is likely to gener- ate that surplus at the expenditure levels now contemplated, even with somewhat lower tax rates than those now in effect. But to reach full employment, we must first remove the restraints under which the economy has been operating in recent years. Except for an easy money policy which is ruled out because of our balance- of-payments problem, no other policy is available to restore our economic momentum than fiscal policy. POLICIES TO RESTORE ECONOMIC MOMENTtTM Private demand can be stimulated through fiscal policy either by increasing expenditures or by reducing taxes. Congress is now com- pleting action on the President's expenditure requests for this year. These requests contemplate a rise in Federal expenditures (as meas- ured by the national income accounts) amounting to $5.8 billion in fiscal year 1963. Further expenditure increases of any substantial magnitude would require considerable advance planning as well as congressional action and would therefore not be effective soon enough. Expenditure policy should, in any case, `be geared largely to the long- run needs of the economy and to the demand for public services. Under the circumstances, tax reduction would be the best and most effective method of providing a strong and immediate stimulus to the economy. In the past, consumers have consistently spent about 92 or 93 percent of their disposable incomes. There is no reason to suppose that they would respond very differently to the added take- home pay from a tax cut than they would from a straight increase in their wages. (In fact, as a result of withholding, the additional take- PAGENO="0229" POLICIES FOR FULL EMPLOYMENT 219 home pay from a tax cut is indistinguishable for the vast majority of wage earners from the additional take-home pay due to an increase in wages.) This addition to consumer spending would increase employment and incomes, leading to further rounds of spending. Moreover, the improvement in sales expectations would have effects of its own on business expenditures. It would, in the first place, probably reverse the decline in inventory investment; second, it would also promote additional fixed investment. Together, the effects on consumer and business spending could well provide the stimulus needed for a rapid advance to full employment provided the tax cut is large enough. I do not not agree with the view that a tax cut should be delayed until after a recession has begun. The weakness of investment in the last few years is a reflection of the slow growth of demand and the con- tinuation of excess capacity. There is substantial danger that busi- nessmen will come to regard a slack economy as a normal state of affairs. Under these circumstances, our economic recoveries will become even more disappointing than they have been in the last two cycles and our rate of growth will become chronically depressed. A prompt tax cut would very quickly be translated into higher business sales and break these bearish expectations. Since the economy is already $30 billion below potential and the prospects are that it will lose ground in the months ahead, strong medicine is needed to overcome the effect of the disappointing perform- ance in recent years. Even if it is assumed that the tax reduction will have a substantial direct effect on business spending, a cut of at least $10 billion would be required to close the gap between actual amd potential output. In arriving at this judgment, I assume that the effect of the tax cut would not be offset in whole or in part by expendi- ture reduction. If expenditures were reduced, the size of the tax cut needed to reach full employment would increase by more than the cut in expenditure. I believe that what the economy needs is a permanent reduction in tax rates, because it is now clear that the present rates choke off ex- pansions long before high employment is reached. However, con- sideration of a permanent change in tax rates would trigger off a na- tional debate that could not possibly be completed in this congres- sional session. Moreover, uny permanent revision in the rate structure should be carefully adapted to the tax reform program scheduled for congres- sional consideration next year. For this reason, I would suggest the enactment of an equal percentage-point cut in individual and cor- porate income tax rates effective October 1 for a year or 15 months, with the understanding that these rates would be superseded by a new rate structure which would be included in next year's tax reform bill. A reduction of one point in all individual income tax rates would cost $2 billion a year; the same reduction in the corporate rate would cost $0.5 billion. Accordingly, a 4-point reduction in the individual and corporate rates would amount to a total reduction of $10 billion at an annual rate; of this, $8 billion would go to individuals and the remaining $2 billion to corporations. PAGENO="0230" 220 POLICIES FOR FULL EMPLOYMENT This package would meet the requirements of simplicity and size, and would have the added advantage of maintaining the present dif- ferential between top and bottom bracket individual income tax rates and between individual income tax rates generaily and the corporate rates. It would also give the administration and the Congress the necessary flexibility to coordinate the proposed tax reform with per- manent rate reduction. The effect of this tax reduction on the budget for fiscal year 1963 would be much smaller than the full-year effect. I estimate that the deticit would be increased by approximately $6 billion before taking into account any recoupment from the effect of the tax cut on business activity. It should be emphasized, however, that this increased deficit in fiscal year 1963 would lead to a smaller deficit, or perhaps even a surplus, in fiscal year 1964. Although the case for an immediate tax cut is strong, I realize that the odds against the enactment of such legislation during this congressional session are very heavy indeed. If Congress does not cut taxes this year, an alternative program should be devised to give the administration sufficient power to cope with the problems that may arise before Congress is organized and ready for action next year. In my opinion, a minimum program would include the following: First, the President should be given the authority he requested early this year to make a te.mporary reduction in individual income tax rates of up to 5 percentage points. The cut would take effect 30 days after submission, unless rejected by the Congress. If the Congress is not in session when the cut is proposed, it would take effect im- mediately but terminate. 30 days after Congress convened. If the Congress is reluctant to yield this authority to the President on a permanent basis, it might extend the authority until the end of February 1963, when it will be organized to act quickly if necessary. Second, provision should be made for the use of Federal funds to extend unemployment compensation benefits for a limited period to workers who exhaust their benefit rights under the regular State un- employment compensation laws. Similar legislation has been enacted during the past two recessions, and has proved to be an effective. countercyclical measure. Since it is too late to process a permanent law, the temporary law which expired in April of this year should be reenacted for another year, for humanitarian reasons alone, if not for reasons of purchasing power. Third, the capital improvements program for distressed areas which has already passed the Senate and is now being considered in the House should be enacted before Congress adjourns. The legislation is designed to provide funds especially for relatively small local proj- ects on which work can be started quickly. The amount of money involved is modest enough to insure that the funds would be spent on useful projects. Finally, the administration should plan now to submit a budget for the coming year that would yield a much smaller surplus at full em- ployment levels of income than the surplus implicit in the budget for fiscal year 1963. Although it has been reduced somewhat since 1960, the full employment surplus for the first half of calendar year 1963 which is implicit in the current budget is of the order of $10 billion (on a national income basis). PAGENO="0231" POLICIES FOE FULL EMPLOYMENT 221 The Economic Report stated that "if demand falls short on cur- rent expectations, more expansionary policies will be pursued." It is clear that the signs were set too high early this year and it is to be hoped that budget planning will be more realistic the next time around. In closing, I should like to recall to the committee that, when I last appeared before you in December 1960, the economy was in a con- traction that was already 6 months old. Nevertheless, many people denied that there was sufficient evidence to justify immediate action to stimulate demand. It was also said that caution was necessary to avoid unbalancing a budget that was already becoming unbalanced because of the reduc- tion in employment and incomes. And there was a great concern about the inflationary consequences of a vigorous fiscal policy at a time when there were large reserves of idle men and machines waiting to be productively employed. Although the economy is not in a recession now, our rate of growth continues to be inadequate by any standard and there is very little, if any, steam left in the current expansion. But we are still told not to prejudge the situation; more concern is expressed about the condi- tion of the budget than about the condition of the economy; and we are still warned of the dangers of inflation even though unem- ployment is high and inflation has long since subsided. As an economist, I cannot explain the defensive attitude which has gripped the Nation in recent years. I can only express the hope that this committee, which has done such excellent educational work in economic affairs since it was established more than 15 years ago, will help alert the country to the needs of the times. Chairman PATMAN. Thank you, sir. I would like to know about the basic premise on which you reach conclusions as to the kind of tax cut which you think we should have. Of course, I know we want to raise the level of savings, the level of investment, the level of income, and the level of consumption, raise all levels, but my question specifically is this: Relative to consumption expenditures as defined in the national income account, are savings too low or too high? How would you, Dr. Eckstein, answer that? Would you say they are too low or to high? Mr. ECKSTEIN. Sir, in the present short-run context they are ob- viously too high. Not in the long run. Chairman PATMAN. What do you say, Dr. McCracken? Mr. MCCRACKEN. The proportion of income being saved does not seem to me to be greatly out of line with our historical trends. Chairman PATMAN. Do you consider it too low or too high? Which would you say, if you can answer it categorically. Mr. MCCRACKEN. They are, I suppose, too low in the sense that ob- viously we need a step-up in the demand for output, though I do not think this gets very close to the heart of the present problem. Chairman PATMAN. How would you answer? Mr. PECI-IMAN. I agree with Professors Eckstein and McCracken. Chairman PATMAN. I would like to call your attention to two charts prepared by Dr. Roy Moor of the committee staff. They show how the income which would be made available to individuals under the tax cut would be distributed among the various income brackets under PAGENO="0232" 222 POLICIES FOE FULL EMPLOYMENT the different methods of reducing individual income taxes. The chart on the left is self-explanatory. It shows the average tax reductions. Can you read those figures from where you are? Looking at the addi- tional money that would be made available to individuals having adjusted gross incomes of between nothing and $5,000, the relatively low income class, we see that the different methods make quite a dif- ference in the amount of money which would go to these individuals. The figures show the distribution, by class of a $6 billion overall re- duction in taxes. If we split the first income tax bracket, setting up a bracket of between zero and $1,000, and applied all the cut in that new first bracket, individuals with less than $5,000 of income would on the average have a net gain of $75. If we increase the personal income exemption from the present $600 to $800, individuals in this group would gain $76. If we applied all of the tax cut in the present first bracket, individuals in this group would benefit by $60. If we had an across-the-board cut such as has been frequently suggested, in- dividuals in the lowest income group would benefit by only $42. Looking at the families with incomes of over $50,000 you may notice that the different methods also give different results. If we increase the personal income exemption these individuals would receive an extra $300 of disposable income, but if we had an across-the-board these individuals would receive an extra $1,680 of disposable income. But the chart on the right is probably more significant for our con- siderations of how a tax cut would affect the economic activity. This shows the percentage increase in the aggregate income of each income class which would be brought about by the different methods. For example, if we increase the exemption the lowest income receiv- ers would have their disposable incomes increased by 2.8 percent, while the aggregate income going to families with over $50,000 of income would be increased by six-tenths of 1 percent. To take the other ex- treme, however, an across-the-board cut, we find that the aggregate in- comes in the lowest income group would be increased by only 11/~ percent, while aggregate incomes of the group of over $50,000 would be increased by 3.3 percent-more than twice the rate of the lowest income families. Would the members of the panel care to comment on whether these different methods of reducing taxes would have important differences in their effect on savings, investment, consumption and overall eco- nomic activity? Would you start, Dr. Eckstein? Mr. ECKSTEIN. Of the points to be made in this connection, I think one very obvious point in this: That a $6 billion tax cut will not ac- complish miracles in any event because the increase in income accru- ing to anybody is only 3 percent, which is not exactly a revolution of the economy. Second, in general, it is my belief that this kind of an issue-that is, the proper distribution of the tax burden-is largely a noneconomic issue and elected officials are the people properly to pass judgment of this sort. On the effect on saving, what studies have been done on this problem tend to suggest that people in the lower income brackets have somewhat higher spending propensities than the upper brackets, but the total impact of any change in the tax burden can at best make a small contribution to total expansionary policy. PAGENO="0233" POLICIES FOR FULL EMPLOYMENT 223 Average Tax Savings per Individual Under Various Methods of Mal~ng a $6 Billion Reduction in Individual Income Taxes~ ADJUSTED GROSS INCOME CLASSES Reduce Rate in Half First Bracket 7.5 Percentage Points $0 -5,000 5,000 - 10,000 10,000 -20,000 20,000 -50,000 over 50,000 Increase Personal Exemption $200 $0 -5,000 5,000 - 10,000 10,000 - 20,000 20,000 -50,000 ____ over 50,000 ______ Reduce First Bracket Rate 4.6 Percentage Points $0- 5,000 5,000 - 10,000 10,000 -20,000 20,000 -50,000 over 50,000 Reduce Each Individual Rate 3 Percentage Points Across the Board Cut $0- 5,000 5,000 - 0,000 10,000 - 20,000 20,000 - 50,000 _______________ over 50,000 _______ __________________ $75 ~ $142 ~ ~ $150 ~ $112 $76 :~ $132 $168 _____ $300 $300 $60 ~ $148 ~ $175 ~ $185 ~ $42 ~, $114 ~ $288 ~ $762 ~ $1680 * Es//mated for /962 on basis of /960 do/a of Internal Revenue Service PAGENO="0234" 224 POLICIES FOR FULL EMPLOYMENT Percentage increase in Taxable Incomes, After Taxes, of the Different Income Classes Under Various Methods of Making a $6 Billion Reduction in Individual Income Taxes* ADJUSTED GROSS INCOME CLASSES __________________________________________________________ $ 0-5,000 5,000-10,000 10,000- 20,000 20,000 -50,000 ________ over 50,000 $0- 5,000 5,000 - 10,000 _______________________ 10,000 -20,000 20,000 -50,000 over 50,000 ______ $0- 5,000 __________ ____________ 5,000 - 10,000 _____________________ 10,000 -20,000 20,000 -50,000 _________ over 50,000 _____ $0- 5,000 ______________ 5,000 - 10,000 10,000 -20,000 20,000 -50,000 __________________________ over 50,000 ____________________________ _______ Reduce Rate in Half First Bracket 7.5 Percentage Points 3.0% ~ 2.2% ~ .5% - .8% .1% Increase Personal Exemption $200 2.8% 2.2% ~ 1.4% .2% -.6% Reduce First Bracket Rate 4.6 Percentage Points 23% 2.3% ~ 1.4% - .9% .5% Reduce Each Individual Rate 3 Percentage Points "Across the Board Cut" ~ 1.5% _______________ 1.8% ~ 2.4% ~ 3.0% ~ 3.3% *Etimoted for /962 on bosis of /960 dote of Internal Revenue Service. PAGENO="0235" POLICIES FOE FULL EMPLOYMENT 225 Chairman PATMAN. Thank you, sir. I will not insist on answers to these at this time. I will put the questions in the record. I wish each one of you would comment on them when you review your transcript and extend your remarks, if you please, or insert anything else that you feel is germane. An across-the-board tax cut would increase disposable incomes of families in the high-income brackets a great deal more than it would for those at the lower end of the scale. If you felt that our basic problem is one of inadequate rate of savings, I could understand this kind of proposal. But if you think that the problem is underconsumption, then I should think you would want to give the largest cuts to the low-income groups, or at least keep things even. In other words, an across-the-board cut would tilt the income distribution in favor of the high-income families. Do you have any distribution by income classes of the percentage of family income going into consumption and the percentage going into savings? I will ask you to submit an answer when you review your transcript. Next, have you experts made any estimates which would show how much reduction in taxes would be required to produce a given amount of stimuli under each of the alternative methods: raising the exemp- tions, making the cut in the first income tax bracket and making the cut across the board? This is a question that concerns me. If we had an across-the-board cut in taxes; that is, a cut which would change the income distribution in favor of the top bracket income receivers, would we not have a worse fiscal structure after the period of the deficit is over? In other words, would it not, in the long run, in- crease the troubles which the tax cut is intended to cure? *With reference to the economy of Western Europe, I think I can see that there are peculiarities in the situation which would enable these economies to operate at full employment even where a large share of income is going into savings and investment. A dynamic rebuilding or reconstructing of the whole European economy is going on. They are building modern plants to replace handicraft plants in anticipation of future consumer demand for the output of those plants. But I wonder, in a situation like ours, if we can have full employment with anything like the percentage of income going to capital in Europe; that is, the high profits and high interest rates of Western Europe. Could you comment on that? I will ask you to do that when you look at your remarks. But I think those charts make out a convincing case for the tax savings going to the low-income groups. Certainly if our problem is underconsumption, the answer is obvious. (Information submitted by Otto Eckstein, Harvard University, follows:) The major studies of the effects of income distribution are the following: Harold Lubell, "Effects of Income Redistribution on Consumers' Expendi- tures," American Economic Review, XXXVII (March 1947), 157-70, XXXVII (December 1947), 930. Isi. Bronfenbrenner, Taro Yamane, and C. H. Lee, "A Study in Redistribution and Consumption," the Review of Economics and Statistics, XXXVII (May 1955) 149-59. Alfred H. Conrad, "The Multiplier Effects of Redistributive Public Budgets," the Review of Economics and Statistics, XXXVII (May 1955), 160-73. Lubell and Bronfenhrenner do not attribute much expansionary effect to changing the income distribution; Conrad comes to a more optimistic conclusion. PAGENO="0236" 226 POLICIES FOR FULL EMPLOYMENT As a first approximation, I would assume that all of a tax cut accruing to individuals with incomes below $5,000 would be spent, and between one-half and three-fourths of a tax cut on incomes over $15,000. Applying a multiplier of 2, every $1 of low-income tax cut would raise GNP $2; the figure for high- income tax cuts would be $1 to $1.50. (Responses by Mr. Pechman to the questions raised by the chair- man:) 1. I `would rank the four illustrative tax cuts in the following order as re- gards their effect on personal consumption expenditures: (a) an increase in the personal exemptions; (b) a reduction in the rate in the first half of the first bracket; (c) a reduction in the rate applying to all of the first bracket; and (d) an across-the-board cut of equal percentage points. However, the difference would not be very large. Although average consumption is a higher proportion of income in the lower income brackets than in the high-income brackets, dif- ferences in consumption out of increments to income are probably much smaller. 2. There are no current estimates of the consumption-saving patterns of fam- ilies in different income classes. But earlier studies have all indicated that con- sumption declines relative to income as income rises. There are no data on the proportions of additions to income that might be consumed at various levels of income. 3. I do not agree that the fiscal structure would be distorted in any way as a result of an equal percentage-point tax cut. As I indicated in my statement, such a cut preserves the rate of progression and might therefore be more accept- able as an interim measure than a reduction in taxes applying mainly to one part of the income distribution. Since the consumption effect would be sub- stantial in any case, I would support an across-the-board cut under present cir- cumstances. Chairman PATMAN. I have probably taken up my time, and I will yield to Mr. Curtis for questioning. Representative CtrRTIS. Thank you, Mr. Chairman. I find myself in a d,ifficult position to ask questions because all three presentations start on a premise with which I disagree, a very funda- mental premise, that our economy is stagnant. The very symptoms that I think you all use to substantiate your view that the economy is stagnant are what I would interpret as growing pains. We have had this argument before, Dr. Eckstein and I. I think it comes to two things. One is a question of whether or not we feel that an economy does move forward through business cycles, as we call them. Do we agree it does, that that is normal, to go forward in periods of expan- sion and then contractions like the peristaltic action, if I can be a little earthy? Is that a natural thing? If it is a natural thing what are we trying to do-interfere with a natural process? Rather should not we be understanding it and working with it? Could I ask that question? Is it a natural process, or is it something that you want to eliminate? Do we want an economy moving like that and so we feel it moves up and down? Mr. EoKsriIN. Congressman, I doubt a little bit whether this is in my statement. Actually, the business cycle itself has been becoming milder of its own accord. The 1960-61 recession was a very mild one, more so than 1958. Even that was very small by prewar standards. I think our concern is that the little ups and downs have so pre- occupied us, especially with the immense amount of statistics and figures which come out every single day, that we have tended to lose sight of the longer run trend. Representative Cuirns. Do we agree, is it a natural thing? Is this the way an economy moves forward, through contraction and ex- PAGENO="0237" S POLICIES FOR FULL EMPLOYMENT 227 pansion? Again, to use the earthy illustration, of the peristaltic action, in actual life so many things move forward in that way. Do you think that is a natural state? If it is, we should not be trying to destroy it, should we? Mr. ECKSTEIN. Our economy has always grown with cycles. Representative Cuirns. It has, but is it natural and is it the way it should be, that is the question? I think some of you economic theorists are treating something that is natural as if it were a disease. Mr. PECHMAN. I will try. What I do not like is your use of the term "natural." You use it in a way which suggests that, once you have said it, that is all there is to be said about the cycle. Representative CtmTIs. No. Mr. PECHMAN. You said that 2 years ago, Mr. Curtis, when you were talking about growing pains, about business cycles. We never got back to high employment then. The real question is not- Representative CURTIS. I will get to that because I happen to think, and this was the next question-maybe I better interject this-you see in your concept of this gap theory that Dr. Eckstein and Dr. Heller and apparently most economists, and your paper seems to buy, is on the assumption that there is failure to have full utilization of our productive resources which includes the labor force, which includes plant capacity. What I suggest that you are failing to realize is part of this natural thing, particularly in a dynamic economy which is innovation-and that to me is the real reason- Mr. PECIIMAN. Are you satisfied with the economy, as it is today? Representative CURTIS. On innovation? Mr. PECHMAN. Yes. Representative CURTIS. I am never completely satisfied but let me say this, that the innovation as near as we can figure reveals that 25 percent of the goods and services now on the market were not even known 5 years ago. There is a test of innovation. How much money is going into research and development? How much is going into retraining? Here is what I wanted to say. Part of the natural proc- ess, as I see it, is retooling, actually junking obsolete equipment. That applies to human beings, to taking skills that have become obsolete and retraining for new skills in demand. So a lot of what you people, I am afraid, call unemployment and unused capacity is part of a natural process of dealing with obsolescence. Mr. PECHMAN. I must confess I have heard you say this a number of times, Mr. Curtis, and I would like to understand your position. Particularly the position that everything is going along all right. Representative CURTIS. I did not say that. Because I am critical. If I had time, and I do not here, but I will come around in the second round, to point out where I am critical. Incidentally, we all agree on one thing, the need for tax reform, and the fact that our budgetary process and fiscal policy is interfering with this natural, I say, process. You all for other reasons advocate the same approach. No, I am not satisfied with our economy. I never am. I do feel it is a basically sound situation and what we have got to do, in my judgment, is understand it a little better. Mr. PECHMAN. There is no question about that. The problem, it seems to me, is that in recent years we have not utilized the tremendous resources of this country to the fullest advantage. For the last 5 PAGENO="0238" 228 POLICIES FOR FULL EMPLOYMENT years our rate of growth has been falling farther and farther behind the rate of growth in other industrialized economies. We are now taking a back seat to some of the smaller and less advanced countries. If this continues over a period of years, I do not think we will be able to survive the competition that we will be subjected to. Representative Cuirrrs. Your statement in my judgment begs the question that is at issue. You are measuring growth in terms of gross national product which I have tried to point out is not an accurate measure of growth. You have to dig into the component parts, such as innovation and new goods and services to test whether there is real growth. As I have tried to point out, the shift we have seen in our economy from the manufacturing sector to distribution and serv- ices, the amount of increased leisure time, the percentage of time spent by an individual human being in education; those are measures of real growth, not gross national product, which is simply a measure of economic activity in a given year. Mr. PECHMAN. Do any of the measures that you suggest indicate that we are doing better now than we did in 1960? Representative CURTIS. Certainly so. Mr. PECITMAN. Would you suggest some? Representative CURTIS. Yes, one is measurement of school con- struction. Incidentally, one of the most glaring inadequacies of this administration is the fact that the school bonds in 1961-new school bonds voted-went down from $2.2 billion to less than $1 billion. It went down to $850 million. But take the cycle from 1950 to the pres- ent, President Kennedy said we had to double the amount we are spending on education in the next 10 years. My comment was, "Why slow down?" It has been more than two and a half times from 1950 to 1960. That is what I regard as significant growth. Mr. PECHMAN. I agree we need more schools. Representative CURTIS. I am talking of a sample of measurement. Mr. PECIIMAN. We could afford to build more schools if we had higher GNP, the measure you do not like. Representative Cuirns. I disagree with you. We are building them and the local districts are doing this because one of the essential sound things in our economy has been the real estate tax, the property tax. Mr. PECHMAN. Every time they build a school it goes into the GNP. Representative CURTIS. My time is up. Chairman PATMAN. You mentioned the bonds not being offered for sale for school purposes. Do you not think that the peop1e~ concerned have refused to vote them because the interest rates were too high? Representative CURTIS. No, as a matter of fact, let us get our indi- cators here and let us know what we are talking about. These are the Health, Education, and Welfare indicators of July 1962. The charts here are very interesting, and I think need to be followed. The first chart on page 25 is public educational construction, bond elections, bond sales and contract awards, and shows first bonds voted upon in public school election bonds, and then the number passed. Chairman PATMAN. What percent? Representative CURTIS. The percent passed ranges, beginning in 1957, 74 percent, 78 in 1958, 62 in 1959, 83 percent in 1960, and then dropped to 69 in 1961, and it is ranging around there. But here is the point. The amounts of bond issues voted start out 1.3 billion, go up to 2.2 in 1960, and then drop down to 851 in 1961. PAGENO="0239" POLICIES FOR FULL EMPLOYMENT 229 Chairman PATMAN. I urge you to look that over more carefully and evaluate it more carefully with this in view: that the people turned down these bond issues because the interest rates were too high. More of the local people pay taxes on what they owe than what they own because of the ad valorem system. They are very careful about levy- ing these extra costs on themselves. Representative CURTIS. I might say to the gentleman that an exami- nation reveals that is not so. I think I can tell you why this drop. It is because they are waiting for a Federal program. Chairman PATMAN. What year was that? That was during the preceding administration. Representative CURTIS. 1961. The other figure on this thing, if we go on to the next page, you get your public education construction, interest, cost of bonds, and educational construction put in place. Chairman PATMAN. Senator Douglas, we are intruding on your time. Senator DOUGLAS. Not at all. We have the interest rate on long- term bonds, Federals; the movement of the State and municipals is very similar; in 1953 the rate was around 21/2 percent, and it has been rising to 4 percent more or less as of the present time, or a relative increase of 60 percent during this period. Dr. McCracken, in your statement you state that the reserve position of the banks has been easing. You mention this as an indication that monetary policy has not impeded economic expansion. I wonder what evidence you have for the statement that the reserve position of the banks has been easy. Mr. MCCRACKEN. I would make two or three points here. First of all, there is the simple fact that the net free reserve position has continued at a very substantial level. Even with recent changes free reserves are still in excess of $300 million. Senator DOUGLAS. May I stop you right there. Dr. William Moor of the committee staff has charted the free reserves for a number of years. The chart shows, in brief, that in 1961 the average free re- serves for the year were above $500 million; probably a closer figure for the year as a whole would be $550 million. The average free re- serves for the year thus far have been around $375 million. Mr. MCCRACKEN. That is right. Senator DOUGLAS. Or a decrease of some $150-$175 million. A fur- ther analysis indicates that almost the entire amount of these free re- serves is in the country banks where only a small proportion of the demand for lending actually takes place. For instance, in the figures for the end of June, the free reserves in the country banks amounted to $371 million. In the Reserve city banks, there was a minus $5 mil- lion. In Chicago, a reserve of minus $3 million. In New York, a minus $12 million. The actual "free reserves" were thus entirely in the country banks, where, as I have said, a very small fraction of the total loans originate. We should also remember that a few years ago we made vault cash a part of the reserves. You have to have cash for cashing checks and so forth and so on. So it would seem to me that in practice free re- serves are virtually nonexistent. It puzzles me, therefore, when I read these statements-and yours is not the only one-that the reserve posi- tion of the banks has been easy because free reserves are plentiful, when they have declined absolutely and as a matter of fact are con- PAGENO="0240" 230 POLICiES FOR FULL EMPLOYMENT centrated almost exclusively in the country banks and consist almost exclusively of vault cash. Mr. MCCRACKEN. Nonetheless, the evidence supports the conclu- sion which I stated in my testimony. Senator DOUGLAS. Are my figures erroneous? Mr. MCCRACKEN. This is what I want to comment on. In the first place excess reserves historically tend to be concentrated in the country banks. This is not new. Larger banks keep even temporarily sur- plus funds quite fully employed in such things as bills or the sale of Federal funds. In the second place, while the net free reserve figure, like any other simple figure, is subject to limitations, it is a useful quick way of getting some indication or some impression of the pressure on the banking system. It indicates at present a condition of relative ease, an impression confirmed by collateral evidence. I happen to be a director of a bank and spend some time in banking circles. There is a vast amount of difference in the sentiment of the bankers so far as their lending policies are concerned, or particularly so far as their interest in building up their loans, relative to that in 1957 or 1959. There is not the loaned up sentiment that there was in those years. Moreover, there has been an 8½ percent increase in bank credit during the past year. That is double the normal needed gain to support vigorous economic growth. So, as I look at the evidence, I do not see it support- ing the position that the major problem that we face at the present time is in the area of monetary policy. Senator DOUGLAS. I wish you would take another look at these figures, because it may indicate that free reserves are virtually non- existent. The second question I want to ask perhaps applies to all three of you, although I came in late and did not hear Dr. Eckstein's statement. Dr. McCracken and Mr. Pechman seem to believe that the balance-of-payments problem requires relatively high interest rates. Yesterday, we brought forward facts indicating that so far as the short-time rate is concerned that the American rate is above the Swiss rate, which is only 2 percent. It is above the French rate which is about 21/3 percent. It is above the Dutch rate, which is just about. 2l/~ percent. It is below the French, British, and Canadian rates. But, if you take the arbitrage costs into account, it is approximately equal to the French rate, and the British rate, and I think there are charts here to demonstrate that. It is below the Canadian rate, but I can hardly believe that people would transfer American dollars to Canada in view of the shaky situation in Canada which has caused them to devalue their dollar. Now, then, just what is it that you are afraid of as far as the situa- tion is concerned? Is it the fact that our balance of payments is against us? Is that the point? Mr. PECHMAN. I would be concerned about substantially lowering the interest rate, particularly the short-term interest rate. Senator DOUGLAS. How about the long-term rate? Mr. PECHMAN. I would like to keep the long-term rate at the pres- ent level, or even lower it a bit. The short-term rate controls short- term capital flows, which are particularly sensitive to interest rates. I think we have to keep short-term rates at a higher level than we kept them during the early postwar period. PAGENO="0241" POLICIES FOR FULL EMPLOYMENT 231 Senator DOUGLAS. Is there a drain from Switzerland? Mr. PECHMAN. No, but I am afraid that, if we pushed the rates substantially lower than they are today, it might stimulate a large flow of liquid funds abroad. Senator DOUGLAS. Don't we have a real margin of safety on this and need we be concerned with speculative outflows of gold in search of higher interest rates abroad? That is what I am trying to say. What are you afraid of: that the balance of payments is against us and Europe may not be content with leaving their balance on deposit iii dollars? Mr. PECHMAN. Both factors are involved. I do not want you to misunderstand me, Senator. I do not want a higher level of interest rates. Senator DOUGLAS. I understand. But you do not want a lower rate. Mr. PECUMAN. That is right. In other words, I am saying that we have done fairly well in monetary policy up until recently. I am a little concerned about the noises being made on monetary policy, though I cannot say that the action has been as bad as the noises. If these noises are followed up by action, I would be terribly concerned, as you would. Senator DOUGLAS. Here is the point. Recently the Federal Reserve sold Government securities and depressed the price and consequently raised the yields. The result has been a rise in the short-term rates and a lesser rise, but some rise, in long-term rates. On the question of the unfavorable balance of payments, must we accept eternally those inadvisable items which turn a favorable balance of trade into an unfavorable balance of payments, which turn $3 billion surplus in commodities to a 11/2 to 3 or 4 billion unfavorable balance because of the so-called inadvisable items. Are we committed indefinitely to continue maintaining military divisions in Europe? Are we committed indefinitely to the attendant costs of expenditures of dependents? Are we committed indefinitely to the existing level of foreign aid if the other countries do not contribute? Are we com- mitted indefinitely to the present flow of capital abroad when virtually every other country imposes some controls upon the export of capital. I mention all these things. Can we take the existing unfavorable balance as something we cannot do anything about? Mr. PECHMAN. I agree with the implications of what you said. A great many of these things have already been done and a lot more perhaps should be done. Certainly we should not have a domestic policy that would prevent us from getting back to high employment merely because of the balance of payments. I think that is the important lesson of your remarks. Senator DOUGLAS. That is the point I was making. My time is up, but if any of you wish, you may volunteer a reply. Mr. MCCRACKEN. May I make just one comment, Senator Douglas. The point of that part of my testimony where I comment.ed on the balance of payments problem was simply this. We hear a great deal of discussion that the nature of our rather precarious balance of pay- ments problem makes it impossible for us to consider expansionist fiscal policy action. Precisely the point that I was trying to develop here was that if we manage an expansionist economic policy correctly, there is reason to think that this kind of action at least would be 87869-62-16 PAGENO="0242" 232 POLICIES FOR FULL EMPLOYMENT neutral in its effect, and I think personally there is at least an even chance that it might improve our balance of payments. Senator DOUGLAS. YOU say "correctly," what do you mean? Mr. MCCRACKEN. If the expansion of business activity that we got sets off a very substantial rise in the price level, or if we gave the economy a surfeit of liquidity, then this would probably work out to have adverse effects. But in the technical sense, the adverse effect on our balance of payments of a higher level of business activity because of the higher imports, would, I suspect, be largely offset by favorable effects on the large capital outflow-and ultimately even a strengthen- ing of U.S. exports. Senator DOUGLAS. I was not speaking of commodities. Mr. MCCRACKEN. I understand. Senator DOUGLAS. I was speaking of the military and dependents' expenditures, foreign aid, capital investment abroad. Mr. MCCRACKEN. All of that would help. Some reduction in these is an essential part of the solution. Chairman PATMAN. Senator Javits? Senator JAvITS. Gentlemen, I notice an interesting consensus among all three with respect to a tax cut which is very interesting in view of the fact that the press and public and Mr. Heller all assume the mat- ter is decided and that there will be none. Therefore, I notice, also, an interesting consensus among you-certainly two of you explicitly, and perhaps I missed it in the third, suggest that we give the Presi- dent the authority to make a tax cut. Suppose I should tell you, just for the sake of this argument, that is equally impossible. Just as the President can decide that he would not ask the Congress for a tax cut, the Congress can decide that it would not give him authority to make one. I have little doubt, and I state this unilaterally, that is just. as sure by now as the fact that he is not going to ask for one. Representative CURTIs. Surely. Senator JAVITS. I think the Congressman is right. Where does that leave us in view of the fact that your recommendations, Dr. Pech- man, are directed essentially toward governmental action? I notice at pages 7 and 8 where you say that what we should do, if we cannot get a tax cut, is to give the President authority. I tell you unilat- erally, and I think it is sound, that is just as unlikely and impossible as the other. Then really you boil down to recommendations to extend unemploy- ment compensation benefits, and to deal with the capital improvements program already passed by the Senate. I do not think you put that very high on your list, or that the administration submit a new budget. Again it is not too decisive a form of action. So really we get down to extending unemployment compensation benefits for a year. I could not agree with you more. I thoroughly agree with you. Now I would like to ask you all this question: Are there not many other things which could be very helpful-assuming now that not- withstanding your view and mine, as you know widely advertised, that there should be a tax cut, that it should be now and it can be now and it makes a lot of sense, and the fact that we are not going to give the President this authority, which I asked you to postulate, and the fact that perhaps we would not even do this unemployment thing much as I agree with you. Are there any things which the Presi- PAGENO="0243" POLICIES FOR FULL EMPLOYMENT 233 dent could do other than that which would help our situation, not necessarily only in the governmental line? For example, do you think that some effort should be made to deal with the business problems in making the transition to automation and in financing that transi- tion-something which the President might very well generate through his Labor-Management Advisory Committee? Do you think that some action on the part of the Congress concerning the rash of big strikes that seem to be imminent on the railroads, to deal more effec- tively than we do under the Taft-Hartley law, with the problem of national interest strikes might be something to which we ought to direct our attention? Do you think that some declaration by the Department of Justice as to its policy in respect of the antitrust laws might be an important factor? Somebody here suggested that the President ought to make a deci- sive statement of the view of the country on business profits, and their desirability and importance. In short, do you have any suggestions which go to the only clue to this proposition I find in your statements, that of Professor McCracken's paper which at page 5 says that busi- nessmen were alarmed by the inferences they drew from the adminis- tration's handling of the steel price dispute? Then he says on page 6, consumer attitudes have never regained the levels of buoyancy they reached in 1955, and there has been some deterioration since events of April and May, which I would imagine refers to the same events. What do you say about that, gentlemen? My time is up and I have asked you a long question, because I am a lawyer. Mr. ECKSTEIN. I think this country has many problems and accom- plishments and there are lots of things the Government might do and lots of things the Government might stop doing. One thing the Gov- ernment might well do is to create a more certain business environ- ment with regard to areas of regulation, antitrust and so on. Even if policy is tough, business is better off knowing it is going to be tough than not knowing at all and having to deal with a rather erratic kind of situation. Other than that, I do not think a little bit of action on these longrun structural problems, such as depressed areas and auto- mation, is any kind of a substitute for the kind of massive fiscal action which is called for. I wil even go so far as to say that in some way it distracts us from the main problem. These structural programs, which I agree are very much needed to ease the introduction of technological progress into the economy, will be much more successful if the overall situation is healthier. Senator JAvITs. Thank you very much. Mr. MCCRACKEN. May I make one comment? Senator JAvITs. I would like to have you all comment, if you would. Mr. MCCRACKEN. I do not think any reasonable estimate of the magnitude of the economic effect of action in these other areas would be equal to the kind of stimulus we could get from tax reform and reduction. Now, if these are ruled out, however, then the question be- comes: Do we just sit on our hands, or are there other things to do? There is no question in my mind but that something constructive could be done along the lines you have indicated in your question. It would be very helpful to try. It certainly would not hurt to try. Senator JAVITS. Thank you. PAGENO="0244" #34 POLICIES FOR FULL EMPLOYMENT Mr. PEOHMAN. I agree that the longrun problems that you sug- gested ought to be tackled and it would be helpful from the standpoint of business and consumer confidence to know that they are being thought about constructively. But I also think that the point made by Professors Eckstein and McCracken is quite right. I know of noth- ing that would equal the potency of a very substantial tax cut. But I have worried about your question and that is why I have a program at the end of my paper. Since you foreclose the possibility of Congress giving even tem- porary authority to the President to cut tax rates, I am sure that when you have your hearings next February on the Economic Report you will find that unemployment is no lower than it is today. It may even be higher. And you will be lamenting the fact that we wasted another 6 months, and that the rate of growth of the economy will have been further reduced; in other words that we will still be where we were 2 or 4 years ago. I think the quicker we start solving these long- run problems, the better. Senator JAVITZ. Gentlemen, you have given me encouragement and fortitude to continue my `campaign for an incentive tax cut. Thank you. Chairman PATMAN. Mr. Reuss? Representative Rnuss. A question first of my colleague, Mr. Curtis. Did I hear you right-you attribute the fact that a smaller total of local school bond issues was voted in 1961 than in the period, 1958- 60, to President Kennedy's advocacy of Federal aid for education? Representative Ctrinis. It was the unsettled condition, yes. The sc~hool districts thought they might get it free or get it from the Fed- eral Government. Representative REUSS. Then I did hear you right. Representative CURTIs. That is correct. Representative Ruuss. How do you account for the fact that school districts voted larger amounts for local school bonds in the period 1958-60, when President Eisenhower was advocating aid for school construction? Was that because they did not believe him? Representative CunTIs. I guess so. Representative REUSS. A question for the panel- Representative Cuirris. If the gentleman would yield. You made a wisecrack. Representative REuss. How long do you want me to yield? Representative CtmTIs. Just to comment. I would say it could be that: I do not know. It certainly deserves explanation or contem- plation. I merely suggested that this could be the reason. I think it probably is. Representative REuss. A question for the panel: Leaving aside, for the moment, the politics of tax cuts, monetary policy, and other methods for dealing with our economic lag, what is the difference in economic effect of a tax cut of, say, $6 billion and increased Federal expenditure of $6 billion? The increases in Federal spending in my example weuld be for schools, hospitals, urban rapid transit, urban redevelopment, antipollution work, and other necessary public works. Is there, in your opinion, anything different economically between one method and the other? They would both increase the deficit by $6 billion in the period immediately ahead. Would one method give more impetus to the economy than the other? PAGENO="0245" POLICIES FOR FULL EMPLOYMENT 235 Let US also leave to one side, the point that the construction work re~ quired by a public works program takes a bit longer to translate into actual expenditure. Would you each give me your opinion ~ Mr. MCCRACKEN. Certainly I would not take any Procrustean view with regard to Federal expenditures or taxes that one is all evil and one is all virtue. It would seem to me that on the "first round" the rise, in Federal expenditures might very well have a slightly more expansive immediate effect than a decline in taxes. With a tax re- duction some part of the resulting increase in income would presum- ably be saved. On the other hand it is not easy to effect an imme- diate, large upward displacement in the trend of Federal spending. Representative REuSS. I assume you are comparing the average saving by consumers of 7 to 8 percent of their disposable income with the fact that a million dollars spent in building a school is by defini- tion spent. Mr. MCCRACKEN. In the first round, yes. On the other hand at this stage of the game the evidence is quite clear, to me, that the time has come when we do need some action on the tax side in order to start moving toward a level and structure of taxes that would be some- what less of a drag on economic expansion and growth secularly, quite apart from the very immediate period. Mr. ECKSTEIN. Congressman, the total Federal purchases of goods and services outside of defense in 1960 were $8.6 billion. Of that, a very substantial -fraction is agriculture. The rest was defense. Representative CnRTIS. Federal? Mr. ECKSTEIN. Federal goods and services. Only $8.6 is nonmili- tary. And that includes space. To effect a substantial increase in that would be very difficult. The Federal Government simply does not buy that many civilian goods and services to make it an instrument of the same magnitude as a tax change. Representative REUSS. I suggested some areas of public expendi- ture where the needs today are very great. However, I am putting to one side the question of whether increased expenditures are po- litically feasible, socially just, or economically desirable in terms of resource allocation. What I want to know is, would you get the same economic impetus by spending $6 billion more as you would by taxing $6 billion less? Mr. PECHMAN. I want to agree with the point you are making. The ratio of taxes to expenditures that is too high. You can reduce this ratio either by reducing taxes or increasing expenditures. If we got businessmen and consumers to spend as much as is necessary to get us to high employment, today's tax structure would not greatly im- pede the rate of growth. I think there are things that can be done to improve our rate of growth, but the rate of growth that we can achieve at high employ- ment is awfully tough to budge. We would have to make many changes to increase the growth rate. One of them would be to re- form the tax structure to the extent that it impedes incentives. Representative REUSS. Then, what you three gentlemen contend is not that we need a tax cut as such but that we need a budget imbalance at the present time for various reasons. In economic terms, am I not right that it is not the level of taxes alone, but the level of taxes in PAGENO="0246" 236 POLICIES FOR FULL EMPLOYMENT relationship to Federal spending which chokes off the economy before full employment is reached? If the budget tends to balance before full employment is reached, the ailment could be cured by either of two methods. Dr. McCracken says, "Cut taxes." Gaibraith might say that public expenditures should be increased. Mr. PEOHMAN. I agree. Representative REU55. I have used your names rather freely. I hope I have not misinterpreted your positions. Mr. MCCRACKEN. No.. Clearly the two sides of the budget must be taken into account. I would agree with this. A tax cut would temporarily mean an enlarged deficit. If, however, tax reforms will really strengthen the economy (as I think they can) we can be ahead of the game in the long run on renewals of the deficit. Representative REuss. There has been much talk recently about a tax cut as though it were the only way out. Actually, budgetary balance seems to me to be the real problem. I am not suggesting what fiscal policy mix we should have, except to say that the best mix is one which combines relatively easy money and low interest rates, a tax cut and spending for the Nation's needs. An aggressive trade policy would also help. Representative REU5S. Dr. Eckstein, in your statement on page 8, you refer to the argument which says, Why cut taxes now, since this will cause interest rates to rise and to cancel the benefit of the tax cut? The growth rate will not increase, but we will have a larger deficit. Your reply is that, although the monetary authorities actually shrank the money supply and increased interest rates in the 1958-59 re- cession, they will now allow the money supply to increase at some modest rate. Why do you think this will be the case, particularly in view of Mr. Martin's recent testimony that he would not permit any of the deficit resulting from a tax increase to be financed by the banks. Mr. ECKSTEIN. It would certainly be far beyond my capabilities to analyze why our central bank does what it does when it does. How- ever, what I am really trying to sa.y is this: The tightness of money and the level of interest rates in 1963 will be largely determined by the policy choices made by the Federal Reserve and the Treasury. I do not know whether they will do the right thing or the wrong thing, but the extra few billion of deficit which will have to be financed, I doubt will be the decisive considerations. It would obviously raise in- terest rates somewhat. But I do not believe that additional financing alone would reverse the basic tone of the capital markets. Could I also take another moment while I have the floor? When I read my statement I also made a quick comment on the possibility of lowering withholding schedules effective January 1. I stand cor- rected on that. It would take congressional action to lower the with- holding rates. Representative REUSS. I am glad you made that point because I was about to ask you. More administrative flexibility in the with- holding provision might be desirable, but it does not now exist. Senator PRox1~nRE. I would like to ask Mr. Eckstein, Senator Javits indicated there is not much prospect of a tax cut, Yet Senator Javits PAGENO="0247" POLICIES FOR FULL EMPLOYMENT 237 advocated a tax cut tile other day which he said would be. a $7 billion tax cut. He included in that the $1l/2 billion reduction in tax burden the administration has already achieved because of the adjustment of the depreciation. Now, as he pointed out, it appears that tile Finance Committee with that monster they are about to report out, is going to further reduce taxes, and as far as the investment credit would seem to provide an additional $1 billion tax cut. FOR BUSINESS SPECIFICALLY IN CASH FLOW So is it not true that during this year of 1962 if Congress takes no further action, there is likely to be, in effect, a tax cut for business of about $21/2 billion? Mr. ECKSTEIN. That is correct. Senator PRoxMniE. Since you advocated a. $6 billion tax cut, this is 40 percent of the way. Mr. ECKSTEIN. No. Our analyses took those for granted. Senator PR0XI\IIRE. You are really advocating $81/2 billion tax cut if we want to include everything? Mr. EcKs~IN. If you want to include all the previous relief, yes. The Treasury is supposed to get a little bit of the investment credit. back in revenues from loophole closing. They are not to get all of it. Senator PROXMIRE. Very little the first year-A net cut of a billion dollars in taxes. Mr. PECITMAN. May I just interpose that I am distressed to see so much pessimism about some of tile things that were not mclucled in the Finance Committee bill. I should hope for example that an effort would be made to restore withholding on tile floor. Senator PR0XMIIIE. It will be made but it does not have much chance. Mr. ECKSTEIN. To answer your question more to tile pomt, the acicli- iona.l savings that will be macIc available by these measures will cer- tainly have to be considered in making up the next tax packa.ge. It. is a fact tllat the cash flow of corporations will have been augmented by between $21/2 and $4 billion. I do not think anybody knows where in that range. And for any tax bill in the future, it would not make any sense to keep pouring more and more money into that area alone. Senator PROXMHIE. That is right. From what you say I take it this is one area where. we are probably less in need of a tax cut. This relates to a vote tha.t we may be about to take on the floor of the Senate in the next few weeks, wllether or not we. should have an invest- ment credit. I am inclined to feel that the cash flow increased before the improveni emIt in the depreciation policy of the administration. Now the casil flow is going to be abundant, and periumps superabundant. Tllere is an additional loophole in this investment credlit to permit for tile first time a depreciation exceeding a hundred Percent which %vou}dl seem to have some equity disadvantage. I am wondering whether in your judgment, Dr. Eckstein, if this is a seusibTe proposal now under the presem1t circurnst ances. Mr. ECK5TEIN. I am still an optimist that. even if not 110W within the reasonable future we will get the short-rull pmo1~e111 straightened out. Maybe that is foolish, but I believe we can, and there is a reason- able prospect we wili. If you really look at it as a long-term question, PAGENO="0248" 238 POLICIES FOR FULL EMPLOYMENT I do believe that we have something to learn from the experience of Western Europe and Japan, and that tax devices will raise the total rate of investment. Senator PRox~fIiu~. Yes; but is this the right kind of tax device? In the first place, business has not indicated any enthusiasm. McGraw- Hill said this will have the result of increasing investment by $300 million although the Federal Government will lose a billion dollars. A survey by the Wall Street Journal, with 68 big firms queried, only 1 said they would change their investment policy. It is a nice windfall, but one they do not expect to influence policy and do not want it. Mr. ECKSTEIN. This will not be very effective as long as the aggre- gate rate of activity does not lead to anything like optimal utilization of capacity. I would not attach too much significance to the im- mediate answers of businessmen. I think most of them did not under- stand what the credit was about. I have explained it to a few small businessmen and in some cases they very clearly told me, that it cer- tainly would help them quite a bit. Senator PROXMIRE. These were the biggest firms in the country and people who had very distinct ability, and understanding in this area. They have sufficient specialists so they should be competent on some- thing of this kind. Let me ask Dr. McCracken, you assumed the same thing Dr. Heller did yesterday: That the supply of money should include time deposits. We did not have a chance to pursue it on this, but I want to take the few minutes I have left to pursue it with you. Dr. Heller seemed to ignore his own indicators which show on page 26, money supply, total, and under total it does not include time de- posits. It does include currency and demand deposits which have been the traditional definition of money supply. Then it shows related deposits or time deposits separately. On this basis, and I think you can make a good argument that time deposits are not money, it is clear that money supply has been dropping very rapidly in relationship to the gross national product, whereas in 1953, it was 35 percent; 1958, 31 percent; a year ago, 27 percent; now it is down to 26 percent. This does seem to represent a real squeeze which is being directly reflected in rising interest rates, as Senator Douglas demonstrated so well, and by the drop in free reserves. Mr. MCCRACKEN. I would define the money supply differently from the Federal Reserve or the concept as included in the Economic In- dicators. There is no one definition which is uniquely and clearly and unambiguously vastly superior to another. The assets that people hold are really a continuum, ranging all the way from currency, the most liquid asset, to demand deposits and time deposits and for cor- poration short-term securities, which serve for them a function vir- tually the same as cash. One important function of money is to serve as a reserve of purchasing power for unforeseen contingencies. Cer- tainly time deposits serve this function well, and practically are im- mediately convertible into demand deposits. In any event one can say this. In the last year total bank credit has increased over 8 percent, half of which has occurred since the turn of the year. Perhaps that is a better measure ofthe monetary influence on economic activity. As a matter of fact, in my opening statement I used the figures on bank credit, rather than the money supply, because it was not until after my PAGENO="0249" POLICIES FOR FULL EMPLOYMENT 239 prepared statement had been mimeographed that I got the July Federal Bulletin with the new seasonally adjusted data. Senator PROXMIRE. To follow up on this, would you not all agree that if the Federal Reserve Board and the Treasury continued to fol- low a tight money policy, if they continue to push up interest rates, if they continue to shrink reserves, and the Chairman of the Federal Reserve has indicated he might very likely adopt such a policy, and action on the part of the Treasury has indicated they are moving in the same kind of direction, then we are going to need a bigger tax cut to get the same stimulation in the economy? Furthermore would you agree that it is conceivable that if we have a relatively modest and small tax cut with a substantial increase in interest rates, that the economy might not move at all. It might stand still or even retro- gress. Mr. PEOHMAN. I would agree that, to the extent interest rates are raised, a larger tax cut would be necessary. However, I would hope that, if we had a substantial tax cut, it would not be accompanied by higher interest rates. I certainly do not think that we ought to permit long-term interest rates to rise and to reduce investment at the same time that we are trying to promote investment. That would be ill-advised policy under present circumstances. Senator PROXMIRE. I would like to ask Drs. Eckstein and McCracken one more question: In reply to what Mr. Reuss said about cutting taxes and increasing expenditures, you indicated that the expenditure side of the budget, Dr. Eckstein, was pretty difficult to expand. In Dr. McCracken's presentation he said on page 14, this proposal for a tax cut would be, in short, a step toward fiscal conservation. In the long run it would make for a less rapid increase in expenditures and more spacing on the tax side for further needed reforms. I know that Dr. Eck- stein said that a reduction in tax rates will force the Government to scrutinize expenditures more closely in the coming budget. I believe in economy in Government. I wish I could subscribe to your view that taxcutting will lead to expenditure reduction. But I feel when economists are talking about deficits and asserting that we need bigger deficits, this destroys the discipline Government has. You can make a strong argument if you accept your basic assumptions for almost unlimited spending. Services are needed and wanted. There is a lot of pressure for them. What is a poor Senator or Con- gressman going to do when he gets that kind of pressure and when the economists say it will be greater for economy if you cut taxes and increase spending? It is wonderful for the politician if he ac- cepts that viewpoint. When you do that you get in the position where you could have a very bad misallocation of resources, and where you have no real discipline to exercise prudence in Governnment spending. This directly contradicts what both of you gentlemen said in your statement. Does not this concern you at all? Mr. EcKs1~IN. I think you would agree with us, would you not, sir, that in general a tax cut would lead to less spending than no tax cut. Senator PROXMIRE. In old days, yes. But now when a tax cut is justified not because spending has been reduced or spending can be reduced, but although spending is increasing and has been increasing, PAGENO="0250" 240 POLICIES FOR FULL EMPLOYMENT the argument is made we need a deficit to move employment up. I say under these circumstances the tax cut will not restrain expendi- tures. Mr. ECKSTEIN. Historically, in recent years has it not been like this? The Budget Bureau and the President have been very tough when there was no recession. When there was a recession the lid was off, so to speak, and new programs began. Everybody got a little bit more money in all fields. Senator PROXMIRE. Now there is no recession and believe me nobody is very tough and Congress is spending money with record rapidity. Mr. ECKSTEIN. There are a lot of structural issues both in taxation and expenditures. Obviously, there are some tax cuts that would be worse than some expenditure increases and vice versa. A lot of peo- ple, including, I think, the three up here this morning presently favor a tax cut, because they really feel it is impossible to prepare a high quality expenditure program of the requisite magnitude within the time schedule in which events are occurring. Mr. MCCRACKEN. The importance of maintaining the concept of fiscal discipline, to which you have alluded, seems to me to be exceed- ingly important. While clearly .the advocacy of a tax cut is suggesting a program that would make the deficit larger, I prefer to put this in terms of getting toward the kind of tax structure which would seem to me to be more consistent with increasing the vitality of the econ- omy. Now, how does one reconcile these two? I would reconcile them on a basis that has received substantial attention recently. The im- portant thing is always to compare the relationship between our ex- penditures and the volume of taxes which the present tax structure would produce at reasonably full employment. I would be very reluctant, under any circumstances short of a real emergency, to sug- gest a tax cut which would leave the tax structure not comfortably covering expenditures at full employment. If this is our approach to the budget problem we do not surrender concern about fiscal dis- cipline. So our tax action should leave us with a tax structure that will always comfortably cover expenditures, assuming that we have reasonably full employment of our productive resources. Senator PRox~rIRE. My time is up, but I would like to say that is an awfully theoretical goal as compared to balancing the budget, which is precise and with all its weaknesses you can still arrive at some arithmetic precision. To talk about a full employment balance- you can argue on vague generalities a long time. Mr. MCCRACKEN. There is no question about this. I suppose to some extent the function of a professor is to be theoretical and ex- plore things that may not have immediate applicability. But it does seem to me that there is validity to this way of looking a.t the budget problem, and I suspect that we shall hear more about it. Mr. PECH.MAN. I just want to agree with what Professors Eckstein and McCracken said, although I did not make this point explicitly in my statement. In reply to your question, I believe that expenditures would be lower if we had a tax system that next year produced $90 billion rather than $95 or $98 billion. In other words, I do think that the prospective level of the tax receipts exercises a restraint on spend- ing. The existence of a large deficit, which is your alternative hy- pothesis may relax restraints. PAGENO="0251" POLICIES FOR FULL EMPLOYMENT 241 As a matter of fact people do not understand that a deficit indicates one of two things; either the economy is not operating up to full capacity or expenditures are wasteful and too high. We have had deficits during the past 5 years because we have not reached full employment. Representative CURTIS. I want to get into another question, but first I want to lead into this. The thing I have not understood and I have asked all the witnesses before the Ways and Means Committee, and this coimnittee, is this: How does this theory of a tax cut in a period of a deficit already relate to the economic problems it creates in the debt-management area? As a member of the Ways and Means Committee I have always had to be concerned about how we market our bonds. If you take $5 billion, let us say, and give it or transfer it from the governmental sector to the private sector in the nature of a tax cut and then market $5 billion of bonds in the private sector,, why do people suppose that stimulates the economy? Maybe there are some reasons. Occasionally I have gotten answers to the effect that the transfers involve different people. I say let us go into that. But we have not had very much discussion on that subject. Dr. Heller yesterday had only one little paragraph on the problems of debt management in his prepared statement-simply to say they are great and very difficult, and we have to be very careful about whether we market the bonds to the consumer or whether we use the Federal Reserve System. I said if you are going to use the Federal Reserve System and simply create more money, in effect you are not talking so much of the tax cut effect as you are talking about the fact that inflationary forces of this nature would stimulate the economy. Would any of you care to comment on that? Mr. ECKSTEIN. It is certainly an extremely difficult question on which economists have pondered and reach no definitive conclusions. There are some things you can say. First, if economic activity ex- pands as a result of the tax cut, some normal increase in the money supply should go along with it. Representative CURTIS. Let me stop you there, if I may, Doctor. You say, "If it does." To me that begs the question. What we are talking about-does it? Will it? Mr. ECKSTEIN. Let us take that question first. I take that for granted. Would that tax cut be spent? That is the first question. Representative CURTIS. That is correct, but nothing should be taken for granted. Mr. ECKSTEIN. The evidence on that, and there is some disagree- ment among the experts, I would say it would be fa.ir to summarize it this way. As far as consumers are concerned you would find-and there is an immense amount of statistical work clone-people would say somewhere between 60 and 80 cents of every doflar would be spent within a year. Representative CURTIS. We have never done this. This has always been theory, as I understand. There is no place we can look where we have cut taxes for the purpose of this kind of economic stimulation. I am just taking your aggregate. You take $5 billion here in tax cuts and then you take it back in bonds. Dealing in aggregates I do not see what you have done, unless there is something about the mix in here. PAGENO="0252" 242 POLICIES FOR PULL EMPLOYMENT Suppose you sold it in E-bonds. The purchasers then are the con- sumers. Then they would not have $5 billion to spend. You have taken it right back from them. Suppose some goes to investors, as some would, then they do not have that to invest. The Government has taken it. Mr. ECKSTEIN. Sticking to the tax side, a tax cut on business, I think most people who have tried to make studies of it tend to say in the long run the larger part of additional cash flow would be spent. Then you get to the other side of the question-to what extent is spending reduced by the bond financing? Mortgage money and other long-run money is presently not terribly scarce. It is not rationed even though interest rates have moved up. It seems to me that it is up to policy whether long-term investible funds other than internally generated funds are going to be made very scarce or not. That is a question oT Federal Reserve policy. So we have that side of the coin under somebody's control to some extent also. Of course, the Federal Reserve could run a policy which is so tough that they could completely undo the effect of the tax cut. Representative CURTIS. Particularly with the balance-of-payment problem. To me these are the issues we should have been discussing in the Ways and Means Committee. Yet the witnesses who appeared before us were unprepared to discuss it. It was improvising, instead of the prepared papers being on that point. I thought that everyone was begging the question. The question is, Will a tax cut which in- creases deficit financing and puts an added burden on debt manage- ment in the condition we are now in, balance of payments and so forth, stimulate the economy, even if it would work at other times under different circumstances? This is an untested theory at `best. At any rate I wanted to pose that. The one thing I particularly wanted to ask a question on here is this: I have just recently got my ducks in a row on it. I know you are all interested in new economic phenomena. I think we have a beauty here. To me it is an amazing thing and one that requires real study and explanation. That is the fact that the civilian labor force, and I have the figures back to 1929, has continually increased each year ex- cept for war years. With the total labor force which includes the Armed Forces it continued to increase. But for the first time since 1929, in the year 1962, the civilian labor force actually has not in- creased and yet our population figures would indicate that there would be an increase of around 1 million. I average out the figures from 1921) to 1959; we increased on an average about 700,000 a year. In the figures that we have here from 1955 to 1961, we increased almost a million a year. \Ve were able to ask questions on this. Dr. Ewen Clague sent in a letter to the commit- tee saying his statistics were right. I had raised the question whether the phenomena could be explained as statistical errors. Secretary of Labor Goldberg yesterday said that this is a phenonemon to which they just do not know the answer. I have been trying to fit it into my theory of what I think is the test of real economic growth and my be- lief that we are not stagnant and it does make sense to me that we are having people withdraw from the labor market because they do not want that extra income or balancing in their minds whether they would rather have the leisure time or the income. People did go into the PAGENO="0253" POLICIES FOR FULL EMPLOYMENT 243 labor force apparently, women, so that their family could get another car or downpayment on homes, and so on. Maybe that is it. I do not know. Certainly this gap theory, if you apply this million group, you must put it into the unemployed area, and so the gap has widened. I do not adhere to the gap theory, but to those of you who do, I would think this would be very worrisome because then your gap is increasing. Mr. ECKSTEIN. I have tried to make a little bit of inquiry on this problem. I gather that the lack of growth of labor force is not con- centrated in any one group. I think originally the thought was it might be earlier retirements because of the improved social security benefits. Represenative CuRTIs. The figures showed it to be in all age groups and not by men or women, either. Mr. EGKSTEIN. There are a lot of different phenomena and so far nobody is in a position to put them together. Certainly one thing that does happen in a depressed area, you do slowly over the years evolve a new way of life in which people drift out of the labor force and draw relief and make a living without working. It takes several years of not much prospect for employment where you are located be- fore you get this kind of effect of people just sort of drifting out of the labor force and finding some other way of getting along. Representative Cmrns. Even in the depression years of the thirties, the civilian labor force increased each year. I did want to point that up. The final thing, and I just want to get this more or less on the record; to me the places that we have to get into in reforming our tax structure are not just rates. Yes, I am very much interested in rate reform. I want to point up some of the specific things in our tax laws I think are impeding economic growth. They seem small, but I do not think they are in economic effect, only in revenue. One is a tax law which works against labor mobility. The law as it presently is says that a man's residence is where his job is. This may have been true in the 1920's and even 1930's. As a matter of fact, our laboring group now, 80 percent of them own their own homes. So their residence is where their home is. This archiac law has an effect on the tax of those individuals if they have to follow a job. If they are technicians, like from McDonnell Aircraft, men going down with their missiles, from St. Louis to New Mexico, and they are in New Mexico over a period of some months, what is a per diem allowance becomes taxable income according to the Federal tax laws. Likewise, when you shift a plant, like Chrysler did from Evansville to St. Louis, the workers cannot immediately sell their homes. They follow their jobs and they are commuting back and forth. They can- not deduct the cost of maintaining two residences from their taxable income. This is a reform badly needed. In my estimation, one of the greatest problems in our dynamic economy is matching skills with jobs and encouraging labor mobility, to bring this about. This tax law encourages labor immobility. The second point, our tax laws work against training and retrain- ing. Another great problem in a dynamic economy going places, as ours is, is in upgrading skills, training, and retraining. The tax law says if you study to hold your job you can deduct the cost from PAGENO="0254" 244 POLICIES FOR FULL EMPLOYMENT your taxable income. But if you go to improve yourself by training for a better job, you cannot. Yet the process today is such, if my interpretation of this dynamic economy is right, that if you have a skill, it can become obsolete in 5 years. Formerly, in father's time, you could have a skill that would last you a lifetime. Really, to maintain yourself you have to be in a position of upgrading your skill, retraining constantly, and yet our tax laws work against this process. Third,, our tax laws on research and development are out of date and working against economic growth. You have to tie the actual research and development into a marketed product to get a tax deduction. Yet today pure research which. is not tied to a product must be conducted if we are to move forward, and our tax laws work against that. Our tax laws work against equity financing, giving an undue preference to retained earnings and debt financing. We started to reform that in 1954, one step out of three was taken. But even this modest reform was so hit on the head, I would say, in a demagogic fashion, by people who refused to look at the problem, saying we were giving tax cuts to rich people, that we have been hard put to hold the little progress we made, let alone take the next two desirable steps. The purpose of the stock dividend tax credit was to try to relieve the double tax burden on new equity financing of growth on the theory that new equity financing was a more effective way to promote economic growth, than retained earn- ing and debt financing. This reform actually works against the rich investor in favor, of the smaller investor and encourages the nonin- vestor to become an investor. And then finally I must mention the burdensome taxation we im- pose on profits which has had a lot of discussion here. This is an out-and-out tax on incentive, the well spring of human . progress, economic or otherwise. I simply want to put those matters on the record. So much talk has been spent on economic aggregates that we tend to forget the components where we will find the source of our problems. You call them structural when I refer to them in this way. I think if we would get to work on these structural things which mean little as far as the revenue is concerned, we would move forward. It would mean a great deal to economic growth because we would be removing some of these impediments to economic growth. We would help to match up the unused labor force with the jobs that are going begging. I am convinced there are more jobs going begging today, than there are unemployed, which is traditional, not unusual, in America. In other words, we have a labor shortage. We have not matched the human beings with the jobs that are going begging. Thank you. Senator DOUGLAS. There very well may be a tax cut, if not in 1962, in 1963. In connection with that, the chairman asked me to read cer- tain sentences from the report of the commission on money and credit set up by the CED, which certainly is not charged with being a radical commission. These are from pages 134 and .135: As in the proposal for formula flexibility- said the commission- the most appropriate choice for shortrull discretionary changes in taxes is the first-bracket rate of the personal income tax. They are least likely to open PAGENO="0255" POLICIES FOR FULL EMPLOYMENT 245 up controversial questions of income tax structure. The legislative and admin- istrative problems in making such changes would he relatively simple. No un- certainty would be encountered in complying with such changes. That is the end of the first quotation. Then the second quotation was the italicized summary on page 135: The commission, therefore, concludes that when discretionary tax adjust- ments are used to promote shortriin economic stabilization, they should consist of variations in the first-bracket rate of the personal income tax. Thank you very much, gentlemen. rjl~~~ committee will reconvene at 2 o'clock. (Whereupoii, at 12 :30 p.m., the hearing in the above-entitled mat- ter was recessed, to reconvene at. 2 p.m. the same day.) AFTERN OON SESSION Chairman PATMAN. The committee will please come to order. We have as our first witness this afternoon Mr. Leon H. Keyserling, economic consultant, Washington, D.C. Mr. Keyserling is well known. He has been around Washington a long time. He has been a witness many, many times before this committee, before the Banking and Cur- rency Committees of the House and Senate, and others. Mr. Keyserling, we are glad to have you, sir, and I notice you have a prepared statement. You may proceed in your own way. After you finish we will have Mr. Saulnier and then after he finishes we would like to have the panel interrogate both of you. We will interrogate you together instead of separately, if that is all right. You may proceed. STATEMENT OF LEON H. KEYSERLING-, FORMER CHAIRMAN, COUN- CIL OF ECONOMIC ADVISERS, ECONOMIC CONSULTANT, AND PRESIDENT, CONFERENCE ON ECONOMIC PROGRESS, WASHING- TON, D.C. Mr. kETSERLING. Mr. Chairnian aimcl members of the committee, I think the most expeditious method would be for me first to read some brief highlights of my conclusions, which will take oiuiy a relatjvely few minutes, and then I have some supporting materials in the form of charts which I would talk from orally. Chairman PATMAN. All right. Mr. KEYSERLING. Beginning with my prepared statement, I have been asked to speak about fiscal policy. But naturally, fiscal policy derives from the condition of the economy, and ties in w-ith other economic policies. So, while I shall concentrate on fiscal policy, I shall try to relate it to the matters which determine what. it is oraL what it ought to be. I think the members of the committee are familiar with the methoct I use, which is to prepare over tue years a rather complete clescriptioii of the economy in action, and also what I call my model of an economy operating consistent with maximum employment, production, and purchasing power under the Employn'ient Act of 146. Then, I constantly test the actual condition of the economy against the model, and try to discern where relationships went wrong and where the difliculties appeared. This has given iiie a rather full view-, PAGENO="0256" 246 POLICIES FOR FULL EMPLOYMENT and I think has helped me to arrive at some forecasts which have turned out to be moderately accurate. I want to call attention to just a few of these before this committee, only for the reason that this has a bearing upon what I shall say about the future now. In 1954, before this committee and elsewhere, I forecast an average annual economic growth rate of 21/2 percent from 1953 through 1960, which turned out to be accurate, and also forecast the growing levels of unemployed plant and manpower which would result. This, also, turned out to be reasonably accurate and, therefore, more or less vin- dicated my assumed needed growth rates, because if my assumed needed growth rates had been too high, the actual unemployment of plant and manpower would have been lower than my forecasts. Second, in 1957, before this committee and elsewhere, when people were generally concerned about inflation, I was very concerned about the oncoming recession, which very shortly. thereafter appeared, and similarly in early 1960. In early 1961, before this committee and else- where, and in a publication in May 1961, and in a meeting with about 150 Members of the Congress, I said that I thought that, with the policies then in being, the economic growth rate under the new ad- ministration would be no better than under the old one, for the simple reason that in my nonpolitical view you could not change an economy much without changing policies much. I said that I thought that the economic growth rate in 1961 and in 1962 would be only about half as high as what we would need to get back to reasonably full employ- ment and production; that it would probably be the shortest recovery of all; and that it would probably convert into stagnation and reces~ sion more quickly than the others because of the cumulative effect of the uncured imbalances. Unfortunately, this has come to pass to date, though the recession still lies ahead. Senator BUSH. You are speaking of the current recovery? Mr. KEYSERLING. I am saying that the current recovery is the weakest since World War II. Senator Busii. You are not indicating that you think it is finished, are you? Mr. KEYsERLING. I will deal with that specifically in my statement, Senator. Senator BUSH. All right. Mr. KEYSERLING. In support of my feeling that we need immediate and extensive changes in national economic policies-this is my first point-U.S. economic performance has been highly unsatisfactory since early 1953. Since then to date, our average annual growth rate has been only about 60 percent of the needed rate; we have at no time had maximum employment and production; and, through a recur- rent pattern of inadequate upturns, recessions, and stagnations, we have moved inexorably in the long run toward rising levels of idle manpower and plant. In second quarter 1962, the true level of unemployment averaged about 6.5 million, or almost 9 percent of the civilian labor force, taking into account full-time unemployment, the full-time equivalent of part-time unemployment, and the concealed unemployment repre- senting inadequate growth in the labor force due to scarcity of job op- portunity. I will demonstrate that in detail with my charts. PAGENO="0257" POLICIES FOR FULL EMPLOYMENT 247 Similarly in second quarter 1962, total national production was about $73 billion or almost 12 percent below maximum production. Let me say, parenthetically, that Chairman Heller in his statement yesterday said that national production was about $30 billion below the true level. He obtains this figure by projecting a 3"/2-percent growth rate from 1957 or 1955 as being consistent with maximum em- ployment and production. I have shown before this committee, on other occasions, and will show again, that this is a very much lower growth rate than can possibly absorb the new technology and the growing labor force. As a matter of fact, the reason why the recovery in the first three quarters of 1961 came so far short of getting us back to full employ- ment, and why the economy has done so much worse since then than was anticipated by many of the forecasters, including the Council of Economic Advisers, is that they have persisted in understating the growth rate needed to regain and maintain maximum employment and production. In other words, the underestimate of the size of the problem is the first step toward taking inadequate remedies. Since late 1961, we have been in still another period of economic stagnation, with an annual growth rate of only 3.5 percent from fourth quarter 1961 to first quarter 1962, and only 2.8 percent from first quarter 1962 to second quarter 1962. Of course, those figures cannot be related to the 5-percent growth rate that I think is needed in the long run, because you need a much higher growth rate than 5 percent when you are in a recovery period. That rate would merely hold you where you are with respect to unemployed plant and manpower. And many indexes of activity tend to reveal an overall growth rate even lower if not negligible or negative in June and July. All signs now are that this latest stagnation will end up in the fourth recession since 1953, and trying to guess-let me underscore this-trying to guess whether this will happen later this year or in 1963 is a sad and fruit- less misdirection of energy. In view of the dismally consistent long-term record since early 1953, we are closing our eyes to reality and playing with fire when we ask for another few weeks, and then still another few weeks, to see where we are going, or when we look at every little ripple from week to week in order to squeeze consolation out of the inconsequential. We have done very badly for long enough; the time to start reversing the course is now. I do not share CEA Chairman Heller's apparent view, expressed in his testimony yesterday, that the fast rate of upturn during the first three~ quarters of 1961, or how much better we have done in recent years than in the 1930's, may have some bearing upon where we are now and what we should do. With reference to my analysis of the causes of our chronic economic difficulty, which is my second point, the central cause of this difficulty is that ultimate demand, composed both of private consumer outlays and public outlays for goods and services, has failed consistently to keep up with our increasing power to produce, as generated by business investment, improvements in technology and automation, and enlarged worker and managerial skills. In second quarter 1962, measured as an annual rate, a deficiency of about $56 billion in private consumer 87869-62-iT PAGENO="0258" 248 POLICIES FOR FULL EMPLOYMENT outlays, and some deficiency in public outlays, were the dominant factors in the deficiency of about 73 billion in total national produc- tion at an annual rate. While there was also a deficiency in gross private domestic invest- ment, and in investment in plant and equipment, during second quarter 1962 and during the period 1953 to mid-1962 as a whole, this defi- ciency was caused by the deficiencies in ultimate demand which led to vast idle plant capacities and therefore dissuaded private invest- ment. During the upturn or boom periods which have occurred since 1953, investment in plant and equipment has tended to race forward at a nonsustainable rate when measured against ultimate demand and unused plant capacities. Throughout the whole period, prices and profits and other funds available for investment have been ample or excessive, in that they have always been adequate to spark a level of investment as high or higher than justified by ultimate demand. This is true even today, despite the exaggerated talk about the "profit squeeze"; most profits now are very rewarding, and where they are inadequate it is only because of deficient ultimate demand and the extraordinarily high level of unused plant capacities. Profit-sales ratios indicate clearly that what business really needs is more sales. CEA Chairman Heller's testimony of yesterday, in its citation of facts and indeed in its general analysis, powerfully reinforces what I have just said; that is, that profits are good and in many instances advancing; that funds available for investment are ample or even re- dundant, especially when cash flow is taken into account; and that only unused capacities and deficient ultimate demand stand in the way of more ebullient investment. Under these circumstances, I might fairly construe Dr. Heller's continued support of still more tax concessions for investors as evi- dence of his proper responsibility to keep in step with existing ad- ministration policies. Meanwhile, I cannot understand fully why the administration is still debating what kind of tax cuts we need, or even leaning toward a composition of tax cuts which would exacerbate the imbalances between investment in the means of production and ultimate demand by favoring corporations and high-income indi- viduals unduly, at the expense of those middle- and low-income con- sumers who spend for consumption a larger part of their aftertax incomes. My third point is with respect to tax policy-and let me say that my discussion follows the very penetrating questions in the statement which the chairman of this committee put out in announcing the hearings-dawdling or delaying with respect to tax reduction has no justification, in the face of a chronic economic ailment which is now being confirmed rather than alleviated. And in view of the central reasons for the chronic economic ailment, the proper nature of the immediately needed reductions in taxes is clear as day. Tax policy since 1953 has aggravated the imbalances in the relationship between investment in the means of production and ultimate demand; recent Treasury revisions in tax regulations move in the same direction; and passage of the 7-percent tax credit would move still further in the same direction. PAGENO="0259" POLICIES FOR FULL EMPLOYMENT 249 To restore a better balance throughout the economy, large and im- mediate tax reduction should concentrate upon increasing the after- tax incomes of low- and middle-income consumers, who have a pro- pensity to spend a much larger proportion of their disposable incomes than higher income families. Senator BUSH. May I just ask parenthetically how do you define the middle-income group? Mr. KEYSERLING. There is no one definitive definition. In my recent studies, it is indicated that the middle-income group are those, let us say, with family incomes from $4,000 to about $8,000 a year. Senator, I would be very glad to provide you with a study which shows the exact compositions of the number of families falling within the different sectors. Senator BUSH. I just wanted to get what you meant. You spoke of the low-income group and then the middle-income group. I am not quite sure what you meant by middle. Mr. KEYSERLING. For a multiple-person family, I would say below $4,000, at least in urban areas, is low and from $4,000 to $8,000 or thereabouts is middle. Senator BUSH. I see. Mr. KEYSERLING. These tax cuts should have an annual value of about $7 billion in fiscal 1963. Let me emphasize what I am saying now. These kinds of tax cuts would be good, not only for the short run, but also for the long run; they would be sound long-term reforms, in addition to their immediately stimulative effects; and thus the claim that we should wait until next year in order to develop syste- matic "reforms" in the tax structure is in my view specious. In other words, once you accept my basic proposition, which I think to be sound, that we have a chronic economic problem of 91/2 years duration, then it follows that the situation really hasn't changed fundamentally, and looking at all the little or short ups and downs and saying that each one is a change in the situation is, as I have said before, looking at a man whose head is bobbing up and down in the water, and every time his head comes up, saying he is up again. The economic trouble is chronic. We should be particularly on guard against adopting, in the name of "reform," revisions in the tax structure which would aggravate rather than remedy the fundamental imbalances in the economy which have existed since 1953 and still exist. Such tax reforms as closing loopholes, while ultimately desirable, should be deferred, because ef- forts to enact them now would forestall the top priority tax action which is needed now. I have noticed the very interesting article in the New Republic this week by Senator Douglas. I wish that he were here. There is no man in Congress for whom I have a higher regard, and I have not yet recovered from a debate which I had with him in 1952. None- theless, I do differ with him in this particular instance. I agree that we should wait for tax reduction until we "see the whites of their eyes," but I have been seeing the whites of the eyes of the chronic economic trouble for many years. It depends on what you define as the whites of their eyes. If you are concerned only in an antirecessionary policy after the event of recession, then you should wait for tax reduction until you have a recession. But if you are PAGENO="0260" 250 POLICIES FOR FULL EMPLOYMENT concerned with the fundamental, long-range problem of an inade- quate growth performance, of chronic economic stagnation, of our competition with the rest of the world, of all the matters about which the President so eloquently has spoken on so many occasions, then the whites of their eyes are right up at the crest of the hill now. With respect to Federal spending policies, I have this point to make. The proposition that any immediate cuts in tax rates should be counterbalanced by comparable cuts in Federal spending is so ob- viously wrong in `the context of our whole economic problem that it should require no analysis. We are so far short of maximum employ- ment and production and have such a long and difficult road to travel to get there and then to stay there, that we need both tax cuts and increased spending now. We also need increased spending, `because of the grave neglect of many priorities of national need. The current and prospective economic situation, in my view, calls for Federal spending in fiscal 1963 about $3 billion higher than the administration proposes. Thus, my proposed tax cuts and spending increases would have a combined annual value in fiscal 1963 of about $10 billion. This would provide total stimulation to the economy, including indirect effects, of about $25 to $30 billion. Of course, var- ious economists will suggest a different product mix between the tax cuts and the spending increases. I would like to call your attention to the number of economists whose overall figure converges pretty close to the $10 billion that I suggest. Some of them suggest it all in tax cuts. I personally can't see how, as a great nation, we can concern ourselves only- Senator BUSH. You say it would provide a stimulus to the economy, including indirect effects of about $25 to $30 billion. In what would that be reflected? The gross national product, or the gross national income? Mr. KEYsERLING. This is the gross national product, Senator. This is merely the so-called multiplier effect of the changes in fiscal policy. Senator BUSH. Thank you. Mr. KEYSERLING. On the subject of balancing of the Federal budget, I make this point, which is my fifth. Let me say clearly here that it is a complete misconception to think that I am in favor of an unbalanced budget. I am in favor of a balanced budget in a balanced economy. We now have, and sinc,e 1953 have had, a spending and tax policy which is grossly erroneous and self-defeating, because it attempts to balance the Federal budget at levels of economic activity woefully short of maximum employment and production. In consequence, de- spite constant declarations of intent to balance the Federal budget, we have run an aggregate Federal deficit of $30.7 billion from the beginning of 1953 through the middle of 1962. In vivid contrast, and I will demonstrate more clearly with my charts, if the expenditure side of the Federal budget during this period had been enough higher to fulfill its appropriate share of the task of maintaining maximum em- ployment and production, the application of actually existing tax rates to an economy functioning at maximum levels of activity would have yielded an aggregate budget surplus estimated at $14.3 billion from the beginning of 1953 through the middle of 1962. In other words, the net difference between the deficit of $30.7 billion and the PAGENO="0261" POLICIES FOR FULL EMPLOYMENT 251 $14.3 billion surplus which I estimate would be about $45 billion. This implies that we should have had lower tax rates, as well as higher spending, during this period as a whole, and indeed both would in fact have been necessary for maximum prosperity. Under the Federal budget for fiscal year 1963 as now officially pro- posed, I estimate that our total national production during fiscal year 1963 will be at the very deficient level of not more than $565 billion, and might well be only $555 billion or still lower. At this particular point, most of the other estimates are about the same. This would mean a Federal deficit of $4 to $7 billion, or even higher. The changes in tax and expenditure policy which I recom- mend would result, according to my estimates, in total national pro- duction close to $600 billion for fiscal year 1963 and a Federal deficit of $6.5 to $7 billion. Thus, the true alternative is between choosing a planned deficit that will be highly beneficial to employment and pro- duction, and stumbling once again into a deficit through neglect of the needs of the economy, just as we stumbled into a $12 billion deficit in one year recently, and I think about $6.3 billion during the fiscal year just ended. Some people seem to think if you stumble into a $6.3 billion deficit it has the same accelerating effect upon the economy as if you plan a $6.3 billion deficit. This, of course, is not correct. In one event you are starting out at the beginning of the year with a fiscal policy that is stimulatory to the economy. In the other event you are starting out at the beginning of the year with a fiscal policy that is repressive of the economy and you stumble into the deficit be- cause the economy suffers. It is not the same thing at all. Moreover, the program which I recommend would offer a realistic prospect of reasonably full production and employment by 1964. This condition, along with the closing of some tax loopholes when the time is more propitious than now, and this is what some people call a practical consideration or a political consideration, would yield enough revenues to balance the budget even with the reduced tax rates and increased spending which I propose. As a matter of fact, on this matter of tax reform, I have said above that I think that the kind of tax reduction which I propose is really the most basic, and long-range, and fundamental kind of tax reform, and that, so far as the tax reform of closing loopholes, such as depreci- ation allowances and so forth, I would like to do some of that but it is entirely secondary now. It isn't going to stimulate theY economy if you do it. It may give some people a sense of moral fervor. I would like to see it done ultimately. It may be important, when we are wedded to the concept of getting as close as we can to a budget balance, but such kinds of tax reforms in my mind are entirely sec- ondary, and I think that they should be put aside so that with less acrimony and more dispatch we can get down to the job of the kind of tax reform that we really need now in the interest of the whole economy. Mr. REUSS. Mr. Keyserling, when you say 1964, do you mean fiscal year 1964? Mr. KEYSERLING. I would say calendar year 1964. I don't believe that, where we are now, we can get to full employment by fiscal year 1964, except by changing my $10 billion compound to $15 billion, and for what I call practical reasons I have held it a bit below that. PAGENO="0262" 252 POLICIES FOR FULL EMPLOYMENT Senator JAVITS. Mr. Chairman. Chairman PATMAN. Senator Javits? Senator JAVITS. If the chairman would allow me-I may not be able to stay but a few minutes as I have a bill on the floor and I have to go back-I didn't quite get, Mr. Keyserling, your point about taxes when you talked. Would you mind making your point again? Mr. KEYSERLING. My point about taxes is that I think we need an immediate tax reduction, and I want to commend the Senator on what he said about that, although we don't agree on the exact composition. I think, also, that his statement about the lack of vigor in pressing for this now is correct. I say that we need an immediate reduction in taxes because we have been suffering from a chronic economic ail- ment for 9'/2 years and that, therefore, waiting another 2 weeks, or 4 weeks, or 6 weeks for another little inconsequential ripple has little to do with the case. Such delay bespeaks a continual attention only to very short-range developments, which negates the very concept of the chronic ailment. Senator BUSH. Tell him also about your schedule of reduction. Mr. KEYSERLING. Then I say, and here the Senator and I do not have exactly the same program, that the program should concentrate very heavily, if not entirely, upon the reduction of consumer taxes in the middle and lower income brackets, on the ground that this would provide the most immediate stimulus to consumption, and in other parts of my testimony I analyze why the other forms of tax reduction are not needed now. Senator JAVIT5. I thank my colleague and I am very grateful to the chairman. Mr. KEYSERLING. On the subject of rates of saving and family in- comes, which is one of the other questions raised by the committee chairman, I say this: Federal tax and expenditure policy since 1953 to date, along with other developments in the economy, have resulted generally in too high a rate of personal saving, and too low a rate of consumer expenditures, measured against total personal incomes after taxes. May I say here that I do not measure the appropriate rate of per- sonal saving, and here I differ from some economists, primarily by historic records in the past. I measure it primarily by looking at the economy and seeing whether as a matter of pragmatic observation in- vestment and consumption have been kept in balance or whether one has outrun the other, and since the function of savings is to spark investment or to feed investment and the function of consumer spend- ing is to add to ultimate demand, I derive the conclusion that the rate of savings has been too high from the fact that, generally speak- ing, investment has outrun ultimate demand and resulted in vast unused capacities. I might call this the functional approach, or the real wealth ap- proach, or the ultimate performance of the economy approach. This condition is the natural counterpart of the imbalance between invest- ment in the means of production and that portion of ultimate demand which is represented by consumer spending. The appropriate remedy is to reverse the regressive trends in in- come distribution which have been persistent in recent years. May I point out that, since I put out my income study a few months ago, PAGENO="0263" POLICIES FOR FULL EMPLOYMENT 253 there have been two very good books on the subject, one by Robert Lampman and one by Professor Kelso, which support what I have been saying all along: under conditions of low economic growth and high unemployment, we have had a regressive redistribution of na- tional income in recent years. The appropriate remedy is to reverse the regressive trends in in- come distribution which have been persistent in recent years, and which cause too much saving relative to consumer spending because higher income families save more while lower income families spend more relative to the size of their incomes. I am not talking here about a share-the-wealth program or equal- itarian program, but I think it is always the function of national pol- icy to improve the equity of income distribution. This has been part of our long-range progress, and whether this is the purpose or not, every tax policy, every monetary policy, and every other basic eco- nomic policy, does affect income distribution, so we might as well look at what we are doing. The kind of tax cuts which I propose would be part of this appropriate remedy. Increased Federal spending would also be part of the remedy, because many of the public programs which need enlargement, such as in the fields of education, health, housing, and social security, improve the absolute and relative incomes of low- income and middle-income families. They also provide a great new mass market for business. A vigorous trend in this direction would also be highly desirable on social grounds, which I have never regarded as outside the scope of national economic policy, in view of the fact that about two-fifths of all Americans now live in poverty or in some lesser degree of de- privation. On the subject of monetary and credit policies, I would say this: I agree entirely, I may say here, with the very eloquent statement made by Senator Douglas in the New Republic this week, excoriating, if I judge him correctly, the recent and current monetary policy. It has been very much too tight. It has been wrong, all along. I do not believe, however, that monetary policy is a substitute for fiscal policy. Also, monetary policy can be used much more easily to repress the economy rather than to expand it, because it is easier to pull a string than to push it. If you don't have the fundamental levels of demand about which I have talked, the mere amplitude of credit and money doesn't expand investment much and does not ex- pand the economy much. I get to that in my analysis of the profit question. Monetary and credit policies, since 1953 to date, have been too strin- gent to float an adequate rate of economic growth and, therefore, have contributed substantially to the chronic rise of idle manpower and plant. As an avowed brake upon inflation, when inflation was actu- ally in process, the stringent monetary and credit policies have been a failure, because the structure and behavior pattern of the modern U.S. economy is such that tightening up on money and credit trans- lates into repressed or reduced levels of employment and production long before it impacts upon the price structure. For example, during the period of reasonably adequate economic growth, 1952-55, the average annual growth in total national produc- tion was 3.5 percent, the average annual growth in the nonfederally PAGENO="0264" 254 POLICIES FOR FULL EMPLOYMENT held money supply was 3.6 percent, consumer and wholesale prices were virtually stable, and the average annual increase in industrial prices was only 1.1 percent. But during the period of economic stag- nation, 1955-57, the average annual increase in total national produc- tion was only 1.7 percent, induced substantially by an average annual increase in the nonfederally held money supply of only 2.5 percent, while there was an average annual increase of 2.5 percent in consumer prices, 3.1 percent in wholesale prices, and 3.6 percent in industrial prices. This whole analysis, which defies some of the conventional economic analysis, is based upon the simple proposition that you may have inefficiency resulting from too high a rate of economic growth or from too low a rate of economic growth. You may have inefficiencies resulting from an economy that is excessively taxed-I don't mean taxed in the technical sense-I mean has excessive pressures on it, or from an economy that is insufficiently pressured, just like a car going too fast or too slow burns too much gas per mile. Most economists have only lately come to realize increasingly this point that I have been making, that an economy that is constantly moving up and down, that has a high level of unemployment and a high level of unused plant, tends thereby to be more inflationary than under fuller utilization, aside from the fact that you lose scores of billions of dollars of national product. Moreover, the tight money policy and rising interest rates con- tribute mightily to the regressive redistribution of national income, repress desirable lines of activity far more than they affect the rela- tively excessive periodic booms in investment relative to ultimate demand, reduce the funds available to governments at all levels for essential public purposes by increasing the interest charges and by making it impossible for States and localities to borrow, and therefore contribute to all of the chronic imbalances in the economy. The open declaration in recent weeks by spokesmen for the Federal Reserve System that they will tighten up on monetary and credit policies, especially if immediate tax cuts are undertaken to stimulate the economy, is an open declaration of war upon the programs which the Nation needs, and represents an almost unbelievably gross incon- sistency in national economic thinking. This declaration of war, by the Federal Reserve System, while it does not say so openly, is tanta- mount to continued adherence to the indefensible proposition that large volumes of idle plant and manpower are indicia of economic health and are necessary to fight inflation. I find it difficult in this connection to follow the logic of CEA Chair- man Heller's discussion of monetary policy in his testimony yesterday. I understand he improved it some in response to questioning. He says this: Fiscal policy and monetary policy are tightly interwoven, indeed are in part substitutes for one another. A given stimulus to the economy can be achieved by a relatively easier fiscal policy coupled with a relatively tighter monetary policy, or vice versa. Let me try to translate that into simple language. It is like saying that, if you take four steps forward and two steps backward, you are still taking two steps forward. But it is nonetheless true that the two steps backward cancel out two of the steps forward, and if you reduce taxes by $20 billion and tighten up on the monetary policy, PAGENO="0265" POLICIES FOR FULL EMPLOYMENT 255 you may still have a net forward of $10 billion, but why should you cancel out the effect of one with the effect of the other, and if you have a relatively smaller reduction in taxes, the tight money policy can cancel it out entirely. Representative REUSS. Did you underline the "vice versa" because you want to emphasize it? Mr. KEYSERLING. I underlined the "vice versa" because it is un- derlined in Dr. Heller's direct testimony. In other words, I would have to ask him. Representative REUSS. Is the policy combination implied in the "vice versa" more offensive to you than the alternative? Mr. KEYSERLING. They are both offensive. I believe it far more pertinent to point out that fiscal and monetary policies should in general reinforce each other; they should in general be complements, not substitutes. When general inflation threatens, both should be relatively tight or tightened; when there is very large economic slack, both should be loose or loosened. I have great respect for Dr. Heller, but in this instance I think that, instead of attempting to rationalize the perverse and damaging policies of the Federal Re- serve System, he might well have called upon that System to bring its policies into line with the real economic situation as he understands it so well and with the policy implications thereof which he compre- hends so fully. Here I want to commend many members of this committee, includ- ing Senator Douglas, as I have said before, for their full realization of this point. The Federal Reserve System does not need a pat on the back; it needs a good jolting. Fundamental conflict between fiscal and monetary policy, recurrent in recent years, is an anachronism. Indeed, at another point in his testimony, Dr. Heller admits that "monetary * * * policy must con- tinue [sic] to aim at providing ample credit and liquidity to support needed recovery and growth." But Dr. Heller then delimits the force of this valid observation by saying that all this must be "consistent with the requirements of balance-of-payments policy." This brings me to the subject of the balance of payments and gold problem. Senator PR0xMIRE. I am sorry that you didn't hear all of the things that I said about the pernicious uses of a tight money policy to cancel out the effects of tax reductions. On the balance of payments and gold problem, which is the final question raised in the chairman's announcement: I am sorry I can't analyze this one in more detail, because I don't know anything on which there is more national confusion. Our balance of payments and gold problem, while a real one, has been exaggerated and misused and subject to the wrong remedies, very analogous to the way in which the inflationary problem was exaggerated and misused and sub- jected to the wrong remedies in earlier years since 1953. The central reason for our unfavorable balance of payments and gold problem is not to be found in the record of our international exchange of goods. In this category, we have been averaging a very favorable excess of exports over imports, and our record in this category might be even better if we achieved the real improvements in productivity and costs which are frustrated by large economic slack and encouraged by fuller utilization of production resources. PAGENO="0266" 256 POLICIES FOR FULL EMPLOYMENT A main reason for our balance of payments and gold problem has been the perhaps excessive movement of American capital to Western Europe (although I think this too is exaggerated) I am not quite sure that I am absolutely clear as to why we should move toward a philosophy of free exchange of goods based upon marginal efficiency but not allow capital to flow where the manager of the capital, so long as we believe in a free system, thinks it will be most efficient. I think we are a little mixed up on this score, but I haven't got time to get into this in detail. A main reason for our balance of payments and gold problem has been the perhaps excessive movement of American capital to Western Europe, and the excessive withdrawal of foreign funds from the United States. Both of these trends are to be explained mainly by the higher rate of economic growth, the lower levels of unemployment, the freedom from economic recessions, and consequently the more favorable opportunities for sustained investment and profits, in some countries of Western Europe contrasted with the United States. It follows inescapably that those of our national economic policies are absolutely upside down which attempt to cure our balance of pay- ments and gold problem by repressing economic growth, employment, and production in the United States. Variations in interest rates, comparing here with overseas, are a relatively inconsequential factor. And in any event, it shows a fantastic lack of perspective to saddle the whole $550 billion American economy with the incubus of rising in- terest rates in order thereby to effectuate some slight changes in our balance of payments and gold position. In addition to the main remedy of restoring and maintaining max- imum prosperity in the United States, we need to improve the devel- opment of international mechanisms which would serve as a clearing- house and set off short-range against long-range claims. In long- range terms, our balance-of-payments position has in general been satisfactory. Now, Chairman Heller, in his testimony, and others have brought up the point that maybe we should try to hold down the long-term interest rates because of our domestic needs, and let or help the short- term interest rates go up in order to take care of the capital flow prob- lem. I have been trying to convince committees of Congress for a long time, and I think unfolding developments have helped me a little bit, that it is absolutely impossible as a basic proposition to do these two things at the same time because interest rates interrelate. Most interest rates are fixed by other interest rates, and that is why I went before the Senate Finance Committee in 1957, when they were talking about raising the interest rates on savings bonds because other interest rates were going up. I said, "You have created a mess. You start raising some and you have to raise others, and you are on an escalator that will never come to an end." It is absolutely impossible to do these two things at the same time. One of the reasons why the recent effort of the Treasury to float long- term bonds, at even what I consider a rather high coupon interest rate of 41/4 percent, didn't work out very well is because we are getting into a situation where you are going to have to pay 5 or 6 percent interest to borrow anything, even on the supreme credit of the Government of the United States. PAGENO="0267" POLICIES FOR FULL EMPLOYMENT 257 Anyway, why should we be freeing such high interest rates into long-term borrowings? Coming to the needed changes in the national policy, which is my last point, during the 9'/2-year period from the beginning of 1953 to the middle of 1962, we forfeited about $387 billion in total national production-measured in 1961 dollars-compared with what we would have achieved at the maximum rates of economic growth called for by the Employment Act of 1946. I don't say we could have done that well. But for goodness sakes, we should have done at least half that well. Over the same span of years, the true level of unemployment aggregated about 24 million man-years higher; in other words, well over 21/2 million higher annually on the average, than it would have been under conditions of sustained maximum employment. The record during the past year and a half indicates no fundamental change in the chronic ailment, although fortuitously we have been in upward movement during most of this short period. In fact, I think it is getting worse because of the uniquely weak character of this recovery and the fact that we are already in stagnation. We are now in another stagnation, and confronted with the ominous threat of another recession later this year or next year. If our aver- age annual growth rate 1963-66 averages no better than during the past 91/2 years, and I do not think that it will average appreciably better without drastic changes in national economic policies, and I think it could even average worse because these imbalances feed on themselves, we could forfeit another $290 billion of total national pro- duction, and suffer another 17 million man-years of excessive unem- ployment, while we talk about the great worldwide contest in which we are engaged and about the needs of our own people and about the need for economic growth. Neither domestic nor worldwide conditions permit us to countenance even the possibility of such development. We must act, and act at once. In one sense, Mr. Chairman, and members of the committee, there is never an "immediate" need for anything, except carrying somebody to the hospital who has been hit by an automobile. You may quibble about whether we should act now or wait until next winter, but once you analyze this problem correctly, we are 5 or 6 years late now, and it is getting later every minute. We won't know any more a few months from now, unless we have a catastrophe. I don't expect a catastrophe within the next few months. I don't see any obstacle in the way of action now that will disappear a few months from now, and this whole business of looking at a few weeks at a time, or a few months at a time, or at the little upturns and downturns, is the greatest manifestation, in my view, of the im- mature nature of our economic policy and our national purposes in times when we should be thinking over the long-range. This completes my summary answers to the policy questions that the chairman has raised. I would appreciate a little chance to docu- ment this with some of my pictures, which I think I can do rather quickly now that I have laid the contours of the argument before you. Chairman PATMAN. You may go ahead and present the charts that you have. I suggest that you confine it to probably 10 or 15 minutes if you can. PAGENO="0268" 258 POLICIES FOR FULL EMPLOYMENT Mr. KEYSERLING. Yes, I certainly believe that we can, because the questions will come later. I think I can do it very quickly. My first chart simply shows the long-term record from 1953 through 1962 esti- mated, the recurrent series of booms, recessions, and upturns. The first sector shows the record by years. The second sector of the chart shows the short-term record quarter by quarter, 1961 and 1962, showing a high rate of upturn during the first three quarters of 1961, and the progressive deterioration since. The third sector of the chart measures this on an annual basis from first quarter 1961, to first quarter, 1962, and so forth, and finally from fourth quarter 1961 to fourth quarter 1962, estimated. In other words, we are experiencing a progressive shrinking in the rate of the upturn, more ominously than during previous upturns since World War II. Senator BUSH. What are those figures in the bottom chart? Mr. KEYSERLING. The figures on the bottom sector of the chart are yearly rates of change from first quarter 1961 to first quarter 1962, actual. Senator BUSH. In gross national product? Mr. KEYSERLING. In gross national product; second quarter 1961 to second quarter 1962, actual, third quarter 1961 to third quarter 1962 estimated, and fourth quarter 1961 to the fourth quarter 1962 esti- mated. My second chart shows the three types of unemployment. The bot- tom part of each bar shows full-time unemployment. The middle part shows the full-time equivalent of part-time unemployment. The top part factors in what I call the concealed unemployment resulting from the phenomenally low growth of the labor force in recent years. In other words, people aren't looking for jobs because the jobs are not there, and I was very interested that Senator Douglas stressed this in his recent article. The top sector of this chart shows the rising level of true unem- ployment. The second sector shows this unemployment as a percent- age of the civilian labor force. Just by glancing at the chart, you can see how much more massive the bars are in the later years than in the earlier years. In first half 1962, which is a stagnation period, and not a recession period, the true level of unemployment was almost 9 per- cent of the civilian labor force, compared with only 5 percent in 1953, although you had a recession occurring in the middle of 1953, and this shows the prolonged and pronounced upward trend. My third chart shows the high volume of idle plant and machines. The lower half of the chart shows that, in first quarter 1962, which are the latest figures I have, 18 percent of steel capacity was idle, and about 17 percent of manufacturing capacity was idle. The top part of the chart shows, as of the end of 1961, the tremendously high vol- ume of idle capacity in a wide range of major industries. Senator BUSH. Where do you get those figures? Mr. KEYSERLING. The sources are cited below, McGraw-Hill, and Steel Institute. All the sources are at the bottom of the charts. Chairman PATMAN. Without objection the charts will be put in the record. PAGENO="0269" POLICIES FOR FULL EMPLOYMENT 259 RECESSIONS, BOOMS, STAGNATIONS, I953.~!62: RATES OF CHANGE IN G.N.P In 961 Dollars 67% 2.7% ~1U1 2.7% 2nd Qtr l960-t~J. `2 ~ 2.1% 1.9% l.8~/ 1st Qtr 1961 ~iII 953 54 957 58 * ~~Annual~ate)~I1 1953-62 954-55 955-56 1956-57 ~ 1958-59 959-60 1960-61 1961-62 (ANNUAL (EST.) AVERAGE) -1.6 I. -2.0% -2.7% (Seasonally Adjusted Annual Rates) 2.8% - 1st QIR 962- 2nd QTR 1962 (Seasonally Adjusted Annual Rates- 12 Month Trends) 7.8% let QTR 1961- 2nd QIR 1961- 3rd QTR 1961- 4th QTR 1961- 1st QTR 1962 2nd QTR 1962 3rd QTR 1962 (ESt) 4th QIR 1962 (ESI) PAGENO="0270" 260 POLICIES FOR FULL EMPLOYMENT CHRONIC RISE OF UNEMPLOYMENT, 1953.1962 ~JRUE~LEVEL~OE, UNEMpLOYMENT~ JJ The man-year figure for first half 1962 is one half the figures shawn for the half year. Aboat 27 mullen man-years of unemployment (true level) would have been cansistenf with maximum emptayment. V Estimated as the difference between the officially reported civilian labor force and its likely size snder conditions of maximum employment. .~/ In deriving these percentages the civilian labor force Is estimated as the officially reported cieitian labor force plus concealed unemployment. PAGENO="0271" 261 POLICIES FOR FULL EMPLOYMENT THE HIGH VOLUME OF IDLE PLANT AND MACHINES - 1954 1962 IRON and STEEL ELECTRICAL AUTOS, TRUCKS MACHINERY and PARTS NONELECTRICAL MACHINERY 2~ OTHER TRANSPORTATION CHEMICALS EQUIPMENT ~ L PAPER and PULP l0~iE ~i ~i 1954-1961 DEC. Annual Average 1961 RUBBER 15% ~. ~ 954-1961 DEC. Annual Average 1961 STONE,CLAYandGLASS 29% 20% ~tñE~ 1954-1961 DEC. Annual Average 1961 PETROLEUM REFIN1NG 1954-1961 DEC. Annual Average 1961 FOOD and BEVERAGES TEXTILES : -~-i- 1954-1961 DEC. AnnuclAverage 1961 E~1Tk --~- MANUFACTURING CAPACITY-1' Source of Basic Dato:-1'McGraw Hill Annual Surveys;~1Est. based on Am. Iron and Steel Inst. data. PAGENO="0272" 262 POLICIES FOR FULL EMPLOYMENT CHRONIC RISE OF OUR UNUSED PRODUCTIVE POWERS (G.N.P.), 1953 1962 ~N~NUAL1FICIENc1ES.~ In Billions of 1961 Dollars Total Doficiency, 1953-Mid /962. 423 81//ion Dollars1' ii The deficiency for first half 1962 is one half the figures shown for the half year. .?i Based upon sufficient annual rate of growth In G.N.P. to provide full use of growth in labor force, plant and productivity under conditions of maximum employment, and production. PAGENO="0273" POLICIES FOR FULL EMPLOYMENT 263 Mr. KEYSERLING. My chart five, taking into account unused plant and unused manpower, estimates the size of the deficits in total na- tional production. The chart shows a deficit, as I have said, of about $73 billion, annual rate, by the second quarter of 1962, coming to almost 12 percent of maximum production capacity. These are really underestimates, because I have no way of estimating the underutiliza- tion of manpower in the plants when they are running at 50 or 60 percent of capacity. I have no way of estimating the accelerated technology and pro- ductivity which would result from full use, so these are very conserv- ative estimates. Now I come to an analysis of the basic reasons for the trouble, and this gets very closely into the matter of tax policy. My view is that the deficiencies in total national production have occurred mostly because of deficient pivate consumer demand. The three parts of the economy which make up total national production are consumer de- mand, public outlays, and investment. Taking consumer outlays first, my fifth chart shows in the bar on the far left in the job sector, the needed rate of growth in consumer outlays, and in the following bars the actual rate which, as you see, has been very much lower. In the bottom sector, I attempt to show the portion of the total deficiency in national production which is made up of the deficiency in consumer outlays. For example, in the'~ second quarter of 1962, the deficiency of about $73 billion in total national production includes a deficiency of about $56 billion in con- sumer outlays. If necessary, I will develop these figures more on questioning. Moving over to my sixth chart, some people think that consumers aren't spending because they don't want to. Indeed, the rate of sav- ing is too high. But nonetheless, the basic reason is income deficiency. The top sector of this chart compares the actual levels of consumer spending and income. The bottom sector makes an estimate that, for the 9½ year period as a whole, the deficiency of over $250 billion in consumer outlays correlated roughly with the deficiency of about $337 billion in consumer incomes before taxes, allowing for taxes and allowing for savings. My seventh chart shows that there has also been some deficiency in public outlays, mostly at the Federal level. The top sector of the chart shows the declining size of the Federal budget, relative to the size of the national economy. The second sector of the chart shows in uniform dollars the declining level of per capita outlays. The first is a measure of the economic problem. The second is a measure of the national need. Coming to my eighth chart, the Federal budget reflects national economic deficiencies, and I brought this out earlier in my testimony. The top sector of the chart shows the annual deficiencies in national production over the years. The middle sector of the chart shows the actual condition of the Federal budget, and, `as you see, it was generally in surplus very early in the period and generally in deficit later in the period. The third sector of the chart compares the size of the deficits in national production with the condition of the Federal budget, and shows obviously that as the national production deficit has increased, the Federal budgetary deficits have become larger. 87869-62----18 PAGENO="0274" DEFICIENT RATE OF GROWTH IN PRIVATE CONSUMER SPENDING, 1953-MID'62 Rates of Change in 1961 Dollars Needed Rate of Growth ~ Actual Rate of Growth 5.7% 5.1% 3.4% 3.4% 3 2~/ ii i 110.91 hill 1953-Mid 1962 (95354 (95455 (955-56 (95657 (957-58 )958~59 (95960 960-6) 4th.Qtr.61- Ist.Qtr62- Annual Avenage lst.Qtr62 2ndQtr.'62 (Seasonally Adjusted Annual Rates) THE PRIVATE CONSUMPTION DEFICITS DOMINATE THE DEFICITS IN THE TOTAL ECONOMY Billions of 1961 Dollars 264 POLICIES FOR FULL EMPLOYMENT Ist.Qtr.62 2nd.Qtr.'62 (Seasonally Adjusted Annual Rates) Deflclency in Pr)vate~~~ _.Consumsr Expenditures~L~.- ~ ~ / Deticlency In Grass * Va 70.4 Detlclency In Total 72.9 51500) Production Stagnation Periods 1953-Mid'62 Annual Avencge (956 (958 (959 (960 1961 Year Stagnation / Reces~on 6L4 Rec:ssion- us . Year RecessIon- Boom Year PAGENO="0275" POLICIES FOR FULL EMPLOYMENT 265 LOW GROWTH IN PRIVATE CONSUMPTION REFLECTS LOW GROWTH IN INCOMES Rotes of Change in 1961 Dollars ~ Total Private Consumer Spending ~ Total Personal Income After Taxes 5~7% 4.8% 4.1% Ii~IhiihII_ 1953-Mid 1962 1958- (959 1959- 1960 1960- 96) 4th. Qtr. 1961- 1sf. Qfr. (962- Annual Average st. Qtr. 1962 2nd DIr. 962 (Seasonally Adjusted Annual Rates) THE PRIVATE CONSUMPTION DEFICIENCY OF $254 BILLION, 1953-MID 1962, REFLECTED A $337 BILLION INCOME DEFICIENCY Billions of 1961 Dollars Deficiency in Deficiency in Deficiencies in Short Fall in Deficiency in Private Consumption + Consumer Saeings Consumer Income + lanes Paid by = Consumer Income After loses Consumers Before Tases PAGENO="0276" 266 POLICIES FOR FULL EMPLOYMENT The last period is 1958-mid-1962, with an annual average deficit of $64.5 billion in national production, and an annual average deficit of $4.3 billion in the Federal budget, both cash and conventional. My ninth chart illustrates what I said earlier in my testimony. The first sector of the chart is the actual Federal budget over the years, showing the predominance of the deficits. In the second sector of the chart, to show that my notion is not taken out of thin air, I have plotted the level of Federal expenditures appearing in my model maximum prosperity budget, somewhat higher each year than the actual, because I think they were too low. Then I have calculated carefully what actually existing tax rates would have yielded at max- imum production and it shows, of course, a surplus during most of the period, with a deficit in 1953-54, due mostly to the high level of expenditures during the Korean war. Now, coming over to my 10th chart, this brings me to the matter of private investment. This has a great deal to do with tax policy. I am for private investment. I am for private profit. I wish they were higher. They would be higher if our economy were performing better, and I have no objections to tax reductions for private investors and for corporations when there is room for them. I do object to throwing billions of dollars out of the window for this purpose, when our narrow margin of capacity for tax reductions could be used to much better purposes and when we are wedded for one reason or another to trying to keep the budget somewhere near balanced. In my 10th chart, I show in the top sector that, during the 91/2-year period as a whole, there was a deficit in gross private investment and there was a deficit in plant and equipment investment. In fact, the deficit averaged $10.3 billion a year in the case of gross private in- vestment and about $7 billion a year in the case of plant and equipment investment. But how did this occur? It did not occur in anything like a straight line. It occurred in a succession of very rapid upturns when private investment far outran ultimate demand and led to large unused plant capacity, and then, because of the large unused plant capacity, the investment was cut way back so there was a low average for the period as a whole. But if one who wants to understand the equilibrium problem, to understand how this happens, one must look at these separate periods. From the first three quarters of 1955 to the first three quarters of 1957, before the 1957-58 recession, investment in plant and equipment went up 9 percent and ultimate demand, in the form of both private consumption and Government outlays, went up less than 3 percent. Then there was a very sharp investment cutback in the recessionary period. Naturally, being more volatile, investment went way down. Then, from the first half of 1959 to the first half of 1960, before the 1960 downturn, investment went up 11.6 percent and ultimate demand only 2.6 percent. Then there was another recession and another big cutback. I haven't chosen these periods arbitrarily. I have chosen these periods carefully on the basis of when the changes in the trends actually started to occur. From the first quarter 1961 to the first quarter 1962, there was a slowdown in the rate of investment increase during the upturn period, due to the cumulative effects of all the un- used plant capacity. This means that, most recently, we have been PAGENO="0277" POLICIES FOR FULL EMPLOYMENT 267 FEDERAL BUDGET HAS SHRUNK RELATIVE TO TOTAL OUTPUT AND NEEDS5 I954~I962 Fiscal Years BUDGET OUTLAYS AS PERCENT OF TOTAL NATIONAL PRODUCTION Percent BUDGET OUTLAYS PER CAPITA In 1961 Dollars $371.59 $142.65 In NatI Security All Domestic and InternotI Programs 1954 1962 PAGENO="0278" 268 POLICIES FOR FULL EMPLOYMENT THE FEDERAL BUDGET REFLECTS NATIONAL ECONOMIC DEFICIENCIES BillIons of 1961 Dollars (Annual Averages, Calendar Yearsl NATIONAL PRODUCTION CONVENTIONAL BUDGET DEFICIENCY (Billions of Current Dollars) (Billions ot 1961 Dollars) 1958- (958- 1947-50 (954-57 MID 62 +0.9 I954-~57 MID 62 (947-50 -0.5 Deficit ~ (958- aa ~±!L MID 62 (947-50 (954-57 Billions of 1961 Dollars ANNUAL~CONJThN~OFTFIE.FEDE*RALBDGET .~FEbERAL DEFCITS~ GROW. WI ftt~ATIONALECONOMIC DEHCIENCIES CASH BUDGET (Billions of Current Dollars) PAGENO="0279" Conventional Budget, Calendar Years ~~~epts Expenditures ~Deficit 1953 1954 1955 956 1957 1958 1959 1960 ..L_.L...J_ 50 1961 l962~' POLICIES FOR FULL EMPLOYMENT 269 tillionsof Dollars A BALANCED FEDERAL BUDGET DEPENDS UPON A MAXIMUM PROSPERITY ECONOMY Budget, Calendar Years Expenditures 1~MODEL FEDERAL BUDGE COP~SIS1ENT ~ 90 100 to 0 90 7° to 60 70 Aggregate Surplus, /953-MId /962: $14.3 B/lion 60 .11 First half year 1962 shown at annual rate, seasonally adjusted. g, Expenditures ore shown as actual expenditures plus estimated deficiencies in expenditures during the period. Receipts ore estimated by applying actual tax rates to maximum prosperity levels of economic activity. PAGENO="0280" 270 POLICIES FOR FULL EMPLOYMENT getting a lower rate of investment expansion, even in the upturn period, and Dr. Heller pointed this out, because finally business says: "My goodness, how much more are we going to increase excess plant ca- pacity?" This slowdown in the rate of investment increase is very serious, and it is one of the reasons why this most recent upturn is shorter and less satisfactory than earlier ones, because due to the cumulative effect of excess plant capacity and inadequate demand there is less propulsion in the investment upturn. But to deduce from this that the factor militating against investment is the tax policy or the profit rate doesn't comport with analysis of actual developments. My 11th chart shows these actual developments. It shows the trends before the 1957-58 recession, as to prices, profit, and investment. We see prices rising, profit rising substantially, and investment in plant and equipment rising enormously more in various key industries. Coming to my chart 12, before the 1960-61 recession, although prices were generally down slightly and although profits were gen- erally down, nonetheless there was a tremendous investment splurge because of the appraisal of business that the potential markets were there to justify this level of investment. This indicates that the down- turn in prices, the downturn in profits, was on the basis of a more than adequate profit margin to stimulate investment when the other en- vironing conditions were there, and probably indicated that the prices and the profits had been much too high in the previous period. But be that as it may, the investment boom again occurred, and, as I showed on my 10th chart, it very far outran ultimate demand. Coming to my 13th chart, here is the situation from first quarter 1961 to first quarter 1962. Here you have a somewhat downward trend in prices generally. In the case of the iron and steel industry you also had a downward trend in investment, because of the enormous unused capacity. Generally speaking, though, and in steel also, there was a rather pronounced upturn in profits. And generally, there were upturns in investment, though not as large as in the previous upturn periods for the reasons I have given. This leads me to the conclusion that the conditioning factor, with respect to investment, is neither the tax structure nor the profit posi- tion, but rather the condition of ultimate demand and the amount of unused plant capacity. Let me say, Chairman Heller in his testimony yesterday supported this absolutely and completely. He talked about the fact that profits in the first quarter of 1962 were higher than in the first quarter 1961. He talked about the effect of cash flow. He said the only thing that they need in order to have a still more re- warding level of profits, is more markets, and until they get that they are not going to invest sufficiently. In fact, he said they are overcashed and undermarketed. That is a paraphrase of exactly what he said. Of course, I don't understand why, after saying this, he shifts over to the proposition that, having given one and a half billion dollars in the form of tax credits through Treasury regulations, and moving toward giving another billion in the form of the /7 percent credit, there is need to move on to give another large portion of any future tax reduction to the same investors. I don't und~r~tand the apparent PAGENO="0281" POLICIES FOR FULL EMPLOYMENT 271 dichotomy between the analysis of the facts and the policy con- clusions. Representative REuss. Before you leave this chart, I thought I heard you say in this period steel profits went down. It was steel investment that went down, not profits, was it not? Mr. KEYSERLING. Yes. As the chart shows, steel investment went down. Representative REuSS. Profits went up. Mr. KEYSERLING. Yes. In the first quarter of 1962 they went up. Representative REuss. I thought I heard you say they went down. Mr. KEYSERLING. I may have misspoken. The next series of charts relate to the wage question. As wages are a basic factor in consumption, and investment is a basic factor in enlarging our productive capacities, I want to show for these periods the relative trends of wages and investment. As you will see on my chart, before the 1957-58 recession, wage rate changes lagged generally far behind profits and phenomenally behind investment. What this means very simply is that, as cor- roboration of my earlier charts, the power to consume was not in- creasing anything like as fast as the power to produce, and I think that this is very important to stress, because of the widespread mis- impressions about wage trends in recent years. My 15th chart shows how the rate of increase in plant and equip- ment outran the rate of increase in wage rates during the period from the first half of 1959 to the first half of 1960, before the 1960-61 recession. And my 16th chart shows how again, from the first quar- ter of 1961 to the first quarter of 1962, the rate of increases in profits and in investment in plant and equipment generally outran the rate of increases in wage rates. I also have another few charts, which analyze wage trends in the perspective of the whole economy. My 17th chart shows in the top sector the deficient rate of growth in wages and salaries for the 9'/2-year period as a whole. The lower sector of this chart shows that the deficiencies in wages and salaries have constituted the dominant portion of the deficiencies in total consumer income before taxes. My 18th and 19th charts show that, for the period 1947 to mid-1962 as a whole, with respect both to the entire nonfarm economy and manufacturing, wage rate increases and productivity increases were about in balance, and that during the most recent 5 years, wage rate increases in both cases have lagged very seriously behind produc- tivity increases. These data lend no support to the popular impres- sion, and the impression of many economists, that wage rate increases have outrun productivity increases and therefore forced up prices. The truth of the matter is that profit margins per unit have been too high, after allowing for all business costs including wage costs, which means that prices have been too high. The inadequacy of profits at times, as I have already demonstrated, relates entirely to the low level of operations and the high amount of unused plant capacities, which in turn are attributable to the deficiency in ultimate demand caused in large measure by the deficiencies in total wages and even in wage rate increases. PAGENO="0282" 272 POLICIES FOR FULL EMPLOYMENT GROSS PRIVATE DOMESTIC INVESTMENT WAS DEFICIENT DURING 1953 `-MID 1962 AS A WHOLE ~ Gross Private Domestic Investment ~ Investment in Plant and Equipment AVERAGE ANNUAL GROWTH RATE 1953-Mid 1962 In 1961 Dollars 4.4% 2.6% ~ 0.3% NEEDED ACTUAL BUT INVESTMENT IN MEANS OF PRODUCTION AT TIMES OUTRAN ULTIMATE DEMAND; HENCE INVESTMENT CUTS AND RECESSIONS ~ Gross Private Domestic Investment ~ Investment in Plant and Equipment ~ Ultimate Demand: Total Private Consumption Expenditures Plus Total Public Outlays (Federal,State and Local) for Goods and Services AVERAGE ANNUAL DEFICIENCY 1953-Mid 1962 In 1961 Dollars 10.3% Average Annual Rates of Change, 1961 Dollars PAGENO="0283" RISING PRICES, PROFITS, AND INVESTMENT BEFORE THE I957~- 1958 RECESSION The Investment Boom Before the 1957- 958 Recession First Three Quarters 1955 - First Three Quarters (957 ~ Prices;i' ~ Profits after Taxes; 2_~ ~ Investment in Plant and Equipment ~-` UP (8.2% U~I Processed Foods and Kindred Products UP 41.5% UP 31.1% ~T- .1L1IL~t Elocirical Machinery POLICIES FOR PULL EMPLOYMENT 273 Iron and Steel UP UP 28.2% I~jlt~- Petroleum and Coal Products UP Allied and Products Bureau of Labor Statistics, (U.S. Dept. of Labor), Commodity Wholesale Price )ndeses. Securities and Eochongo Commiotion, Profit Estimates. Securities and Exchange Commission estimates of eopenditures for plant and equipmott. Machinery PAGENO="0284" 274 POLICIES FOR FULL EMPLOYMENT INVESTMENT BOOM OCCURRED AGAIN BEFORE THE I96O~I96I RECESSION DESPITE REDUCED PRICES AND PROFITS First Half 959-First Half 1960 ~ Prices? ~ Profits after Taxes~' ~ Investment in Plant and Equipment~' UP 563% PROCESSED FOODS AND KINDRED PRODUCTS .!J U.S. Dept. of Labor, Bureau of Labor Statistics, coromodity ohatesate price Itdexes. Oi Securities atd Eacharge Cammissloc, profit estirrotes. ~/ Securities ard Eachatge ~orrrrdeslon, esticrates of eaperditures for plart ard equlpmett. PAGENO="0285" POLICIES FOR FULL EMPLOYMENT 275 PRICEa PROFIT AND INVESTMENT TRENDS DURING CURRENT ECONOMIC UPTURN st Quarter 1961-1st Quarter t962 Prices ~` ~ Profitscf ~ Investmentk PETROLEUM and COAL PRODUCTS Data: U.S. Dept. of Labor, wholesale commodity price indexes. ~` Data: Securities and Exchange Commission. ~` Data: U.S. Dept. of Commerce and Securities and Exchange Commission. DOWN 0.2% UP UP 10.7% 3.5% UP 20.4% UP ~ 12.1% DOWN 5.0% DOWN 21.4% 1RON and STEEL DOWN .7% CHEMICALS and ALLIED PRODUCTS UP 35.5% UP 23.7% -I DOWN 2.2% UP 0.9% UP 8.0% DOWN 6.7% ELECTRICAL MACHINERY NON-ELECTRICAL MACHINERY ~MOTOR VEHICLES and EQUIPMENT PAGENO="0286" 276 POLICIES FOR FULL EMPLOYMENT On top of all this, the material which I have thus far presented measures actual wage rate increases against actual increases in pro- ductivity. But the actual increases in productivity have been repressed by the large economic slack and consequent inefficient use of plant and manpower. Wage rate increases, to fulfill their proper consumption function, should be related to the technological changes in produc- tivity, which means the changes in productivity which would occur under conditions of reasonably full utilization. My chart 20 demon- strates this proposition by comparing rates of actual productivity growth under varying degrees of economic utilization, and therefore substantiates my conclusion that the lag of wage rate increases behind technological change has been severe indeed, and thus has been one of the main factors in the poor character of our overall economic performance. Chairman PATMAN. They will all be in the record. Mr. KEYSERLING. The main point is that there is nothing wrong with our productivity, whenever there is adequate ultimate demand. One day we hear that our productivity is increasing so fast that we are never going to be able to expand ultimate demand enough to use all the labor force because technology and automation are advancing so fast. The next day we hear from the same people that productivity and technology are increasing so slowly that we are at a competitive disadvantage all around the world. Both statements can't be gen- erally true. The fact of the matter is that productivity and technology are in- creasing faster than we dare to realize, both in the factory and on the farm, and the great problem is to expand distribution apace. There is nothing wrong with American productivity, or American in- ventiveness, or American managerial skills. This is an economic prob- lem and not a technological problem. This brings me back to the question about profits that Congressman Reuss asked. My 21st chart shows profits in some key industries, showing in the final bar of each box the first quarter of 1962. This does show iron and steel profits, up again in the first quarter of 1962, although not above the ailtirne peaks of some of the earlier years. In the case of motor vehicles, as we have all read in the papers re- cently, the profits are enormously above any previous time, and in the case of other key industries they are either at or above or very near alltime peaks. Let us remember that there is at the same time a very low utiliza- tion of capacity, as I showed. My 22d chart bears upon this. When you look at profit sales ra- tios, you see that they have held up very well, and that most of them have increased, which simply means that, if there were a higher level of operations, if there were a higher level of ultimate demand, profits would soar, and quite properly would soar, far above their recent levels, which in themselves have been very rewarding and quite high. PAGENO="0287" POLICIES FOR FULL EMPLOYMENT 277 BEFORE THE I957~I958 RECESSION, PROFITS AND ~NVESTMENT OUTRAN WAGES~BASIC TO CONSUMPTION First Three Quarters 1955-First Three Quarters 1957 ~ Profits-1' ~ Investment-°' L] Wage ~ ILO% PROCESSED FOODS and KINDRED PRODUCTS .1' Data: Securities and Exchange Commission. &i Inxestment in plant and equipment. Data: U.S. Dept. of Commerce and Sxcurities and Exchange Commission. ~1 Average hourly earnings of production workers. Data: U.S. Dept. of Labor. PAGENO="0288" 278 POLICIES FOR FULL EMPLOYMENT BEFORE THE I96O~196I RECESSION INVESTMENT AGAIN OUTRUN WAGES-BASIC TO CONSUMPTION First Half 959-First Half 1960 ~ Wage Rates ~" Investment ~ CHEF~ICALS and ALLIED PRODUCTS i' lnvesfment in plant and equipment. Data: U.S. Dept. of Commerce and Securities and Exchange Commission. L Average hourly earnings of production workers. Data: U. S. Dept of Labor. PAGENO="0289" POLICIES FOR FULL EMPLOYMENT 279 PETROLEUM and COAL PRODUCTS NON-ELECTRICAL MACHINERY Up 20.4% II CHEMICALS and ALLIED PRODUCTS Up 136.8% ~UP `3.3% MOTOR VEHICLES and EQUIPMENT ..ii Data: Securities and Exchange Commission. 2/ Investment in plant and equipment. Data: U.S. Dept. of Commerce and Securities and Exchange Commission. ~ Average hourly earnings of production workers. Data: U.S. Dept. of Labor. PROFITS AND INVESTMENT DURING CURRENT ECONOMIC UPTURN OUTRUN WAGES-BASIC TO CONSUMPTION 1st Quarter 1961-1st Quarter 1962 ~ Profits~L' ~ Investment~~ ~ Wage Rates~' UP 0.7% UP UP 3.5% * IRON and STEEL UP 35.5% ~`ii DOWN 6.7% ELECTRICAL MACHINERY 87860-62---19 PAGENO="0290" 280 POLICIES FOR FULL EMPLOYMENT DEFICIENT RATE OF GROWTH IN WAGES AND SALARIES, 1953-MID 1962 DEFICIENCIES IN WAGES AND SALARIES ARE LARGE SHARE OF DEFICIENCIES IN TOTAL CONSUMER INCOMES BEFORE TAXES Billions of 1961 Dollars 1959 Deficiency in ---Wages and Salaries. Deficiency in Other Consumer Incomes. I ----Deficiency in Total Consumer Incomes Before Taxes. L.~ Needed rate of growth 6.6% Rates of Change in 1961 Dollars Actual rate of growth 6.5% 63% 5.3% 3.8% Down .8% Down 1.6% ISeassnally Adiusled Annual Roles) PAGENO="0291" POLICIES FOR FULL EMPLOYMENT 281 RATES OF CHANGE IN NONFARM OUTPUT, AND IN NONFARM WAGES AND SALARIES, PER EMPLOYEE-HOUR, 1947-1962 -~ Annual Average Rates of Change, Measured in Uniform Dollars 1947-1962 1947-1950 )Pre-Korean War) 1950-1953 (Korean War) 1953-1962 (Post-Korean War) 1.7 % ~ 2.9% Output Wages g. Salaries Per Employee-hour Output Wages & Salaries Per Employee-hoer 1947- 1962 lEnd Korean War Years 1950-19531 1957-1962 (Mast Recent 5 Year Period) L ~u Output Wages & Salaries Output Wages & Salaries Per En~doyee-hoor Per Employee-hoer 1' 1962 estimated Output Wages & Salaries Per Employee-hour Output Wages C. Salaries Per Employee-hour PAGENO="0292" 282 POLICIES ~FOR FULL EMPLOYMENT RATES OF CHANGE IN MANUFACTURING OUTPUT, AND IN WAGES AND SALARIES, PER MAN-HOUR, 1947-1962 -~` Average Annual Rates of Change, Measured in Uniform Dollars 1947-1950 (Pre-Korean War) 1947-1962 3-9% 2.9% 2.9% Output Wages & Salaries Per Man-hour 1950-1953 (Korean War) 1953-1962 (Post-Korean War) Output V ~ Per Man-hour Output YL~,.. ~JS Per Man-hour 1947-1962 : (Exci Korean War Years 1950-1953) 1957-1962 (Most Recent 5 Year Period) Output Wages & Sakiries Output Wages & Salaries Per Man-hour Per Man-hoer -~` 1962 estimated PAGENO="0293" POLICIES FOR FULL EMPLOYMENT 283 TRENDS IN OUTPUT PER MAN-HOUR j-OR PRODUCTIVITY -1910-1962 Average Annual Rate of Productivity Growth for the Entire Private Economy ~Tf/E' ~ INDICATING AN ACCEL ERA PING PRODUCTIVITY GROWTH RATE UNTIL 1955-1961 :THE~RECORD $/NCE LARANO RECONVERSION;, INDICATING A STILL HIGHER PRODUCTIWTY GROWTH RATE UNTIL iT WAS ADVERSELY AFFECTED BY RISING ECONOMIC SLACK 4.1% 1947-1953 Period of Reasonably Full Employment 1950-1955 Period of Moderate Economic Slack 1953-1960 l~' 5-1961 Period of Period of Relatively Large Still Larger Economic Economic Slack Slack 1961-1962 (est.) Period Affected By Economic Upturn Note: Based on U.S. Department of Labor estimates, relating to man~hours worked. PAGENO="0294" 284 POLICIES FOR FULL EMPLOYMENT Let's now look at my 23d chart. This shows that, in addition to the profit factor, there is the cash flow factor. In other words, even the high profit figures under conditions of low capacity utilization do not represent the real availability of funds for corporations. Here I an- alyze the organization of financing from internal sources, which is done through various types of internal sources, including depreciation, amortization, retained profits, and depletion allowances, so that what is actually happening is that even in some of the cases where there seems to be a profit squeeze, the Federal tax policy has been so liberal that really, for all practical purposes, there have been more invest- ment funds available than at some earlier times when the figures were showing a better profit picture. I have had an opportunity to analyze this difficulty for the railroad industry, and the difference between the figures when you just look at the profit trends for the railroads and the figures when you look at their true financial position, is fantastic in the case of some of these very large rail companies which are seeking merger on the ground that they are on the way to bankruptcy. My final series of charts indicate the magnitude of the economic task confronting us. My 24th chart shows the needed increases in total national production, in various components of national produc- tion and income, and in employment. The goals for 1964 bring home how far current programs, and programs under active discussion, are short of the minimum requirements for restoring maximum employ- ment and production even by 1964. My 25th chart shows the differ- ence, 1953-56, between the high and the low growth rates. My 26th and 27th charts portray the nature of a Federal budget which would exert its appropriate role in an effective nationwide effort to restore and maintain maximum employment and production, and in helping to meet the great priorities of our public needs. Now, what do all these charts show in substance, as I see them, as they bear upon fiscal policy? As they bear upon fiscal policy, they show first, that the problem in the American economy since 1953 has been the age-old problem of not being able to distribute what we can produce. It is an anomally that almost everybody agreed to this a few years ago, and almost everybody has forgotten it now. Businessmen, conservatives, liberals, economists, were all saying the American economy has a genius for production, but doesn't know how to distribute what it could produce. Ultimately and basically, this is what unused plant and manpower mean, that we don't distribute what we can produce, and it certainly isn't because we are an affluent society. It certainly isn't because we don't have poverty in our midst. Even since the great depression, we haven't learned to distribute what we currently can produce, and yet our economic policies during the last 9½ years, if I may say so, under Bepublican and Democratic administrations almost alike, have been wedded to a monetary policy, a tax policy, an interest-rate policy, and other policies which have aggravated rather than remedied these basic imbalances in our economy. PAGENO="0295" POLICIES FOR FULL EMPLOYMENT 285 KEY PROFITS AFTER TAXES ARE HIGH DESPITE LARGE UNUSED CAPACITIES 1953' 100 200 50 00 50 :.JRoN~AND'sTEELI~ PETRoLEUMr.RE~'lNIN6~ ~LECTRiCAL MACHINERY 250 ~OTAL~ MANUfACTURIN~3 ) `61 QI `62 P250 200 Note: First quarter 1962 figures shown at annual rate, not seasonally adjusted. Data: Federal Trade Commission-Securities and Eochange Commission. PAGENO="0296" 286 POLICIES FOR FULL EMPLOYMENT PROFITS-SALES RATIOS INDICATE STILL HIGHER PROFITS WILL RESULT WHEN CAPACITIES ARE MORE FULLY USED Manufacturing Corporations' Profits after Taxes, as Percent of Net Sales 7.1% 5.5% ~ uu 1::;: 953 96$ a' 953 1961 lstQtr $962 IRON ~AND STEEL' ~MOTO~:VEHJCLES~A'ND EQUIPMENT. PETROLEUM REFINING 0.3% `ELECTRICAL. MACHINERY 96$ CFIEMICALS AND ALLIED PRODUCTS ~TOTALMANUFACTURING~ N 73% 7.2% 6.1% Ip.. II $953 1961 Data: Federal Trade Commission, Securities and Exchange Commission. PAGENO="0297" POLICIES FOR FULL EMPLOYMENT 287 TOTAL FUNDS USED BY CORPORATIONS HAVE INCREASED Billions of Currenf Dollars Annual Average 36.9 PORTION OF THESE FUNDS USED FOR PLANT AND EQUIPMENT HAS GROWN 76.7% PORTION OF CORPORATE FUNDS DRAWN FROM INTERNAL SOURCES HAS RISEN Depreciafion and Amortization ~ Retained Profits and Depletion Allowances Annual Average Datai Department of Commerce. 1947-1953 1953-1961 Annual Average 1947-1953 1953-1961 Annual Average Annual Average -1961 Annual Average PAGENO="0298" 288 POLICIES FOR FULL EMPLOYMENT GOALS FOR 1963 AND 1964, CONSISTENT WITH LONG-RANGE GOALS THROUGH 1966 1963 and 1964 Goals Compared with Estimated 962 Dollar Figurea in 1961 Dollars EMPLOYMENT (In millions of mon-years) UP 5.7 UNEMPLOYMENT (in millions of man-years) 963 1964 TOTAL PRODUCTION UP CONSUMER SPENDING DOWN 7 UP $50 BIllIon 1963 1964 FAMILY INCOME (Ave roOd WAGES and SALARIES NET FARM INCOME UP $26 Billion UP $44 Billion I TRANSFER PAYMENTS UP UP $lOBillion $SBllllon 1963 1964 UP $5Bltlion $8BIllion 1963 1964 BUSINESS ahd PROFESSIONAL INCOME * UP UP $3BIlllón $SBllleon 1963 1964 GROSS PRIVATE DOMESTIC INVESTMENT UP $20 BIllIon jij~ 1963 1964 RESIDENTIAL NON FARM CONSTRUCTION 4BUlion 1963 964 PUBLIC OUTLAYS FOR GOODS and SERVICES ICalendar Years) FEDERAL UP UP $9 BillIon $5BllIIon 1963 1964 STATE and LOCAL UP UP PAGENO="0299" DIFFERENCES IN RESULTS OF HIGH AND LOW ECONOMIC GROWTH RATES, I963~1966 Bold face - Difference in 966; Italics -Difference for four year period as a whole Dollar figures in 1961 dollars POLICIES FOR FULL EMPLOYMENT 289 EMPLOYMENT (In millions of mon-years) TOTAL PRODUCTION $2? Billion $76 B/Il/on PAGENO="0300" 290 POLICIES FOR FULL EMPLOYMENT TOWARD A FEDERAL BUDGET CONSISTENT WITH MAXIMUM EMPLOYMENT AND THE PRIORITIES OF NATIONAL PUBLIC NEEDS i/Based upon Budget estiinotes as of July 20, 962. ~/l~cluding education and public health. 114.0 ,..lnterest ~ General Government Commerce 1111111111 `.~`Natural Resources "Agriculture .~"Labor and Welfare~' F"."Veterans \ `International Affairs and Finance `Housing $1' Billions of Dollars l~3 Estimafedil Proposed.!' Goal Major National Security ________ _-) Fiscal Years (Current Dollars) l~~6 Goal Calendar Year (1961 Dollars) BURDEN OF FEDERAL OUTLAYS IN A FULLY GROWING ECONOMY WOULD BE LOWER THAN IN RECENT YEARS TOTAL FEDERAL OUTLAYS AS PERCENT OF TOTAL NATIONAL PRODUCT/ON IGNP) NATIONAL DERTAS PERCENT OF TOTAL NATIONAL PRODUCTION (ONPI (1963, Fiscal; All Other Years, Calendar Years) 56.3% (1963, Fiscal; All Other Years, Calendar Years) (CONVENTIONAL BUDGET) l6.3% I6.4% 159% i!~UU~ 1961 1963 1966 Actual Goal Goal Actual PAGENO="0301" POLICIES FOR FULL EMPLOYMENT 291 A FEDERAL BUDGET GEARED TO JOBS FOR ALL AND ADEQUATE PUBLIC SERVICES 1962 and 963, Fiscal Years; 1966, Calendar Year Per Capita Outlay irs 1961 Dollars ALL DOMESTIC PROGRAMS AND SERVICES (Includes also Agricultsre; Natural Resources; Veterans; Csmmerce; Interest; General Government, etc.) %ofTotal Per Output Capita 6.05 175.53 6.20 189.90 6.11 217.78 TOTAL FEDERAL OUTLAYS NATIONAL OEFENSL ~f TECHNOLOGY AND ALL INTERNATIONAL %.ot Total Per Output Capita 0.20 296.14 lGoalIO2l 312.47 Goal 9.85 351.65 %oflotal Per Year Output Capita I962~' 020 5.79 1963 Goal 0.31 9.46 1966 Goal 0.67 23.97 PUBLIC ASSISTANCE %of Total Per Year Output Capita 962.11 0.21 6.00 1963 Goal 0.31 9.46 1966 Goal 0.48 16.98 LABOR AND MANPOWEñ AND OTHER WELFARE SERVICES HOUSING AND COMMUNITY DEVELOPMENT Year 1962!' 963 Goal 966 Goal % of Total Per Output Capita 0.45 13.10 0.52 15.78 0.52 18.48 % of Total Per Year Output Capita 1962-il 0.06 1.80 l963Goal 0.19 5.78 l9666oal 0.34 11.99 Year l962J' 1963 Goal 1966 Goal JJB&~dget estimate as of July 20, 1962 PAGENO="0302" 292 POLICIES FOR FULL EMPLOYMENT The reason I have analyzed so carefully-I hope carefully-this whole profit picture and investment picture during these recurrent boom periods that collapsed so quickly, is because I have been asked why they collapsed. They didn't collapse because they were not making enough profits. They did not collapse because the tax policy was too severe. They collapsed because, even with a giveaway tax policy, practically, and extremely high profits, they still won't con- tinue to go ahead when they saw more and more that they couldn't sell what they could produce, and this is true in the last year as well as in the period preceding the last recessions. The reason we are now moving into stagnation and recession again, is precisely the same reason as in these previous periods, namely, there were plenty of cash flows, plenty of profits, a very favorable tax situation, but they still would not go ahead with adequate investment, and in fact are willing to go ahead now even less than previously, be- cause now more than ever before they are confronted with unused plant capacity. Business Week, on the 28th of April-and this is my final point, Mr. Chairman-these business magazines amuse me. They have an editorial page in favor of more tax concessions for business. Then they have a fact page or an analysis page which recognizes the opposite. There was a long article, based upon the McGraw-Hill survey in Business Week, which said they had plenty of cash flow, plenty of profits; that the reason they are slowing down their investment is that the investment of tomorrow is based upon the customer of today; and if only they could get the customers, they would have the markets and would make the investments. I think this is `a guide to tax policy, I think it is a guide to monetary policy, and I think it is a guide to general economic policy. Thank you very much for your attention. Chairman PATMAN. Thank you, sir. You may keep your seat there if you desire, and we have our next witness, Mr. Saulnier. Will you come forward, please? I believe, Doctor, you have a prepared statement. You may proceed in your own way. STATEMENT OF RAYMOND I. SAULNIER, PROFESSOR OF ECONOMICS, BARNARD COLLEGE, COLUMBIA UNIVERSITY, NEW YORK CITY Mr. SAULNIER. Mr. Chairman, I have a prepared statement, copies of which I believe have been distributed to the committee. Chairman PATMAN. Yes; they have been distributed to the members. Mr. SAULNIER. This statement was prepared rather hurriedly and I have already detected some points I would like to correct. I hope you will give me an opportunity to correct them before the statement is, as I expect it will be, printed. Chairman PATMAN. You may correct them as you go along, or if you desire you can wait until you examine your transcript of testimony. Mr. SAULNIER. Thank you, Mr. Chairman. `Chairman PATMAN. You certainly will be given permission to correct it. Mr. SAULNIER. I will read the statement, if I may. PAGENO="0303" POLICIES FOR FULL EMPLOYMENT 293 I want, `first, to commend the conirnittee on its decision to hold open hearings at this time on economic policy and to thank you for inviting me to participate in them. Certainly, the hearings are timely. Although the economy is far from being in distress, things have not gone very well and certainly not as well as was expected. The 1961-62 recovery and expansion was not up to par, much less than having been an improvement over earlier recoveries. And there was those who think that after only 17 months of recovery and expansion a downturn is imminent. It also adds to the timeliness of these hearings that they come at a point when the Federal budget is being shaped up for the fiscal year 1964, and I would assume that work on the legislative program for 1963 will soon be under way in the executive branch. In short, the time couldn't be more appropriate for an open dis- cussion of economy policy. I think it would be agreed, also, that such a discussion is needed. As I understand it, you have already received testimony setting forth the salient facts on the economic situation. I will try not to duplicate any of this, but before I comment on policy matters I must give you my own conclusions regarding the present position of the economy and the near-term outlook, for these are critical to my policy recommendations. It is widely acknowledged that for some time now the indicators to which we look for clues as to the economic outlook have been far from encouraging. Warnings of a slowdown in the rate of economic advance began to be visible early this year. Month by month these warnings were confirmed; but the evidence for the month of May went beyond this and suggested a strong possibility of a downturn occurring before the end of the year. If anything, June darkened the outlook a bit. July was another matter. Not very much data are available yet, but what there is suggests that the economy steadied itself and im- proved a bit. Indeed, for a month that is often hard to interpret, I would say that the evidence of improvement in July is pretty clear. Certainly, if we look at the month's developments from the point of view of their policy implications there is no doubt but that they destroyed any case there may have been for an emergency tax cut. And perhaps I can best express my estimate of the near-term out- look by saying that I doubt that developments in the next few months will warrant emergency tax cutting. But it would be a mistake to think that the danger of a downturn has been altogether averted. I don't think one can say at this time that it has been any more than deferred. The economy has shown resistance and strength in the last few weeks but the record for the recovery as a whole obviously suggests a lack of the kind of liveliness one would like to see. The way I read the record, it is saying that there is' no need for emergency antirecessionary tax cutting, but that there is an urgent need to strengthen the underlying forces that make for growth in our economy and to remove obstacles to growth. And I would say that the record is telling us, also, that we don't have an unlimited amount of time to shape and adopt the needed measures. PAGENO="0304" 294 POLICIES FOR FULL EMPLOYMENT The performance of the economy in the last few years, and in par- ticular the disappointing record of the present recovery, provide im- portant guidance as to the kinds of measures that are needed. Four points in this record are especially noteworthy. First, it should be clear from recent experience that we can't pro- duce the economic growth we want merely by the increase in Federal spending. The fact is that in the fiscal year just completed net budget expenditures of the Federal Government rose by more than $6 billion. This followed an increase of $5 billion in the fiscal year 1961, of which nearly 80 percent was incurred in the last 6 months of that period. And I would judge that more increases are in prospect. The budget presented to the Congress in January 1962 projected a rate of expenditures for fiscal 1963 which would be about $6 billion higher than the fiscal 1962 rate. Thus, we have had a $10 billion increase in Federal expenditure rates in the last year and a half; and if things turn out as projected in January, we shall have had a $16 billion increase in 2½ years end- ing June 30, 1963. There has been a sharp increase, also, in spending by State and local governments. The economy has lagged, but no one can say it has lagged because it got no boost from Federal spending. Second, not only have we had a sharp rise in Federal spending but it has been deficit spending, which is widely regarded as being a very strong tonic for the economy. But if a deficit in the Federal budget with expenditures rising will stimulate the economy, then we should be enjoying a good deal more stimulation than we are feeling right now. There was a deficit in the conventional budget of nearly $4 billion in the fiscal year 1961, and a deficit of $6.3 billion was registered in the fiscal year just completed. And still the economy lags. There are all kinds of reasons why our country, with its heavy re- sponsibilities in the free world, should keep its financial housekeeping in strict order, but if we were to put all of these powerful arguments aside and simply look at the record as pragmatists I don't see how we can escape the conclusion that the Federal budgetary deficits just don't work the magic they are reputed to perform. Third, it is not easy, either, to see a ground for complaint that con- sumer buying power has not increased rapidly enough. Between the first quarter of 1961, which was the trough quarter of the 1960-61 recession, and the second quarter of this year, disposable personal in- come rose more than did personal consumption expenditures. Reflect- ing this fact, the annual rate of personal savings went up by about $3 billion, and the savings ratio rose from 6.7 to 7 percent. Fourth, the record shows very clearly that the one major element in our economy that has been really lagging is the volume of expendi- tures by private business concerns on plant and equipment. While other major categories of national product have been increasing very well, and some, such as governmental spending, have been rising sharply, producers' expenditures on durable goods have hardly in- creased at all. They rose in the recovery period, but not nearly enough; and, look- ing at their behavior over a longer period, they were barely larger in the second quarter of 1962 than they were in the second quarter of 1960. PAGENO="0305" POLICIES FOR FULL EMPLOYMENT 295 Furthermore, if the amounts spent were expressed in constant rather than in current prices I expect it would be found that the phys- ical amounts of goods involved was actually less in mid-1962 than it was 2 years ago. When one goes over the whole record, it is pretty clear that the lag in our economy is in private investment activity, and that our major need is to create an environment that will favor a more rapid increase in this category of expenditures. What we need is a program of ac- ~ion that will bring this about. In a moment I will outline a plan of policy which, in my judgment, would fit the present situation, but, before I do that, let me say that a plan of economic policy, like any broad strategical plan, must respect the constraints that are inherent in the situation in which it is intended to operate. There is no point in talking about what it would be help- ful to do if only the situation were not what it is. In the present case, it is futile, and, worse than that, to talk about policy without regard to the fact that we have a substantial and con- tinuing deficit in our balance of payments. When I appeared before this committee last January, I said that I thought this was our No. 1 problem. I think that is still a correct appraisal of the situation. We should shape our policy plans in the understanding that we do have a precari- ous international financial position; and, to the fullest extent possible, our plans should be designed to help improve that position. Further, it is not very helpful to talk about policy plans, fiscal or otherwise, as if there were no deficit in the Federal budget. I have heard suggestions that the Federal Government is not collecting enough money to pay its expenses, even in an advanced stage of busi- ness expansion. If the advocates of this kind of tax cutting have either overlooked the existing deficit, which hardly seems possible, or they have been persuaded that tax cuts which create deficits will give such a strong stimulus to growth that they will pay for themselves with very little delay. As I have shown, there is nothing in our recent experience to suggest that deficits, as such, will do this. In any case, the policy program I am going to propose does respect the facts of our international financial position and our Federal finances. Let me outline the major elements of a program. First, it would be helpful, if this committee, and the administration, would reaffirm the budgetary policy which has been previously stated; namely, that our object in budgetary planning is to achieve a balance over the cycle, with surpluses in periods of cyclical expansion offsetting deficits during cyclical recessions. Any doubts on this should be put torest. Second, it is essential, in my judgment, to initiate at the earliest possible opportunity a program of tax reforms designed to stimulate a higher rate of business capital expenditures. The steps recently taken by the Treasury to liberalize depreciation allowances were a good start. The investment credit would be helpful, too, though my pref- erence would be for a still more liberal depreciation allowance. Beyond these steps, we ought to get the corporate income tax rate down. The 42-percent limit proposed in the Baker-Herlong bill would 87869-62-----20 PAGENO="0306" 296 POLICIES FOR FULL EMPLOYMENT be very helpful, of course, but we might set 47 percent as an interim goal. Also, we should eliminate the near-confiscatory rates imposed on the upper brackets of individual income. Again, I would like to see these reduced over a period as contem- plated in the Baker-Herlong bill, but 50 percent would be a reasonable interim goal. Quite apart from other effects, these tax changes would be tremen- dously helpful to our 4 million small- and medium-sized business con- cerns. The task we face of providing jobs in this decade for a rapidly increasing number of young people is going especially to require a vigorous body of small- and medium-sized companies. Many will find employment in large nationwide organizations, but we should leave no stone unturned to help the small- and medium-sized companies m which large numbers of young people will find their most interesting and rewarding employment opportunities. Third, although I want to see us do every bit of constructive, growth- promoting tax reducing that we can do, I believe we should limit what we do to what can be counterbalanced, in its immediate revenue-reduc- ing effects, by expenditure reductions and possibly by some sales of Treasury-held financial assets. If rate reductions of the type I have proposed promote growth to the extent that I think they will, they will eventually pay for them- selves, but in the interim we should plan to pay for them in some quite tangible way. I suggest that we go about the task of financing constructive, growth- promoting tax cuts as follows: (1) As guidance for the fiscal 1964 budgetmaking process the Presi- dent should set a ceiling on Federal spending. This ceiling should not be higher than the projected spending level of fiscal 1963 and if possible should be lower. (2) With that ceiling as a preliminary guide, an effort should be launched at once to reduce spending on low-priority programs. The economies achieved from this budget review need not go exclusively to financing tax reductions. On the contrary, they might be divided about 50-50 between this purpose and increasing expenditures on truly high-priority programs. By high-priority programs I mean those that give clear promise of enhancing our capability for achieving a vigorous rate of economic growth. (3) Although I would depend mainly on the reduction of low- priority spending to offset the immediate revenue cost of tax reforms it should be possible to offset some part of this budgetary impact from the proceeds of the sale of portions of the huge amount of financial assets which the Federal Government has accumulated over the years under its various direct loan programs. It was estimated in the January 1962 budget message (special analysis E) that outstanding direct loans of major Federal credit pro- grams at the close of the fiscal year 1962 would come to nearly $27 billion. Obviously, one should not press a program of this kind too hard lest it raise borrowing costs in the long-term capital markets. But it should be possible to distribute significant amounts of these assets on terms that would be fully protective of the public interest and without any material effect on long-term borrowing costs. PAGENO="0307" POLICIES FOR FULL EMPLOYMENT 297 Something between $2.5 and $3 billion would be a reasonable be- ginning goal for tax reductions of the sort I have proposed; and I believe that this immediate impact on revenues could be offset by some combination of the means I have indicated. If more can be done, so much the better. It is my considered judgment that a statement to the effect that this is the direction of policy to be followed in tax and expenditure matters would have a very stimulative effect on our economy. But I would emphasize that it is very important to get the program underway soon. Accordingly, the tax aspects should be presented, in my judg- ment, in a form that will minimize the time required for consideration prior to enactment. From this point of view, the simpler the bill, the better. (4) This brings me to the question of monetary policy, which is especially important at this time because of our international pay- ments postition and because of the lag in our economy. No one wants a money policy that will retard the correction of our balance-of-payments position, much less a policy which would actively worsen that position. On the contrary, money policy should con- tribute to the needed correction. But if monetary policy is asked to carry too much of the burden of correcting, or even of protecting, an international payments position which, like ours, is traceable in good part to governmental programs it could very well be so restrictive as to offset all the stimulating effect which we could hope to produce through fiscal measures. The risk of our getting into such a policy dilemma is reduced, of course, to the extent that we succeed in efforts such as those being pressed by the administration in connection with procurement under our military and economic aid programs. Vigorous application of these efforts to conserve dollars is an absolute requirement of policy at this time. This requirement is underlined by the fact that free reserves seem to have been trending down recently, that the money supply currently seems to be shrinking, and money rates and bond yields have recently taken a rather sharp turn upward. Considering all elements in the situation, as the reserve authorities are in a position to do, these developments may be both necessary and beneficial. All the same, I would hope that considering the position of the economy at this time and the extent of the more direct measures being taken to help correct our balance of payments, it will not be necessary to tighten credit conditions over their present position. Actually, some easing would be helpful to the economy, especially in the long- term section of the market. At an earlier point in this statement I suggested the sale of some part of the financial assets currently held by the Treasury as a tech- nique for meeting part of the cost of a growth-promoting tax-reduc- tion program. I realize that this could have a tendency to raise long- term borrowing costs, though I should think the program could be managed so as to limit this effect to a very small amount and hopefully to avoid it altogether. But if long-term borrowing costs have to be lifted, and in the last few weeks they have been lifted in the corporate bond market, I should think it would be better to do this as part of a program to PAGENO="0308" 298 POLICIES FOR FULL EMPLOYMENT finance growth-promoting tax reductions than as part of a normal Federal Reserve open market operation. (5) Finally, let me say a few words on the relation of costs and prices to economic growth. Mr. Bolling of this committee will per- haps remember a letter I wrote him a few years back responding to certain questions he put to me and in which I stressed the importance of cost increases, and particularly of labor-cost increases, as a force behind rising prices. This was not a widely held view at the time, but it has gained a good many followers since. Indeed, not so long ago it was not even fashionable to believe in the necessity of a reasonably steady price level as a basis on which to achieve sustainable and meaningful economic growth. But views on these matters have undergone very considerable change. Nowa- days, there is broad agreement that a reasonably stable price level is the only basis on which a workable economic strategy can be built. I subscribe fully to this view, though I must confess that the con- version to it has been more rapid and more widespread than anything I had expected to witness. But this is good, and I am happy to see it; all that concerns me is that we do not overlook the fact that once price level stability has been made the basis of an economic strategy, one automatically accepts certain other requirements, too. The most important of these is that, in the most general case, pro- duction costs must not increase by amounts that cannot be fully offset, in their effect on unit cost of production, by improvements in pro- ductivity. If this requirement is not respected, the result is a sup- pression of profit margins and eventually a suppression of the rate of economic growth. There is wide agreement, I believe, that for some years we have, as a Nation, been failing to respect this requirement. Competitive conditions, and to some extent governmental pressures, have pretty much fixed a ceiling on prices; currently, many industrial prices are being reduced. But we have been less successful in limiting increases in costs. One way to put this is to say that price inflation, at least for the time being, has been checked but that cost inflation continues. I believe that it is this inconsistencey, which reflects itself in nar- rower and narrower profit margins, that is the major factor behind the lag in our economic growth. And I want to state quite clearly that although I believe we can improve our economic performance through appropriate monetary and fiscal' policies, we must follow appropriate wage-price-profit policies or we will undo all the good these other measures can accomplish. This is obviously what the President and his Council of Economic Advisers had in mind in setting forth certain wage and price guide- lines in the January 1962 Economic Report. There is a good deal that can be said pro and con on the idea of setting guidelines in this fashion, but without going into these argu- ments I must express a reservation about the wage guildeline as cur- rently defined. The principle that labor cost increases should be equated to productivity improvements does not, in my judgment, suit our present situation. What we need now is a chance to achieve an improvement in profit margins and some reductions in prices. If we keep our economy com- petitive enough, which is a requirement underlying any strategy for PAGENO="0309" POLICIES FOR FULL EMPLOYMENT 299 an enterprise economy, we can be sure that profit improvement will not go far beyond what is reasonable before it is translated into lower prices. But in order to achieve profit margin increases and price reductions, production cost increases must be kept well within productivity im- provements, not equated to them. The guideline, in my judgment, should be revised to this effect. It would be helpful also to have a better understanding as to how these guidelines are to be enforced. Certainly it is clear that there is very little to be gained from enforcement procedures of the sort that were employed in the steel incident. I have four suggestions to make in this connection. First, on the application of wage-price guidelines, I suggest that the executive branch limit its role to (i) annual descriptive and analytical reviews, presented in the Council's year-end Economic Re- port, of the major developments affecting wages, prices, and profits; and (ii) a critical evaluation by the President, in his year-end economic message, of wage-price-profit developments during the year. If it should be the President's judgment that developments have not been consistent with the national interest he could state the respects in which he believes mistakes have been made and the lines along which adjustments should be made. There is ample opportunity in the medium of these two messages for the facts to be set forth and analyzed for their meaning and significance and for guidance, which I believe should be couched in general terms, to be given for the year ahead. Short of emergency conditions, and in these connections I would interpret "emergency" quite restrictively, I believe our economy will work better if the executive branch avoids direct intervention in spe- cific wage-price decisions. In the meantime, efforts should be pressed, as I believe they are by the President's Special Commission on Labor- Management Relations, to explore ways of improving the balance of bargaining power in labor markets. Second, I suggest that conferences such as the one sponsored this spring by the Secretary of Labor on national economic issues be held regularly every year. Conferences of this kind are an excellent way to encourage discourse and to improve understanding among labor, man- agement, and Government on economic policy questions. Third, it would also be helpful to provide for the expression of views from the public on wage-price-profit developments. To this end, the Joint Economic Committee or possibly the Council of Eco- nomic Advisers might plan to have open hearings every January or February devoted specifically to this range of questions and in par- ticular to the guidelines, if these continue to be set out by the Council and the President. As far as possible, the effort should be to give an opportunity to be heard in these hearings to all those who have poten- tially useful contributions to make to the discussion. This would be a kind of annual economic town meeting. I come from New England, and I know that it is sometimes not as easy to get such meetings stopped as it is to get them started, but I think this can be managed and, in any case, the open discussion of stated public policy is always a healthy thing in a democracy. Open discussion is certain to help us find our way to an understanding of the kind of wage-price PAGENO="0310" 300 POLICIES FOR FULL EMPLOYMENT policy, shaped through free collective bargaining and competitive markets, under which we can achieve the kind of economic perform- ance we all desire. Fourth, I suggest that this committee make a special point, possibly through the scheduling of special hearings, of examining into the ways in which Government itself may be putting direct upward pressure on costs and prices. I have in mind, particularly, the Government's pro- curement and contracting activities and the programs under which it makes minimum wage determinations as authorized by the Walsh- Healey and Davis-Bacon statutes. We should be quite sure that these programs are administered in ways that are consistent with the kind of wage-price policies which, under the guidelines procedure, we hope to have followed by all labor groups and business units. I would judge, drawing upon my experi- ence in 1956-60 as Chairman of the President's Council of Economic Advisers, that there are responsible businessmen who would say that the programs tend to inflate costs. The problem needs close study. I have limited myself in this statement to fiscal, monetary, and wage- price policies. There are, of course, other parts of a strategy of eco- nomic policy that also deserve attention. But the three I have com- mented on are the crucial ones. If I have overlooked points in which members of this committee have a particular interest, I shall be happy to respond to questions on them. Thank you very much. Chairman PAmrAN. Thank you, sir. I would like to ask Mr. Keyser- ling a question. This is a question that concerns me, Mr. Keyserling. If we had an across-the-board cut in personal taxes, that is, a cut which would change the income distribution in favor of the top bracket income receivers, wouldn't you have a worse fiscal structure after the period of deficit is over? In other words, wouldn't you, in the long run, increase the troubles which the tax cut is intended to cure? Mr. KEYSERLING. That is the way I feel about it very definitely, Mr. Chairman. I think that the equitable thing to do in taxation is the thing that is best for the whole economy-wage earners and investors, high-income groups, middle-income groups, low-income groups. The thing that is best for the whole economy is to have the economy operating fairly consistently at maximum levels of employment, production, and purchasing power. Certainly, nobody has to worry about the adequacy of profits under such conditions and certainly nobody has to worry about how well the high-income groups do under these conditions. I don't think that the taxes on them are "confiscatory." I get around the country quite a lot, and certainly most of them, who haven't inherited great fortunes, couldn't live the way they do, and they live that way honorably, if they were really paying 91-percent taxes on the portion of their in- comes which fall within that tax rate. The fact of the matter is that our tax policy is much too hard, both directly and obliquely, on middle and lower income groups, who haven't got ways of honorable tax avoidance. Therefore, I think you are entirely correct that, when one analyzes what has actually been happening to the economy and where the deficiencies have occurred PAGENO="0311" POLICIES FOR FULL EMPLOYMENT~ 301 which have hurt everybody, a larger spendable income on the part of middle and lower income families would do much for the whole economy than a larger spendable income on the part of the corpora- tions and higher income people, not because I have any objection to their having these higher incomes, but because they translate more largely into savings than can be absorbed in investment. The savings cannot translate fully into investment when there is inadequate ultimate demand, and, therefore, they become frozen sav- ings, which are merely another expression for unused plant capacity and rising unemployment of plant and manpower. So I agree com- pletely with your implication, and I feel very strongly that a mal- adjusted, improper change in the composition of the tax burden which would be represented by a so-called across-the-board tax cut, would in many respects leave us worse off than we are now. Chairman PATMAN. Thank you, sir. Would you like to comment on that, Mr. Saulnier? Mr. SAULNIER. Yes, I would like to comment on that, Mr. Chair- man. I feel that there are many changes that it would be beneficial to make in our tax system. Chairman PATMAN. We are confining this just to this across-the- board, or the low-income group. Mr. SAULNIER. I will come to that point, Mr. Chairman. As I say, I feel there are many changes that should be made in our tax system; to my way of thinking the question is mainly one of priorities we should place on them. In my judgment, the reason why we are not achieving the kind of economic growth we would like to have is that we have an inadequate growth of investment expenditures in the pri- vate sector of our economy, and I have suggested two changes in taxes which would help overcome that. Now, I would like to see a broad, across-the-board reduction in the individual income tax, but, Mr. Chairman, I just don't think we can afford it at this point. Our Government is providing services of increasing scope and variety for the whole American population, for every man in the street, if you will. These services must be paid for and there just isn't anybody to pay for them except the whole Ameri- can people. There is no other place to put the burden of paying for those pro- grams. Of course, a person may persuade himself that the programs don't really need to be paid for, and some people have apparently managed to persuade themselves of this, but I don't see how you are going to run the Government safely unless you do pay for these services and to do this you must tax everyone. That is why, while I would like to see broad individual income tax reduction, I honestly cannot say, Mr. Chairman, that I see it as a practical thing to do at this time. Chairman PATMAN. I would like to ask you a couple of questions, Mr. Saulnier. I wish you would comment on them briefly, if you please. Mr. SAULNIER. Yes. Chairman PATMAN. What specific monetary policy do you feel should accompany any tax reduction that takes place? PAGENO="0312" 302 POLICIES FOR FULL EMPLOYMENT Mr. SAULNIER. Tax reductions, Mr. Chairman, of the character that I have suggested, accompanied, as I have suggested, by reductions in spending on low-priority spending programs and by some, as I have suggested, asset sales, would require no change in money policy. Chairman PATMAN. One other question. To what extent in your view would there be an increase in investment as a result of reduc- tions in the corporate tax rate? Mr. SAULNIER. Would you repeat that question so that I may be sure I understand you correctly? Chairman PATMAN. To what extent, in your view, would there be an increase in investment as a result of reductions in the corporate tax rate? Mr. SAULNIER. I must answer that question, Mr. Chairman, by say- ing this: There is no one thing that will get our economy moving up again, not even a cut in the corporate income tax, though that would be helpful. What we need is a clear definition of a policy, a policy that goes across the board, affecting expenditures, taxes, money, et cetera, and that policy should be clearly defined and projected to our people. I believe that with an understanding of such a constructive policy we would enjoy a good rate of economic growth, and within that policy I would say that the tax changes I have been talking about would be very stimulative. Chairman PATMAN. You won't make any change-this is in cOn- nection with the next to the last question I asked you-in the present interest rate policy, which, of course, I believe you will admit is a high interest rate policy? Mr. SAULNIER. Would you mind telling me, Mr. Chairman, what you mean by an interest rate policy? Do you mean by that the whole Federal Reserve policy? Chairman PATMAN. Yes, sir. Of course I believe you will agree that the Federal Reserve makes the interest rate policy. You and I will agree on that point? Mr. SAULNIER. I think I know what you mean. I just want to be sure, Mr. Chairman, that we are talking about money policy generally and not the policy with respect to the maximum interest rate that can be paid on deposits. Chairman PATMAN. I am talking about general interest rates that have been going up and up and up over the years. Would you change that, or would you let it go like it is? Mr. SAULNIER. I can comment, Mr. Chairman, on the current money and capital market situation and can say whether I think money policy, in that situation is too restrictive, or not restrictive enough. It is. difficult, however to comment on money policy more generally. Chairman PATMAN. All right, sir. What do you think about it, Mr. Keyserling? Do you think that monetary policy should be changed? Mr. ICEYSERLING. Yes; I do. I have thought so uniformiy, for a long time. Chairman PATMAN. I believe you stated what the recessions we have had m the past were. After the recessions in 1948 and 1949 we had one in 1953 and 1954; of course, more of it in 1953 than in 1954; 1955-56, more of it in 1956 than 1955; and then in 1957 and 1958, more PAGENO="0313" POLICIES FOR FULL EMPLOYMENT 303 of it in 1958 than 1957; and then in 1960-61. Is that correct about the recessions we have had in the past? Mr. KEYSERLING. Yes, generally speaking. Chairman PATMAN. You think they could have been avoided by a proper monetary policy? Mr. KEYSERLING. I agree with Dr. Saulnier, and this is one of the few points that I agree with him on, namely, that you cannot stabilize or maximize the health of the economy with any one set of policies. I think we have a broad and variegated economy, and that we need a complex of reasonably workable monetary policies, price-wage policies, fiscal policies, and others. I think we need them all, and I think that usually they should be based upon one central approach. In other words, if it appears upon an actual examination of the economy in action that consumption is tending to outrun investment, which is a typical inflationary situa- tion, then all of these policies should move toward exercising restraint upon consumption and do everything possible to induce investment. If the reverse is true, then these policies should move in the opposite direction. I don't see any sense at all in two policies moving in op- posite directions. That would be like walking the floor with one crutch to walk part of it, and the other to walk the other part, when you need both crutches. You need all policies working in the same direction. In more direct answer to your question, subject to above qualifica- tion, I do think that the tight money policy over the years has been a very pronounced factor in contributing to a seriously low economic growth rate and the recurrent recessions. By and large, the rising interest rates, which are at least a conse- quence of a tight-money policy, if not its intent, tend to ration the national income toward those who lend us back our own money. One of the greatest economic reforms of the last 30 years, in my view, has been the movement in the opposite direction, good for everybody. I remember when I was a boy I would walk by the bank and I would see a sign on the bank, "6 percent interest on deposits." Senator BUSH. That was a pretty average rate in those days. Mr. KEYSERLING. Yes, and of course, the real interest rate on home- building was 8 or 10 or even 12 percent before you got through. If we believe in an incentive economy, if we believe in an enterprise econ- omy, we ought to favor the fellow who enterprises and invests and the consumer who buys, as against the person who lends them back their own money, and, after all, they are lending us back our own money. Now, we started turning the clock the other way in recent years, and I think this has been one of the most damaging factors in the whole picture. I made a study of it where I figured that something like $23 billion had been taken out of the pockets of the average consumer, and the average homeowner, and the average family, and put into the pockets of those who are lending back our own money, during the period 1953-59. I have nothing against these people, but I think it is unsound policy. This is the first way that tight money and rising interest rates hurt the economy. The second way they hurt the economy is that they hit the things we need before they hit the things that are booming excessively. Mr. Martin of the Federal Reserve System, a great and sincere protagonist PAGENO="0314" 304 POLICIES FOR FULL EMPLOYMENT of having us pay more to those who lend us our own money, and I am sure he honestly believes in this policy, in early 1957 before the Senate Finance Committee, said that we needed to do this because consump- tion was too high and investment was too low and savings were too low. Yet in early 1957, we had enormously idle plant capacity. The financial institutions were stuffed with savings, and we had a tre- mendous deficiency in ultimate demand, just as we have now. So a little while later, in consequence of this policy, we got into the worst recession since World War II from which we have never recovered; and the next year the same gentleman came before the same committee ~tnd said that the big trouble we had a year earlier was the great deficiency in consumption and that investment was outrunning con- sumption. Those who make policy should be more contemporaneous with events. Their observations should not be matters of hindsight only. I think we are now in the same kind of situation basically. I agree with Dr. Saulnier that investment is too low. There is no question that it is, but why is it too low? When you move from what I might call generalization to a specific examination, industry by industry, company by company, total by total, the break-even point is not too low. The steel industry has a break-even point below 40 percent. This does not mean that costs are too high relative to profits per unit. If they are not making enough money, it is because they have been operating at low capacity for the last 5 years or longer. I hope the committee will very carefully study these factual examinations I have made, and I am always glad when economists come forth and on the basis of a different set of figures show that there is something wrong with my analysis but there is really no way of matching analyses in terms of the data against an analysis in terms of generalities. The fact of the matter is, as I see it, that a crucial characteristic of American industry is that it generates, at a given level of operations, a level of profits above what it can enduringly invest as against the markets which are militated against by too low a level of ultimate demand. This has happened over and over again. It has happened four times since 1949. And it is happening again now. There is nothing wrong with first quarter profits, 1962, in any basic industry, with some rare exceptions, which would disprove the general rule. The only thing wrong is that business is operating at too low a level of capacity, and this is relevant in my view to tax policy, and to money policy, and to other basic policies, and it applies to price-wage policy fundamentally. Chairman PATMAN. Thank you, sir. Senator BUSH. Mr. Chairman, I have another question. Mr. Keyserling, you and Dr. Saulnier agree about the investment factor being too low. I mean you do agree that that is one of our problems; is that right? You just said that? Mr. KEYSERLING. Yes, sir. Senator BUSH. Dr. Saulnier has developed a thought in here that hasn't been developed before this afternoon in these hearings this week which ~has to do with the question of cost. I am very much impressed with his argument here about the need for a better control PAGENO="0315" POLICIES FOR FULL EMPLOYMENT 305 of cost and the need for not equating increased costs with productivity gains, but using productivity gains not only for wage increases, but for reduced prices, and possibly increased profits; in other words, for the division of increased gains in productivity rather than using it all up in increased costs and particularly wage costs. Our competitive position is constantly under discussion nowadays, particularly as the Common Market is becoming more and more of an economic factor in trade, and this administration is greatly concerned about that as I think we all should be. However, it seems to me that as I talk with business managers and people who control the question of expansion of our plants and the use of investment funds to expand plant and job making opportunities, there is sort of an underlying apprehension. It doesn't come out into the open very much because I think there is a certain fear in expressing themselves that no matter how they may try to control costs, they can't do it because of the very great preponderance of bargaining power that lies within the big labor unions. We have seen lately this year a very substantial increase in the number of strikes over what we had last year. We have even seen some very bad strikes in defense industries and our missile plants. We had a very bad one recently in my State at the Electric Boat Works, which was not really an argument between management and labor, but an argument between unions there, which shut that plant down for a long period of time. We have the Eastern Air Lines shutdown still because of a dispute between the unions, and some smaller union of 550 members has been able to bring that thing to a halt and throw 18,000 people directly out of work and greatly interfere with the travel incident to our trade and commerce in the eastern part of the country. We now see that we are threatened with a big railroad strike and so on. It seems to me that this is one of the underlying causes of uneasi- ness and apprehension and hesitation, and I should like you, Dr. Keyserling, to give your views on that situation. Mr. KEYSERLING. Let me try to. I think that some of the points that I would make are embodied more fully in my charted statistical analyses, which I ran over very quickly. Let me try to clarify at least what my position is in this way: First, you made the point that increases in productivity should be taken partly in wage increases and partly in price decreases. Senator BUSH. At increased profits. Mr. KEYSERLING. This I assent to. I think it is desirable. I haven't found many great corporations that are pioneers in this effort, but I agree with you on that. Second, you come to the even more basic question that, in a free so- ciety, which we both believe in, nationally organized business and organized labor will contend with each other for the share that they get of the gross income, and it is only natural that labor unions should want to increase the labor share and that corporations should want to increase the profit share, which is income after costs, including wage costs. The basic economic question, as you so well stated, is, What is a workable division from the viewpoint of the operations of the econ- omy? I mean there is no such thing as a fair profit or a fair wage in an absolute sense. PAGENO="0316" 306 POLICIES FOR FULL EMPLOYMENT I say that a workable division is a good division. Then I look at wages, and I look at profits, and prices are a factor in both, because the price level determines the real buying power of the wage as con- sumption, and the price factor determines the real buying power of the profit as investment. First I look at the wage side, and I say wages have two functions. One of the functions of wages is to play its part in consumption. Taking that one first, I find a deficiency in consumption relative to the actual productive capacity in being of the American economy Therefore, I reach the conclusion that, from the viewpoint of the consumer side, the wage increases have not been too high. In other words, they haven't produced a redundancy of purchasing power. Then I go over to the profit side. I ask, Have the wages been too high from the viewpoint of leaving over enough profits after wage costs, after payment of dividends, after all other costs, to fulfill the investment function, which gets back to the cost per unit idea? Are the wage costs per unit and other costs per unit leaving the business with too small a margin of profits per unit? The more I study the figures, and I know I am objective, although I may be wrong, as any economist may, the more I reach the conclu- sion, which I think is supported by all the data shown on individual industries and on the overall picture, that in each period of upturn the profits after taxes, after wage costs, after all other costs, have been too high per unit and have been too high in the overall to be used fully, and that is the only workable test of profits. Oh, these profits have been used for a while, when we have gone up in one boom or another, but then we have had a tremendous downturn in investment, which has propitiated the successive recessions. These downturns haven't come because of an inadequacy of profits, because then they could never start. There certainly were plenty of profits during the upturns. They didn't come because of too high a wage cost. What has happened is that the profits have been so high, after allow- ing for all costs, including wage costs, that they led by way of invest- ment to tremendous excess capacity, and then downturns came. I think this is the fact of our American economic life. I don't cite it as an indictment of business. I wish that business followed a price policy and a wage policy that kept the economy in better balance. They would make more profits in the long run and they would invest more in the long run. But I can't find, and I have asked various econ- omists-they will talk in a general way. Let me give an illustration. Senator Busu. You are not worried about the effect of this upon our competitive position, both at home and abroad? Mr. KEYSERLING. Well, it is the same problem. If you say that the reason that the prices are so high in America is because the costs are too high, then you say that you have to reduce these costs, including wage costs, to get a lower price. But if you say, as I say, that the ex- isting price is too high, not because the cost is too high, but because the profit margin per unit is too high, then you reach my conclusion. I think this conclusion is supported by the repeated collapse of each suc- cessive investment boom and each profit boom. I cannot look at the profits of any of our key industries during the past years, or first quar- ter of 1962, and reach the conclusion that their costs are militating against an adequate level of profit for all investment purposes. PAGENO="0317" POLICIES FOR FULL EMPLOYMENT 307 Now, our competitive position would be improved if we had more investment. I admit that. Senator BUSH. You do not think this factor I am discussing with you is inhibiting the expansion of investment? Mr. KEYSERLING. I think what is inhibiting the expansion of in~ ~vestment is unused plant and an inability to sell what they can proS duce now. Investment is based on a prognosis of markets. Senator BUSH. That does not bear out some of the testimony we have had here, like that of Mr. Ellis of the Du Pont corporation. I do not know whether you saw his testimony. He was in here a couple of days ago. Mr. KEYSERLING. If Mr. Ellis puts before this committee, I do not mean the same facts, but the kind of analysis that I have tried to put before the committee, which looks at the factual situation instead of mere generalities, and if his facts and his analyses are as careful as mine and lead to different results, I will be perfectly willing to with- draw from my position and ask your committee to take his point of view. All that I ask is whether Mr. Ellis, in examining this ques- tion of prices, wages, and profits, and what the real inhibiting factors are, is presenting to you as relevant data, and as carefully related to the facts, as what I am trying to do. All too frequently, I find, in a lot of these big corporations, as well as in others, and I am not criticizing them, a tendency to say that wages are too high, and costs are too high, and profits are too low, and taxes are too high, all by way of generalities rather than careful factual analyses. Senator BUSH. But this administration has expressed a strong in- terest itself in a hold-the-line policy, so to speak, because of our com- petitive position. Mr. KEYSERLING. I am not here as an unthinking devotee of the economic policies of this administration. I am trying to be nonpoliti- cal about it. I do not think this administration has thus far satifac- torily met the growth problem nor the unemployment problem, and neither did the previous administration. I cannot, and I do not mean to imply that anyone else is trying to treat this on a basis of the fact that, because I am a Democrat, this administration is right on every- thing. I think that both administrations have swung in a direction of economic policy which has not worked. If I had said this only in 1953 at the beginning of the Eisenhower administration, or only in 1961 at the beginning of the Kennedy administration, I might have had to await events to test my conclusions. All I am saying now is that what has happened squares with what I have been saying, and, there- fore, if policies have not worked, there is something wrong with them. Senator BUSH. My time is up, Mr. Chairman. Representative REUSS (presiding). Mr. Saulnier, you have stated that the economic situation is disappointing, and you have suggested an economic program. First, you favor the recent increase in depre- ciation allowances. Next, you favor the proposed 7-percent invest- ment credit, though you say you would prefer an even larger increase in the depreciation allowance. Then, you favor a cut in the corpora- tion income tax by about 5 percentage points, and a cut in the personal income tax down to the 50-percent level. The proposed personal income tax reduction would assist families with incomes of more than $32,000 a year, as I understand it. PAGENO="0318" 308 POLICIES FOR FULL EMPLOYMENT Mr. SAUFJNIER. That is right. Representative REUSS. The proposed tax revision would cut tax revenues, you estimate, by $2 to $3 billion. Mr. SATJLNIER. Two and a half billion dollars possibly. Representative REUSS. You would offset such a reduction in tax revenues mainly by cuts in Federal expenditures. You would hold wages down in order to increase corporate profit margins. Mr. SAtTLNIEn. No. May I interrupt. Representative REUSS. Yes. Mr. SAULNIER. I would say that the increases in wages should be kept within, well within, the limits of productivity improvement. Representative REUSS. But before you would validate a wage in- crease, you would make sure that corporate profit margins had ex- panded. That is my understanding of your testimony. Mr. SAULNIER. Again I am not sure that I like your word "vali- date." I do not like to cast the Government in the role of validating or invalidating. Representative REUSS. Strike "validate," but is it not your conten- tion that wages either should not increase at all, or increase only after the corporate profit margins have been widened? Mr. SAULNIER. I am afraid I would have to amend that to say con- currently rather than after. Representative REUSS. Concurrently. All right. Mr. SAULNIER. Which is very different. Representative RETJSS. And further on wage policy, you suggest that present minimum wage determinations under programs of the Walsh-Healy and Davis-Bacon type are too liberal, and that they should be kept down. Mr. SAULNIER. It may well be. I think they deserve study. Representative REUSS. Then having stated what I think to be the ingredients of your program, I must ask how it will improve the economic situation. Is it your belief that such a program would in- crease business investment? Mr. SAULNIER. That is correct. Representative REUSS. My question is, Who is going to buy the products that can be made by existing plant and equipment and man- power in our economy under your program, much less the potential output of additional, more modern facilities? Mr. SAULNIER. The first thing I would say, Congressman Reuss, about that is that it would be very helpful, as a preliminary step, to have a clarification of what our policy is. If I may say so, I think there is a good deal of uncertainty through the country at the present time as to what our economic policy is. Representative REuss. I agree. Mr. SAULNIER. And if I may say so, I think it is almost more im- portant that we have a clarification of what the policy is than that we take this step or that step or some other step. Let me illustrate what I mean, Congressman Reuss, by the discussion of emergency tax cuts. 1 read the newspapers pretty regularly, a number of them, and day after day I read accounts that taxes are going to be cut; no, they are not going to be cut; we will think about it next week; we are going to wait until we have the economic figures for July 15 or for August. And the date comes and then it is not quite clear whether they are going to be cut or not. PAGENO="0319" POLICIES FOR FULL EMPLOYMENT 309 Representative REtTSS. I would agree with you there. Mr. SATILNIER. Mind you, Congressman Reuss, I want to speak very constructively here. I honestly believe that it would be a good thing for the country if we decided here just what we are gomg to do. It seems to me that the facts are clear enough now to tell us what we should do. Representative REuss. I agree with you. Mr. SATJLNIER. I think that clearing the air, in itself, would have an electric effect through the country. Representative REuss. I think it is highly important that we clear the air. You, as well as Mr. Keyserling, have, in a very frank and sincere spirit, offered a concrete program for clearing the air. My specific question is, how will your program, in the cleared air which would undoubtedly accompany its enactment, generate purchasing power to take off the market goods we can produce with our present capacity together with the goods which additional capacity could produce? Mr. SAULNIEIi. I would answer that question, Congressman Reuss, by saying that if a program were put forward, the business people of this country, and I say "business people of this country" advisedly, because, after all, we are talking about an enterprise economy which works well if business units work well, and does not work well if they do not work well- Representative Rnuss. My point, of course, is if business units work best when there is a good prospect of selling that which they can produce- Mr. SAULNIER. Indeed they do. Representative Rnuss. I do not see how your program gives us that market. You would take $2 or $3 billion out of the spending stream when you cut expenditures by that much. I do not know how much added capital investment you expect to get. While I would agree with both you and Mr. Keyserling that the level of private investment should be raised, the addition of more capacity will not by itself gen- erate enough consumer purchasing power to absorb the extra output. Mr. SAULNIER. I think I understand the difficulty you have with the statement I made, and I would like to try to clarify it. I started to say that if a program were put forward which the business people and the American people generally accepted as a constructive pro- gram, one that they could understand, one to which they could sub- scribe, I think this would have the effect of improving the confidence which people feel in their future and of removing the uncertainty that they feel in the present situation. That result alone would have an expansive effect on our economy. And within the context of that program you would be doing things in the tax area that would be stimulative. Then, Congressman Reuss, I would like to comment, if I may, on your observation that Federal expenditure reductions would take funds out of the stream of expenditures. I am not sure that that needs to be the case, and I suggest that there is one area of the Fed- eral budget to which one might look for possibilties for expenditure reduction, where I think a lowering of expenditures would not neces- sarily take money out of the income stream, but would in effect shift activity from, shall we say, the public to the private sector. That PAGENO="0320" 310 POLICIES FOR FULL EMPLOYMENT is the area of the budget which we call Federal credit programs, and which is a very substantial part of the budget. Representative REuss. Thank you. Mr. SAULNIER. I do not want to make that suggestion, Congress- man Reuss, quite sincerely. There are many expenditures where Fed- eral Government is spending the money-it is in the Federal budget- but if the Federal Government were not spending, it very likely would be spent in the private sector of the economy. Representative REuss. Thank you very much. Congressman Curtis? Representative Cuirns. In listening to these discussions I am im- pressed, particularly in relation to tax cutting, which it is assumed without offer of proof would stimulate the economy, with the further unproved assumption that demand may be equated with consumer purchasing power. It seems to me that therein lies some of the mis- conceptions. To prove my assertion I would relate it to the agricul- ture sector of our economy. As near as I can see, we could increase consumer purchasing power double, triple, or any amount, and it would have very little bearing on utilizing our agricultural surpluses. It seems to me that we have reached a stage in our economy where at least in some sectors we are dealing with an economy of plenty as opposed to one of scarcity. That is why I relate it to the agricultural sector, because that seems quite clear, and what have we done about that? Because the real consumer demand has not been there, we have artificially put it in there through Federal expenditures, agricul- tural subsidies, and that is where the purchasing goes on of our agri- cultural produce. In that instance we can continue to improve our efficiencies of wheat farming, cotton farming, or whatever, and lower our unit cost in that fashion, but still the difference is made up with tax dollars where the Federal Government just buys the surplus and stockpiles it. I wonder if you would comment on that, Dr. Saulnier, as it relates to this question that we are now talking about, of whether it is the consumer demand area or rather consumer purchasing power that is the inadequacy. Mr. SAULNIER. Congressman Curtis, I do not diagnose the problem. in that way. Representative Cuin'is. As consumer demand? Mr. SAULNIER. I do not say that the American economy is generally an affluent economy. Representative Cuirns. Do you agree with my analysis in the agri- cultural sector? Mr. SAULNIER. In the agricultural sector, I would say we have a distinct problem of overproduction. Representative CuRTIs. That is right, which is affluence, and even if our distribution system were better, and even though we may have some of these low consumer purchasing power groups that Dr. Keyserling talks about, even if we project hypothetically the amount that they could buy in the field of agricultural produce, I think using that model we find that it would not make much of a dent in the agricultural sur- plus production. I think it is important that we break down these economic aggregates into components, because I suspect that in other areas what we are really seeing to a large degree is consumer choice having a great play, and not only consumer choice as between what PAGENO="0321" POLICIES FOR FULL EMPLOYMENT 311 the consumer spends the dollar for, but whether the consumer is going to save the dollar, instead of spend it whether he is going to invest it or whether he is going to hoard it, if he saves it. I think there is a difference between investing and hoarding, whether he is going to invest it, spend it, or hoard it, becomes very important. Mr. SATJLNIER. If I may comment just for a minute on that- Representative CURTIS. Yes. Mr. SAULNIER. There is common route by which we get to wrong conclusions on these matters. I think it is not unfair to say that theories on these things divide into two major categories. One of these is that there is an inadequacy of demand, and that somehow or other it is this inadequacy of demand that keeps our economy from working at its optimum level. Those who hold that theory typically argue that the way to correct the situation is to increase consumer demand or overall demand. Sometimes the proposal is for higher wages. Some- times, and frequently nowadays, it is not that, but to cut taxes. There has been quite a shift, I would say, in the last 10 or 15 years in the for- mulation of this theory, but it comes in the end to pretty much the same thing. Representative CURTIS. It is based on that volume. Mr. SAULNIER. It is based on the general premise that there is an inadequacy of demand and that if you somehow increase purchas- ing power, whether by wage increases or tax cuts, you will get yourself moving again. Representative `CURTIS. I wanted to ask one question. Mr. SAULNIER. May I conclude and just add one point. Representative CURTIS. Yes. I am sorry. Mr. SAULNIER. I don't deny the possiblity of there being an in- a.dequacy of demand in a specific economic situation, but. in many eco- nomic situations, and I think in the present economic situation, our problem is to be found in the relationships within our economy and in our capacity to make the kind of economic adjustments that must be made if our economy is to work well. More specifically, I have mentioned the relationship between costs and prices. This is a key to a large part of our problem. I would also like to say to this committee, and I have not mentioned it in my testimony, that I think we need to do a great deal more in the area of education, in vocational training, in the area of guidance, to fit. our people better to the employment opportunities which do in fact exist. I think we can make considerable improvements in our economic performance by these methods. I do not believe that you can substitute a program of expanding demand for such programs. Failing a solution of these problems of internal relationships and capability to perform adjustments, failing a solution of those prob- lems, I think the demand-type formula will produce largely an in- flationary result. Representative CURTIS. I want to comment on that in this other way, too, beca.use there are areas where there is a real demand. I was very interested in our Federal budget for `the National Institutes of Health, and I was interested in two growth figures. One was the growth rate of technicians and people that are needed, research people, by the NIH, and the other was the growth rate of money available to be spent by NIH. The money available to be spent. has a very high 87869-62---21 PAGENO="0322" 312 POLICIES FOR FULL EMPLOYMENT rate of increase. The increase of technicians available, the man- power situation, people available who were trained, was a much lower rate of increase. It was just nonsense to be talking in terms of putting more money in there. We did not have the skills available to fill the jobs going begging here. It takes time to train people in these skills. So even in the areas where there is demand, and I submit there are real areas, treating demand as an aggregate in my judgment is a grQsS error. I want to ask one question if I may on this growth thing. The President stated-I do not know whether you saw this, in his press conference-that the economy had expanded by 10 percent since he took office, and he seemed to imply that this was a better record than under the Eisenhower administration. I do not want to get it into the political aspects, but I mention this because we are com- paring periods and we are trying to relate what is our economic situation. Inasmuch as you followed it closely under the previous administration I wonder if you would comment on that. Mr. SAULNIER. I will comment on it. I did notice that statement by the President. As I recall, his statement was that gross national product had increased by 10 percent since he took office. Now, it is true that gross national product in current prices has gone up by about 10 percent since the first quarter of 1961, which was the trough quarter of the 1960-61 recession. However, if you look at GNP iii constant prices, in order to get a measure of the increase in the actual output of physical goods and services, you will find that the increase is only a little better than 7 percent. I was a little surprised that the President used the current price figures rather than the constant price figures, but I was even more surprised that he found it re- markable that there had been an increase of even 10 percent during a period of business cycle recovery. There is nothing remarkable about that. In fact, I would say the thing that is most noteworthy about GNP in the 1961-62 recovery is that the increase in it was less than what it has been in earlier recoveries. Indeed, it is the tendency of this recovery to lag that accounts for our having hearings here today, I would assume. Representative CURTIS. My time has run out. Mr. SAULNIER. You can judge this recovery by almost any measure, and find that the increases are less percentagewise than they have been in previous recoveries. Representative CURTIS. Thank you. My time is up. Representative REUSS. Senator Proxrnire ~ Senator PRox~rIRE. I want to ask both Dr. Saulnier and Dr. Keyser- ding questions. I want to say, Dr. Keyserling, that I thought your statement that our monetary policy now represents an open declara- tion of war upon the programs the Nation needs was a very accurate understatement of the situation. I could not agree with you more. Dr. Saulnier, you seem to agree to some extent on at least the restraining nature of monetary policy and I was most heartened to see that you say on the bottom of page 10 and the top of page 11: I would hope that in considering the position of the economy at this time and the extent of the more direct measures being taken to help correct our balance of payments, it will not he necessary to tighten credit conditions over their present PAGENO="0323" POLICIES FOR FULL EMPLOYMENT 313 position. Actually, some easing would be helpful to the economy, especially in the long-term section of the market. I welcome that. Dr. Saulnier, you discuss your proposal to lower corporation in- come tax rates, and I am chairman of the Subcommittee on Small Busi- ness in the Senate Banking Committee and am interested in your asser- tion that, quite apart from other effects, these tax changes would be tremendously helpful to our 4 million small- and medium-sized busi- ness concerns. I presume that you are proposing a 5 point cut in the basic tax, not in the surtax, the 30 percent. Mr. SAULNIER. I would reduce the tax from 52 percent to 47 percent. Senator PROXMIRE. Right; but this is made up of two parts, the 30- percent basic tax and the 22-percent surtax. Mr. SAULNIER. Yes. Senator PR0xMIRE. I presume you are proposing a cut in the 30- percent basic tax by 5 points. Mr. SAULNIER. Yes. Senator PROXMIRE. Even this would give very little help as I see it to small business. In the first place, some 75 percent or more of our businesses are not incorporated, and these unincorporated firms are virtually all small. No. 2, of those that are incorporated, about 40 per- cent, 339,000, have no taxable income. These are overwhelmingly small firms. Of those corporations that do have a taxable income, most have a taxable income of less than $5,000, and therefore their maximum benefit from your tax cut would be $250 per firm, so that on this basis I cannot see that 90 percent or 95 percent of small business would get very much benefit from the corporation income tax, although I think it may have merit on other scores. Mr. SAULNIER. I could not cite a figure for you now, Senator Proxmire, but there are many hundreds of thousands of small busi- nesses in this country, small- and medium-sized businesses, organized as corporations, paying a corporation income tax. Senator Pnoxuinn. The figure I have for 1958-I presume there are more now-was 611,000, of whom 507,000 had an income of under $25,000, and their income represented only 7 percent of the total corporate income. There are 85 percent of the corporations with 7 percent of the income that is taxable. Mr. SAULNIER. Yes. I was speaking here with special concerim for the fact that small- and medium-size companies by and large finance themselves. They grow out of the money they n'iake them- selves, whether they are organized, Senator Proxmire, as a corpora- tion and are retaining corporate income, or whether they are organized as a partnership or a proprietorship- Senator PROXMIRE. On this I agree with you 100 percent. Mr. SAULNIER. And are taking their income as individual income. Senator PR0XMIRE. The Butters and Lintner study at~ the Harvard Business School, for example, showed that if firms 40 or 50 years ago had the kind of corporate income tax rates we have now, 1ione of the big firms could possibly have grown to the size they have. You would have no chance to grow through investment, through what has been the traditional way. I would agree with you on individual firm growth, but I cannot see that the individual small businessmen, PAGENO="0324" 314 POLICIES FOR FULL EMPLOYMENT or that 95 percent of them, are going to get any real relief from a reduction in the corporation income tax. I think from the stand- point of growth perhaps you would justify it, not from the standpoint of helping most of our small businesses. Mr. SAULNIER. I am afraid I cannot agree with you, but for the moment I would like to pursue the point of agreement that I have with you, which is that the growth of small- and medium-size busi- nesses is financed mainly out of the income which they make them- selves and retain, and the amount `of income which they can retain out of what they make, whether they are corporations or whether they are partnerships and taxed as individuals, depends in large part on the tax rate. A lowering of that rate, including the high rates on in- dividual income, would assist small- and medium-sized concerns in retaining income which for the most part would be reinvested in the business. Now, a large company, a very large company, also depends on retained income, but at least they always have the option of capital market financing, which the small company normally does not have. Senator PRoxMI1u~. You could not be more correct on that, but the figures do show that 70 percent of the net income of corporations are those very few firms with incomes over a million dollars a year. They are going to get the main benefit of this particular tax cut, but you are absolutely right, there is no other way that a small business firm can grow by and large except by reinvestment of earnings. Mr. SAULNIER. Precisely. Senator PROXMIRE. I would like to pursue the question a little bit that Congressman Reuss asked because I am puzzled by it, and I think there is an interesting contradiction and conflict between you and Dr. Keyserling on this, and that is that you say that business investment seems to be the principal weakness of our economy and we must stimulate private business investment to really move ahead. At the same time your prescription for a tax cut would be a tax cut that would primarily increase business cash flow, and you say that you would reduce Government spending so that there would at least be no ag- gregate increase in the deficit. Mr. SAULNIER. Low priority Government spending. Senator PR0XMIRE. Low priority Government spending, and you would follow a policy of keeping wages in some restraint. At least you would make sure that they do not exert any upward pressures on prices. I think it is a very pregnant question, in view of the full documentation that Dr. Keyserling has given us this afternoon, in which he has given us data that I think is very hard to refute with- out contrary data. How is this going to enable the economy to move? How can you do it? The fact is, as a number of witnesses have testi- fied here, there has been ample cash flow, plenty of money available, and many of the biggest firms have so much cash available that it is almost embarrassing. General Motors is an example of this. Why should more of the same be the answer under these circumstances? Mr. SAULNIER. For the reason that I think a tax policy that would have a greater effect in promoting investment expenditures, and which would permit the funds to be retained out of which that expenditure could be financed, would result in a higher level of investment spend- PAGENO="0325" POLICIES FOR FULL EMPLOYMENT 315 ing and would, as I think we all will agree, have, in agreeable circum- stances, a multiplied effect through the economy. I would say, Sena- tor Proxmire, that I am concerned also about measures being taken to promote a higher rate of investment expenditure because I have the distinct feeling that we have been tending to fall behind in recent years in these matters relative to countries elsewhere in the world. Senator PROXMIRE. My time is up, but I had a printing company in Wisconsin, and we expanded our plant. We did it for one reason. We though we had a good market. We thought we could see an opportunity for us to increase our production by selling more. No matter how much had been available for us in depreciation reserves, or even in profits or how good our profit margin was, if we did not feel we had the market, I think it would have been a very stupid decision for us to make. Mr. SAULNIER. I think I understand your thinking on this. Just let me say that in our country, organized as it is on an enterprise sys- tem basis, on a profit system basis, we have managed somehow, not really by design, but more or less inadvertently, to develop a tax system which, if we sat down to work one out that would discourage risk taking, could not be more artfully designed. But, all the same, we have it. What I am saying is: Let us strive for a tax system which is better designed to encourage investment, risk taking, and business activity generally. In this connection, while I do not make the point in my statement, I think we would be well advised to give very careful consideration to the substitution of some other form of taxation for the profits tax- ation we currently have. And for that other type of taxation I would suggest a producers value-added tax. Our present tax system, which puts the accent mainly on profits, not only has the effect of discour- aging risk taking, but it tends to have a braking effect on the economy when we move toward higher levels of activity. It is excessively unstable in its revenue-gathering effects, and I would like to see us develop a tax system with greater stability in it in this respect. Representative REuss. Thank you, Dr. Saulnier. Representative CURTIS. I had one thing I would like to ask Dr. Keyserling. Representative REuss. Mr. Curtis? Representative CURTIS. Mainly because it was in Dr. Saulnier's statement, and I did not see it in yours. I had this excerpt from the New York Times, an article you wrote which appeared there on August 5, and one of the things you said in there was this: An unequivocabie Presidential assurance against repetition of the recent degree of intervention in price decisions, wage making, and industrial disputes, this would remove a main barrier to confident business investment in new plant and equipment. More investment would create more jobs. Do you still adhere to that? You did iiot mention it in your state- ment. That is the reason I was bringing it up. Mr. KEYSERLING. I adhere to it. I have the same position today that I had on August 5. I am for more investment, and I am at all times for appropriate risk taking. But when we have 15 or 17 percent of our plant capacity idle, and have had an average of so much idleness for a number of years, then there has been too much risk PAGENO="0326" 316 POLICIES FOR FULL EMPLOYMENT taking, and I am not flippant about it. The risks have been very ill advised, when they result in building plants that are not being used. All I want is to encourage risk taking by getting the plants used, and to get the plants used you have to have more sales, and then there will be risk taking on a sound basis. Otherwise, if the other very simple formula is correct, why not reduce the corporate tax rate from 52 per- cent to 22 percent? You would get so much risk taking, and you would have so many plants built, that pretty soon idle plant and man- power would get entirely out of hand. I am for risk taking in proper proportions. Representative CURTIS. May I comment on that? Senator Proxmire is chairman of the subcommittee of this Com- mittee on Economic Statistics, and we held some recent hearings, and have a very good report on industrial capacity. One of the things that has always intrigued me, is the so-called unused capacity. I think discussion about it needs to be always in context with the limitations of those statistics. What I want to relate it to is this: A great deal of the so-called unused capacity that is constantly referred to is obsolete capacity, and the more rapidly innovation comes, the more obsolete plant and equipment we have. How do you relate that? Mr. KEYSERLING. Congressman, are the 9 percent of the human beings available for work, who have not got a chance to work, obsolete? Representative CURTIS. Yes; their skills are. Mr. KEYSERLING. Their skills are obsolete? Representative CURTIS. Yes, and they need retraining. Mr. KEYSERLING. Just a minute. First of all, let me divide this into two parts. The 9 percent unused labor force that you say is obsolete- Representative Cuirns. I said their skills were, Doctor. Mr. KEYSERLING. All right; that their skills are obsolete. But these unemployed correlate fairly well with my estimates of idle plant ca- pacity, and, therefore, tile plant capacity is not truly obsolete, be- cause to have the labor force fully employed you would be using a major part of that plant. Representative CUR1~s. Could we stop there? I do not follow the logic there. Mr. KEY5ERLING. I am saying that if you had full employment of manpower- Representative CURTIS. What would you have them do? Mr. KEYSERLING. I will come to that. I want to answer that ques- tion about what you would have them do, but let us take it one at a time. Representative CURTIS. I could not follow the logic as you were relating the 9 percent. Mr. KEYSERLING. I will try to answer your three questions, because you have asked me three questions. First, I say that, if you had full employment of manpower, and still had 15 to 17 percent of your plants not running, then you could say that the part of the plants that were not running were obsolete, but when you have 9 percent unemployed manpower, you cannot say this, because you cannot say that you do not want people to be working. PAGENO="0327" POLICIES FOR FULL EMPLOYMENT 317 Representative CURTIS. But obsolescence relates to demand. There is not the demand for buggy whips any more. Mr. KEYSERLING. I am coining to the demand question second. Representative CURTIS. You have this thing all wrapped up so we can't follow it. Mr. KEYSERLING. You can follow it if you let me answer. Representative CURTIS. All right. I will try. Mr. KEYSERLING. If you let me answer it you will follow it very well, because you have a tremendous capacity for following it. Representative CURTIS. You are very kind. Mr. KEYSERLING. It is true. Let me answer it, and you will follow it. Representative CURTIS. All right. Mr. KEYSERLING. I am saying that the argument is made, with re- spect to the 15 or 17 percent idle plant capacity, that this is iiot really idleness because we should have a reserve supply of plant. Obsoles- cence is a relative term. You call that part of idle plant obsolescent in the context of the part of the plant that you now think represents optimum efficiency to have idle. I say that, if the United States wants to have 15 percent or more of its plant idle, as reserve supply at full employment, then you can make some argument for it, because there wouldn't be people to operate the unused part anyway. But if you have 15 or more percent of your plant idle and 9 percent of your manpower unemployed, then some- thing is wrong, because you can't apply the argument to the 9 percent manpower that you apply to the plants. You can't say people are obsolete. Now, I will come to the matter of training. That is your second question. Mr. CURTIS. Could I stop on this one first? Mr. KEYSERLING. Surely. Representative CURTIS. YOU say you like to refer to specifics. Let's take this statement, and I think I am about right. Monsanto Chemi- cal Co. says that about 90 percent of their dollar sales today are prod- ucts they had nothing to do with 10 years ago. Mr. KEYSERLING. That is the second question. That I was just ready to answer. Representative CURTIS. You talked about 17 percent of the obsoles- cence being reserve. It isn't reserve. There is no demand for this. Mr. KEYSERLING. I am coming to the demand factor. Let us take them one at a time. My first point is that, if you had a large amount of unused plant and full utilization of manpower, you would say that the unused plan was a desirable reserve; for example, if we got into a war and had to call more people into the labor force on a super-labor- force basis, and so forth and so on. But when we have 15 percent or more idle plant and 9 percent idle manpower, which pretty well corre- lates with it for a variety of reasons, then you can't say that the situ- ation is sound, because you can't treat human beings like plants and you can't say it is perfectly all right if they are idle. You can't say that human beings should be a reserve supply. Now, to the second question. The second question you asked is, How can you get this idle manpower and this idle plant used if there isn't demand? Let me answer that part of the question. Representative CURTIS. For the specific products. PAGENO="0328" 318 POLICIES FOR FULL EMPLOYMENT Mr. KEYSERLING. For the specific product. Representative CURTIS. Which that plant manufactures. Mr. KEYSERLING. Yes. You gave the agricultural example. It seems to me that there has been a confusion in the discussion among actual demand, purchasing power, and real needs. I define actuall demand to mean what people are actually spending out of resources that they have to spend. I don't think that anybody can contest that actual demand, whether it comes from income, whether it comes from credit, whatever it comes from, is far below our current productive capacity of manpower and plant. This is incontestable in my view. It is far below it, and because it is far below it~ actual demand has to be lifted. Now, I come to the next question. Your next question is, would actual demand be lifted if the people had more purchasing power, or would they just save it, or, to put it in another way, have they got enough purchasing power now but are they just not making the actual demand because they have everything they need or want. Here is where I think your agricultural example is absolutely fal- lacious, because it is always true in our economy that as to some specific products there is a saturation point, and this may now be true in agri- culture. This simply means that you have to shift your resources to some other kind of production, but it is still true~ that, in the overall economy, you can't say that the potential demand isn't there, in the sense of needs being satisfied, when there are such tremendous unmet wants. If you think that $4,000 a year or less for one-fifth of our families, and $6,000 a year or below for two-fifths, is the optimum of what the American economy can use and consume, assuming the purchasing power is there, then I would disagree with you. Representative CURTIs. Let's get back now. You have registered one point; in the agriculture sector if it is saturated, then you have obsolescence or unused capacity. Mr. KEYSERLING. The only way you can translate those productive resources into other sectors of the economy, because you can't plow people under, you can't plow families under-you could plow crops under-is to create enough demand in other parts of the economy to absorb those underutilized resources. Representative CURTIS. The point I am going to suggest to you is that they are there. That is why I referred to the NIH. I will give you an area where there is tremendous demand, for private nursing homes or any nursing homes. Mr. KEYSERLING. Then if the demand is there, and this is the root question, why do we have 9 percent idle manpower? Representative CURTIS. Because it takes time to train and retrain. It takes time to retool, to build plants. It takes time to do these things. It takes time for research and development, and that is why all these dealings in aggregates that you are doing, in my judgment, ignore these components wherein lie the differences and difficulties. Mr. KEYSERLING. But the problem of retraining and retooling is a constant problem over the years in the American economy, so you are saying in another way that a level of 9 percent unemployment is the PAGENO="0329" POLICIES FOR FULL EMPLOYMENT 319 fractional or proper level of unemployment that we should have, in view of the time that it takes to retrain and retool. Representative CURTIS. No, I am not. What I am saying is that we have been ignoring this problem and by not treating it we have created a situation where it is entirely too high and it should not be that high. We are losing ourselves in aggregates; we are not paying attention to these components. Mr. KEYSERLING. Roughly speaking; namely, let's say that unem- ployment was 5 percent in 1953 and 9 percent in 1962, do you think that this almost doubling of the unemployment rate throughout the United States is due basically to a deterioration in retraining pro- grams? Representative CURTIS. Yes; or turn it around and put it this way. The more rapid your innovation in your society, and that is my real test of economic growth, the more you are going to create obsolescence, both in skills and in plant. Going into these figures of innovation I was very interested in these figures, that 25 percent of the goods and services on the market today were unknown 5 years ago. Mr. KEYSERLING. Let's assume for the moment that most, or a large part, of the 9 percent of your unemployed are unemployed because they are inadequately trained. What is the galvanizing force to train them, and what are you going to train them for, if the jobs aren't there? Representative CURTIS. The jobs are there. Mr. KEYSERLING. They are there? Representative CURTIS. Yes. You have to identify them, 900,000 jobs going begging in the one field alone, the health field, hospital technicians, practical nurses, doctors. Mr. KEYsERLING. You are not defining jobs there in the sense of the jobs being available. You are defining an unmet need. Representative CtTRTI5. I am talking about jobs where people are trying to hire people and there aren't people with the training avail- able, like in the National Institutes of Health. Mr. KEYSERLING. Do you think, on a nationwide basis, that the jobs available for which people are untrained equate in any practical way with the total volume of unemployment? Representative CURTIS. Yes; not trained now, but could be trained. Mr. KEYSERLING. I disagree with you. Representative CURTIS. I think we need to study this problem to- gether, but I think this: that just as our Nation throughout its his- tory has had a shortage of labor, it is true that there is a shortage today. What we need to do is get the dictionary of skills in the De- partment of Labor brought up to date. We need to study what are the unfulfilled demands for labor, and then we can talk about it, work up some statistics. We haven't even touched this area, we have so con- centrated our minds on failure, the unemployed, that we have neglected success, the jobs going begging. Mr. KEYSERLING. Then what you are really saying, if I understand it, and it is rather an important innovation in economic thinking is, that, after all, the business cycle in its virulent forms, in other words, quick shifts from high employment to low employment, from full capacity use to low capacity use, from prosperity to recession to de- PAGENO="0330" 320 POLICIES FOR FULL EMPLOYMENT pression to recovery, is explained mostly by variations in the adequacy of training as we go along and iSn't due to basic economic forces out- side of the particular problem of training. Representh.tive CURTIS. No; you misunderstand me. I say that this is becoming the dominant factOr in our dynamic economy. It has always been a factor. Representative REUSS. Your time has expired. Senator Proxmire Senator PROXi~IIRE. I would just like to sa~r, before I ask Dr. Saulnier one mOre question and a couple of questions for Dr. Keyser- liitg, that as I remember the Tobin Study which ~vas made by the Council of Economic Advisers a couple of years ago, and the Knowles- Kalacheck study that was made for this committee, both stated that structural unemployment, that is~ the fact that people who are un- skilled are heavily unempl~~ed and we dOn't have adequately trained people for many jbbs, could not really account for a substantial pro- Portion of the unemployment, and I have seen no contrary studies, although I have heard some cohtrary assertions from Chairman Martin and others who contend that our main problem is structural unemployment. It is hard to find ahy documentation to cOnfirm that assertion. Rep1~esëntative CtTRTIS. If the Senator would yield just on that, if you had allowed me to bring in witnesses at the time we held the hearings I think we would have documented our theory, but unfortu- nately the list of witnesses was compiled withOut my having an op- pOrtnnity to contribute. I would have been glad to have brought in ~vitnesses to try to establish this point. Mr. KEYSERLING. May I just make one very brief comment? Senator PROXMIRE. Yes. Mr. KEYSERLTNG. If the problem is due largely to the falling be- hind of skills, the falling of Skills behind technology, if that were the main problem, then assuredly speeding up teelmological progress by swinging more of the economy to investment in plant, which would speed up the i~ate Of technological progi~ess, wonld accentuate this problem, if it is the right explamttion. In any event, you couldh't fit together the proposition that un- employment was mainly structural and the proposition that you should try to spark investment at the expense of consumption. Representative CURTIS. It would simply be an extension of the problem. Because we can cope with the problem if we will identify it. Senator PROxMIRE. We can get On that shortly. I would like to say to Dr. Saulnier I went to Harvard BuSiness School and enjoyed it very much. I recognize that it is, I think, a very responsible school and I think quite conservative school, although it is associated with Har- vaI~d. The attitude on the basis of political polls and so forth indicate it is about 95 percent Republican or at least it was ~vhen I was there and I think still is. The National Association of Manufacturers, which is not an out- standing liberal association. although I think it 15 a fine group of people, financed a study at Harvard Business School of the impact o;f taxes on risk takii~g, a whole series of studies, and I wonder hOw yOu PAGENO="0331" POLICIES FOR FULL EMPLOYMENT 321 would explain the fact that these studies showed no adverse effect on risk taking as a result of our tax system. Mr. SAULNIER. I am not acquainted with the study. I must say the result astonishes me. Senator PROXMIRE. As you see it, it works both ways. Mr. SAULNIER. Perhaps you would be good enough to give me ~ reference on that and I would be glad to comment on it. Senator PnoxMnm. Fine. The studies were criticized by the Na- tional Association of Manufacturers, as I understand, after they were made. Mr. SAULNIER. I may find myself in a critical mood, too, after I check it. It stands to reason that a high profits tax will tend to sup- press risk taking. Senator PROXMIRE. You recognize how it works both ways. If you have a high profit tax, and (1) a carryback and carryforward loss provision on your taxes; (2) you have capital gains provisions where there is every incentive for risk-taking in that sense as compared with other types of investment; (3) you have the kind of law we passed recently for the small business investment companies, where your losses are treated as ordinary losses and your gains as capital gains; (4) there are all kinds of other provisions in our tax laws to encourage risk-taking, including oil depletion provisions and mineral deplet~ion provisions which would encourage people to risk their funds in min- eral investment. So that there are all kinds of ways in which there are at least counterbalancing forces against the obvious discourage- ment that would come from people having their income reduced through a profits tax. Most profound of all perhaps is the marginal utility factor which I think may be very significant. That is, if people had no income tax on, say, $100,000 worth of earnings, the in- centive for working hard to earn another $10,000 might be quite differ- ent and far less than if they had an income tax and their net income would be $45,000 or $50,000 after taxes whatever it works out to, be- cause by almost any standard they would be satisfied with $100,000 and many would not be satisfied with the lesser after-tax figure. Your friend, Dan Throop Smith, I understand, was the editor of this-a fine, man. He was my finance professor at Harvard. Mr. SAULNIER. Was he the author? Senator Pnox1\Im~. He was the author. I know you have respect for him. Mr. SAULNIER. I have great respect for him and this increases my interest in having this citation. Seantor PROXMIRE. You may have a different interpretation. Dr. Keyserling, you are not asking for a quickie compensatory fiscal tax cut in the sense of balancing fiscal policy to get us out of recession. You are asking for a fundamental, substantial, permanent tax cut. Isn't that correct? Mr. KEYSERLING. Yes. The essence of my whole position is that we should not be engaging in an antirecessionary program now. We should be engaging in a fundamental correction of the imbalances which have made themselves more and more manifest in the whole economy for 91/2 years. Incidentally, I think that this is the safest, and surest., and sound- est way to prevent a recession, as a sound, long-range policy. The PAGENO="0332" 322 POLICIES FOB FULL EMPLOYMENT whole essence of my concern is that we are predicating whether or not we should have a tax cut now on the imperfections of prophesy as to whether a recession threatens in 3 weeks, 5 weeks, or next year, which nobody can really answer, whereas we should be predicating ac- tion now-and we confuse the situation by calling it emergency- upon the fact that we have had a problem for 9~/2 years, and it is emergency only in the sense that we are 2 or 3 or 5 years too late al- ready. I regard an appropriate tax cut now as a permanent, durable, sound improvement in the American economic process. Senator PROxMIRE. Is this your economic advice? If the politi- cians decide that the best way they can achieve that, given the atti- tudes in Congress, is to wait until next year, you may deplore the wait, but you might recognize the political realities that there would be more chance of getting it then? Let me ask you then, in your statement on page 4, you engage in something that even baffles me from the standpoint of arithmetic. Frankly, it seems to be bootstrap hoisting. Take your program of a $10 billion cut. Well, let's say a $7 billion tax cut and a $3 billion increase in expenses. You might call it an initial $10 billion increase in the deficit. You say that this would result in about the same deficit ultimately as the deficit we are going to have without it. In saying that I am baffled because you use a multiplier of 21/2 to 3, and taking your extreme multiplier of 3, this would mean that if you have a $10 billion drop in revenue and increase in expenditures, net, then your multiplier would give you a $30 billion increase in gross national product. If you apply the one-sixth rule, of revenue increas- ing about one-sixth, with an increase in the gross national product, you would get back about $5 billion and the result would be that the deficit would be increased by $5 billion and you would have a $9 to $12 billion deficit, not a $4 to $7 billion deficit, and a deficit that would match the biggest we have ever had in peacetime. Mr. KEYSERLING. There are several ways in which I think you don't correctly understand what I am saying. In the first place, the one- sixth figure is not correct for the purposes that I have in mind. In other words, you derive the one-sixth figure presumably by looking at the average tax take related to the size of the economy, but this has nothing to do with the progressive rate at which an increase in gross national product during an upturn rather than a downturn increases the tax take under a progressive tax structure. Senator PROxMIRE. You are giving the benefits to the lower income end of the economic scale. The prime benefits would not flow, at least directly, to corporation income? Mr. KEYsERLING. Indeed they would, because the fact that I am giving the benefits to the lower end of the income scale doesn't affect the fact that this is my formula for an overall upward movement of the whole economy by correcting the imbalances. In other words, I am not saying, because I give the tax reductions to the lower end of the income scale, that this wouldn't improve the investment picture and the profit picture. My position is precisely that it would, because this is what is wrong with the investment and the profit picture. PAGENO="0333" POLICIES FOR FULL EMPLOYMENT 323 My computation works out as follows: The President's proposal for an approximately balanced Federal budget in fiscal 1963 seems to be based upon an estimated GNP of about $585 billion in fiscal 1963. But my estimate now, in line with that of many other economists, is that the program proposed by the President would result in a fiscal 1963 GNP of not better than $565 billion, and perhaps as low as $555 billion or even lower. These figures, respec- tively, would be about $20 to $30 billion lower than the $585 billion figure estimated to produce a balanced budget. The $20 billion lower figure would result in an estimated deficit of about $4 billion, and the $30 billion lower figure would result in an estimated deficit of about $7 billion. These estimated deficits are based upon the fact that, under a progressive tax system, and allowing for the relatively greater impact upon profits of unfavorable economic developments, the re- duction in Federal tax receipts would be much more than one-sixth of the amount by which GNP is lower than $585 billion, and also the deficit would increase proportionally as the GNP deficiency grew. Coming over to my proposal, I estimate that it would result in a fiscal 1963 GNP of close to $600 billion, allowing for the multiplier effect and the timing factor, contrasted with the $565 or $555 billion figure. This $600 billion figure would be about $15 billion higher than the $585 billion figure which would yield a balanced budget under the spending and tax proposals of the President. This $15 billion increment would, because of its composition and because of the progressive tax system, recoup $3 billion or more of the $10 billion planned deficit which I propose, thus resulting in my estimated deficit of $61/2 to $7 billion. This $3 billion or more recoupment is based upon the fact that profit and other income trends, combined with the progressive tax system, would yield incremental tax revenues coming to more than one-fifth of the $15 billion increment iii GNP ($600 billion minus $585 billion). Senator PROXMIRE, My time is up. I would like to see this arith- metically. I think you would make many converts if you could show this because this really bothers me. It bothers many, many Senators, because if you can show that you can reduce taxes and not increase the deficit, it would be miraculous. In fact it would be an accomplishment like that of the fabled Baron Munchausen who found himself sinking in quicksand and only saved his life by pulling himself out by his bootstraps. Mr. KEYSERLING. Further let us just take as a test case, or take two test cases-take the $12 billion deficit that we ran in fiscal 1959, and take the $6.3 billion deficit that we ran in fiscal 1962 just ended. Take those two deficits. One of the charts that I have shown here illustrates this matter for the period 1953-62 as a whole. Then take the size of the C-NP during these years with those deficits, and apply as to the beginning of each of those 2 years, on a judgmental basis, what the size tax cut and increased spending might have lifted the actual economic performance during those 2 years to given levels. Now, economists would have some differences of opinion, but I think you would find that we wouldn't have run a~ bigger deficit in either of those 2 years if we had adopted the alternative policy. In any event, I would like to suggest finally that, even if I am wrong, even if the deficit under my policy were $2 billion higher than under the alternative, I PAGENO="0334" ~24 ~oLIctEs FOE FULL EMPLOYMENT don't think a $2 billion higher deficit is much to spend for a $30 to $4~ billion higher level of national product which gives you the prospect, in terms of real wealth, of achieving a budget balance at full employ- ment in later years. Senator PROXMIRE. I just say it might be $6 or $7 billion higher. Furthermore as the debt is reduced through increasing Federal rev- enues the multiplier is reversed and far below balance.. Representative REuss. The Senator's time has expired. We are very grateful to both of you gentlemen for being with us for almost 31/2 hours this afternoon. If there are no further questions, we will stand adjourned until 10 o'clock tomorrow morning in this chamber, We stand adjourned. (Whereupon, at 5 :25 p.m. the hearing in the above-entitled matter was recessed until 10 a.m. of the following day.) PAGENO="0335" STATE OF THE ECONOMY AND POLICIES FOR FULL EMPLOYMENT FRIDAY, AUGUST 10, 1902 CONGRESS OF THE UNITED STATES, JOINT ECONOMIC COMMITTEE, Washington, D.C. The committee met at 10 a.m., pursuant to recess, in room AE-1, the Capitol, Hon. Wright Patman (chairman) presiding. Present: Representatives Patman, Reuss, Griffiths, and Thomas B. Curtis; Senators Douglas and Proxmire. Also present: William Summers Johnson, executive director; John R. Stark, clerk; Hamilton D. Gewehr, research assistant. Chairman PATMAN. The committee will be in order, please. We continue hearings on the state of the economy and on the policies for full employment, production, and purchasing power. This morning we have a panel of economists on fiscal policy reconi- mendations. George C. Hagedorn, director of the Research Depart- ment, National Association of Manufacturers; John K. Langum, con- sulting economist and president of Business Economics, Inc., Chicago; Joseph A. Livingston, financial editor, Philadelphia Bulletin; Stanley H. Ruttenberg, director, Department of Research, AFL-CIO. Gentlemen, we thank you for coming. We are very glad to have you. Our procedure is to have each witness make an opening statement. Then the members of the committee put questions to the panel under a 10-minute rule for questioning by each committee member. Mr. Hagedorn, you may proceed in your own way, sir. I believe you have a prepared statement. STATEMENT OF GEORGE G. HAGEDORN, DIRECTOR, RESEARCH DEPARTMENT, NATIONAL ASSOCIATION OF MANUFACTURERS Mr. HAGEDORN. I would like to read my prepared statement, Mr. Chairman. Chairman PATMAN. You may do so, sir. Mr. HAGEDORN. Differences of opinion as to the proper fiscal pro~ gram to be followed at any given time are usually the product of dif- ferences in basic conceptions of the function of fiscal policy generally. For that reason it is well to start with a statement of the principles on which the approach advocated in this paper is based. They are relatively simple and not at all original. First, spending should be kept to the minimum needed for performing the necessary functions of the Federal Government. In that way the Governmenl does not use up economic resources which would otherwise be avail- 325 PAGENO="0336" 326 POLICIES FOR FULL EMPLOYMENT able for supporting the growth of the private economy. Second, the tax system should be designed to raise revenues necessary to meet these expenditures, but with a minimum of interference with private economic activity and expansion. This sounds like a very old-fashioned way of viewing the function of fiscal policy in our economy, and maybe it is. But I also think it is the most realistic and appropriate guide for facing the complex set of economic difficulties in which the Nation presently finds itself. The bulk of this paper will be devoted to explaining the reasons for that conclusion. Since the principles just stated may seem rather general and ab- stract, it had better be explained at the start that there is a practical way of implementing them. It is through the earmarking, in advance and by legislation, of the revenue increase which comes from economic growth to income tax rate reform rather than to increased Federal spending. Such a program, spread over a series of years, offers the best hope for a gradual reduction of the burden which excessive tax rates now place on economic activity and economic expansion. It is attainable within the framework of a balanced budget. The approach advocated here may be contrasted with the view that the Federal budget should be regarded as a positive instrument of na- tional economic policy. According to this latter view, the budget should be designed to supplement private demand to whatever degree is necessary at the given moment. Some of the adherents of this view state that they prefer tax reduction to expenditure increase as a means of increasing total demand. 1-lowever, the basic logic of this approach would lead to the conclu- elusion that one way of increasing demand is as good as the other. The net effect of the budget on the economy is to be assessed by the size of the deficit or surplus. According to the jargon of this philoso- phy, the greater the deficit, or the smaller the surplus, the more ex- pansionary the budget is in its economic effects. The case between the two alternative views of the proper objective of fiscal policy could be argued on general principles. However, for the present occasion the discussion will be limited to a comparison of the two approaches in the light of the specific economic situation in which we now find ourselves. You have been holding extensive hearings both at this time and earlier this year, on the state of the economy. So I am not going to try to give you a comprehensive review of that subject. I just want to make a few points that I think are relevant to the current issue of fiscal policy. No. 1, the problem before us is one of chronic suboptimum economic performance, rather than of a short-term cyclical downturn which may or may not be in the offing. For almost 5 years, ever since the latter part of 1957, unemploy- ment has remained at or above 5 percent of the labor force. There is one exception, I think February 1960, it got down to 4.8 percent. That is the only month in the period where it got below 5 percent. The real cause for concern has not been the two recessions which occurred during that period, neither of which was severe, but the PAGENO="0337" POLICIES FOR FULL EMPLOYMENT 327 tendency of the subsequent recovery to lose momentum before reason- ably satisfactory levels of economic activity had been reached. We are not in a situation calling for radical emergency action. But we should be concerned with discovering and removing the barriers which prevent us from attaining fuller realization of our economic potential. Two, although total economic activity showed a substantial growth over this period, two important elements did not participate fully in that growth-corporate profits and business investment expenditures. By contrast, consumer incomes and consumer expenditures have kept pace with the general growth. The facts are summarized in the following table: Percent increase, 1957 to 1st half of 1,962 Percent Gross national product +24. 0 Corporate profits after tax +15. 0 Business expenditures for plant and equipment -.2 Disposable personal income +23.0 Consumer expenditures +24.0 Compensation of employees +25. 0 Government expenditures +38.0 I might say corporate profits have gone up much less. Business expenditures for plant and equipment have not gone up since 1957. Actually that figure shown for corporate profits after tax perhaps doesn't really adequately describe the degree to which profits have been stagnant in the postwar period generally. In th~ last decade, ever since 1950, corporate profits have fluctuated between $20 and $25 billion, and really have gotten no place in that period. They have gone up and down in cycles, but there has been no growth in corporate profits. While the gross national product, the dollar value of eco- nomic activity in the country has doubled. These data certainly do not suggest that pres'ent economic difficulties are due to inability or unwillingness to spend on the part of the public generally. The problem centers rather on the inadequacy of profits and of business investment. Three, costs of production have increased because wages have gone up faster than productivity. In recent years it has been impossible to recover such increased costs in higher prices. This is an important cause of the squeeze on profits already noted. The relationship between the cost of an hour's work, and the output achieved by it., is summarized as follows: Period Percent change per year Average hourly corn- pensation Output per man-hour 1947-53 1953-57 1957-61 6.2 4.6 4.0 2.7 2.3 2.5 NoTE-The data apply to all employees of nonagricultural industries. There has been a gap between those two figures. The cost of an hour's work has gone up faster than the physical yield from each hour's 87509-412----22 PAGENO="0338" 328 POLICIES FOE FULL EMPLOYMENT work. The gap has somewhat narrowed in recent years in the period since 1957, but there is still a sizable gap between those two figures. The discrepancy between average hourly pay and output per man-hour is a measure of the increase in cost per unit of production. This dis- crepancy has been somewhat less since 1957 than in earlier years. The trouble has been that, since 1957, market conditions have been such that it is no longer possible to get back the increased cost in higher prices. Since 1957 the wholesale price index for industrial products has increased by only 0.3 percent per year on the average. There has actually been a slight decline in such prices since 1959. The net result of rising costs and practically steady prices has been a squeeze on profits. The incentive for business expansion, or even for the maintenance of current operations, has been curtailed. Marginal operations which would otherwise be profitable, and provide jobs, are not worth undertaking. Four, as a result of past deficits in our international balance of pay- ments, foreign short-term claims against this country now exceed our gold stock. This necessitates that measures used for promoting eco- nomic expansion at homes shall not depend on low interest rates and shall not encourage increases in costs of production. The gold stock has declined to a level only slightly above $16 billion. Foreign short-term balances-which are potential claims against gold-have risen to $19 billion. A situation of this type is not necessarily dangerous or inherently disastrous. Foreigners are not likely to convert their balances into gold as long as they can earn reasonably competitive interest on them, and as long as they are confident that such balances are ultimately convertible into American goods at internationally competitive prices. But if they come to believe that we will pursue economic policies which will make it impossible to preserve such conditions, they might begin to withdraw gold at a rate which could eventually force us to abandon the convertibility of the dollar at its present rate. Fiscal policy to increase demand-the wrong approach. With this background it seems clear that a fiscal policy designed to raise the level of demand by increasing the Federal deficit is entirely inappropriate- for a number of reasons. First, the economic problem which confronts us is chronic, rather than intermittent or temporary. An occasional deficit to meet a tem- porary situation might be tolerable. But an indefinite series of deficits to offset persistent underlying maladjustments is not to bo contemplated. Second, adoption of such an allegedly expansionary fiscal policy would encourage and intensify the very forces which have brought about the present economic difficulty. TTneconomic wage increases have a restricting effect on economic activity and on employment. If we pursue' a national policy of using Federal deficits to "bail out" those who are responsible for such uneconomic cost increases, we are in effect encouraging them to go ahead and promising to guarantee them against the consequences of their own actions. Finally, adoption of this course would diminish foreign confidence that we have any real noninflationary solution to our economic prob- lems. They are watching to see whether we intend to underwrite cost increases by Government deficits, or adopt the alternative policy PAGENO="0339" POLICIES FO~ ~TJLL EMPLOYMENT 329 of promoting growth through the control of costs and the improve- ment of efficiency. The former course could only lead to mfiation and ultimately the devaluation of the American dollar. The consequences for our own economy and for the free world generally would be very serious. The conditions for prosperity and economic growth: A program for promoting high levels of employment and economic growth with generally stable prices, of course, involves many elements. As long as we are to remain predominantly a private enterprise market econ- omy, such a program must center on the incentives for, and the re- sources available to, private economic activity. As already noted, the two poor performers in our recent economic history have been profits and business investment. A program for growth and prosperty must certainly provide for a reversal of these trends. The growth of labor costs at the expense of profits is a problen'i that must be dealt with. The constant upward pressure on labor costs is due partly to the power of labor organizations to raise wage rates and fringe benefits regardless of market conditions, and partly to a failure on the part of the public to understand that such cost increases curtail employment opportunities and economic expansion. Since I have been asked to speak here primarily on fiscal policy, I will concentrate on that aspect of the problem. There is an im- portant contribution that Federal fiscal policy can make to prosperity and growth. It is through enactment of a systematic program of rate reduction applied both to the corporate income tax and to the personal income tax. Such a. program would increase the flow of capital for modernization and expansion and improve the profitability of business operations. Such a program should be carried out within the general framework of a balanced budget. Otherwise, it would be merely another form of the deficits-to-increase-demand approach which should be rejected for the reasons given earlier. The tax rate reform should be permanent and it should be sub- stantial in amount. It should apply to both corporate and personal income taxes since both affect incentives and both affect the supply of capital for private investment. Time objective should be, not an expansion in demancL but an improvement in profitability and an increase in the flow of savings for investment. Hence, while such a program should involve reduction of individual rates all along the line, it should also provide for a substantial compression of the steep progressivity of the rate structure. This is, of course, too big a package to be achieved all at once. But it is not impossible of achievement if we have enough determination to adhere to a program of gradual rate reduction spread out over a series of years, meanwhile preventing any further increase in Federal spending. The program just described is designed to meet the longer term problem of chronic economic sluggishness, rather than the immediate short-term danger of a cyclical downturn. But the lift that early adoption of such a program would give to the confidence of business and the public would have a prompt and salutary effect on the eco- nomic trends of the immediate future. Progress toward a solution of PAGENO="0340" 330 POLICIES FOR FULL EMPLOYMENT the long-term problem contributes substantially to improving the short-term outlook. Unfortunately, the converse is not equally true. I recommend this approach to your consideration. It is a practical resolution of the dilemma posed by the barriers to growth involved in the present tax system, and the inflationary effects of tax-reductiou involving substantial and persistent government deficits. (Tables acompanying Mr. Hagedorn's statement follow:) TABLE A.-Gross national product and related totals [In billions of dollars] Year Gross national product Disposable income Consump- tion ex- penditures Compensa- tion of employees Corporation profits after tax Business cx- penditures for plant and equip- mont Govern- ment ex- penditures 1 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 $234.3 259.4 258. 1 284. 6 329.0 347. 0 365.4 363. 1 397.5 419. 2 442.8 444. 5 482.8 503.4 518. 7 2 548. 5 $170. 1 189.3 189. 6 207. 7 227.4 238. 7 252. 5 256.9 274.4 292.9 308.8 317.9 337.1 349. 4 363. 6 2 378. 6 $165.4 178.3 381. 2 195. 0 209.8 219.8 232. 6 238.0 256.9 269.9 285. 2 293. 2 313.5 328. 5 338. 1 2 352. 6 $128. 8 141.0 140.8 154.2 180. 3 195. 0 208. 8 207. 6 223.9 242. 5 255. 5 257. 1 278.4 293. 7 302. 2 2 318.4 $18. 2 20.5 16. 0 22.8 19. 7 17. 2 18. 1 16.8 23.0 23. 5 22. 3 18.8 23.7 22. 7 23.3 25. 6 $20. 6 22.1 19. 3 20. 6 25. 6 26. 5 28. 3 26.8 28.7 35.0 37.0 30. 5 32.5 35.7 34.4 2 36. 3 $43.8 51.0 59. 5 61. 1 79.4 94. 7 102.0 96. 7 98.6 104.3 115. 3 126. 6 131.6 136. 8 149. 3 2 158. 7 I Purchases of goods and services, transfers, interest, and subsidies. 2 1st half estimate. 1st quarter estimate. Source: U.S. Department of Commerce; Council of Economic Advisers. TABLE A-1.-Various economic magnitude-s as a percent of gross national product Year Disposable income Consumption expenditures Compensa- tion of employees Corporation profits after tax Business expenditures for plant and equipment Government expenditures I 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 72.6 73.0 73.5 73.0 69. 1 68.8 69. 1 70.8 69.0 69. 9 69. 7 71. 5 69.8 69. 4 70. 1 2 69. 0 70. 6 68. 7 70.2 68. 5 63.8 63.4 63. 7 65. 5 64. 6 64.3 64.4 66.0 64.9 65.3 65.2 2 64. 3 55.0 54.3 54. 6 54.2 54.8 56.2 57. 1 57.2 56.3 57. 8 57. 7 57. 8 57.7 58. 3 58.3 2 58. 0 7.8 7. 9 6.2 8.0 6. 0 5. 0 5.0 4. 6 5.8 5. 6 5.0 4.2 4. 9 4.5 4. 5 3 4 7 8.8 8. 5 7. 5 7. 2 7.8 7. 6 7. 7 7. 4 7.2 8. 3 8. 4 6.9 6.7 7. 1 6. 6 6. 6 18. 7 19. 7 23. 1 21. 5 24. 1 27.2 27. 9 26. 6 24.8 24. 9 26. 0 28. 5 27. 3 27.2 28. 8 2 28. 9 I Purchases of goods and services, transfers, interest, and subsidies. 2 1st half estimate. 3 1st quarter estimate. Source: U.S. Department of Commerce, Coundll of Economic Advisers. Chairman PATMAN. Thank you, sir. Our next witness is Mr. John K. Langum. Mr. Langum, you have a prepared statement, I believe. You may proceed in your own way. PAGENO="0341" POLICIES FOR FULL EMPLOYMENT 331 STATEMENT OP JOHN H. LANGUM, PRESIDENT, BUSINESS ECONOMICS, INC., CHICAGO, ILL. Mr. LANGnM. I would like to go over my prepared statement, and with that I have prepared a document of 10 pages of tables which I should like to use along with my prepared statement. Chairman PATMAN. Without objection they will be inserted in the record. (Document referred to above follows:) CORPORATE PROFITS AND CASH FLOW John K. Langum, president, Business Economics, Inc., Chicago, Ill. Corporate profits in relation to depreciation accruals and capital outlays, 1946-61 tIn billions of dollars] Year Corporate profits after taxes Depreciation and amortization allowances Cash earnings Plant and equipment outlays Net cash earnings Corporate dividends 1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 $13.4 18. 2 20. 5 16. 0 22. 8 19. 7 17. 2 18.1 16. 8 23.0 23. 5 22.3 18. 8 24. 5 23.0 23. 3 $4.2 5. 2 6.2 7. 1 7. 8 9. 0 10.4 11.8 13. 5 15.7 17. 3 19. 1 20. 3 21. 6 23. 1 24. 8 $17. 6 23. 4 26. 7 23. 1 30. 6 28. 7 27. 6 29.9 30. 3 38.7 40. 8 41. 4 39. 1 46. 1 46. 1 48. 1 $12. 5 17.0 18.8 16.3 16.9 21. 6 22.4 23.9 22.4 24.2 29. 9 32. 7 26. 4 27. 7 30. 8 29. 6 $5. 1 6.4 7.9 6. 8 13.7 7. 1 5.2 6.0 7.9 14.5 10. 9 8. 7 12. 7 18. 4 15. 3 18. 5 $5.8 6. 5 7.2 7.5 9.2 9.0 9. 0 9.2 9. 8 11.2 12. 1 12. 6 12. 4 13. 7 14. 4 15. 0 Profit margins and rate of return on equity, all manufacturing corporations, 1947-61 Year Profit after taxes per dollar of sales Annual rate of profit after taxes on stockholders' equity Cents 6.7 7.0 5.8 7.1 4.8 Percent 15.6 16.0 11.6 15.4 11.8 1947 1948 1949 1950 1951 Average for period 6. 3 14. 1 1952 1953 1954 4.3 4.3 4.5 5.4 5.3 4. 8 4.8 4.2 4.8 4.4 4.3 10.2 10.4 9.8 12.3 12.0 10. 9 10.7 8.4 10.2 9.1 8.7 9.4 1955 1956 Average period for 1957 1958 1959 1960 1961 Average for period 4. 5 PAGENO="0342" C) C) C) -~) C) )-~C)C)_~_4 ..)C) C)C)C)C)C) C)C)C)C)C) C)C).-) C)C)CC)C)C) C C) C C) ~)) C) C) ~)c))!CUc)) C) C) C) C) C) C) C) C) C) ~)) C) -~ co C) ~ ~. 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