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/~~1:~~)/.i ;~
THE 1969 ELCONOMIC REPORT
OF THE PRESIDENT
HEARINGS
BEFORE THE
JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
NINETY-FIRST CONGRESS
FIRST SESSION
PART 2
FEBRUARY 17, 18, 19, 20, AN]) 24, 1969
Printed for the use of the Joint Economic Committee
I3ROPERTYOFRUT:tPOSITORY
COLLEGE OF SOUTI~J ~~T~UN1vERSITY
CAMDEN L( L!bR,4Ry
~ 08102
~LLW 2 1
~OV. DO~
U.S. GOVERNMENT PRINTING OFFICE
24-833 WASHINGTON : 1969
For sale by the Superintendent of Documents, U.S. Government Printing Office
V Li Washington, D.C. 20402 - Price $1
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HOUSE OF REPRESENTATIVES
RICHARD BOLLING, Missouri
HALE BOGGS, Louisiana
HENRY S. REUSS, Wisconsin
MARTHA W. GRIFFITHS, Michigan
WILLIAM S. MOORHEAD, Pennsylvania
WILLIAM B. WIDNALL, New Jersey
DONALD RUMSFELD, Illinois
W. E. BROCK III, Tennessee
BARBER B. CONABLE, JR., New York
SENATE
JOHN SPARKMAN, Alabama
J. W. FULBRIGHT, Arkansas
HERMAN E. TALMADGE, Georgia
STUART SYMINGTON, Missouri
ABRAHAM RIBICOFF, Connecticut
JACOB K. JAVITS, New York
JACK MILLER, Iowa
LEN B. JORDAN, Idaho
CHARLES H. PERCY, Illinois
RICHARD F. KAUFMAN,
FRAZIER KELLOGG,
EcoNoMIsTS
ROBERT H. HAVEMAN,
DotiGL~SC. FRECHTLING
(fl)~
JOHN R. KARLIE,
(Minority)
I
JOINT ECONOMIC COMMITTEE
[Created pursuant to sec. 5(a) of Public Law 304, 79th Cong.]
WRIGHT PATMAN, Texas, Chairman
WILLIAM PROXMIRE, Wisconsin, Vice Chairman
JOHN R. STARK ,Executive Director
JAMES W. KNOWLES, Director of Research
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CONTENTS
WITNESSES AND STATEMENTS
MONDAY, FEBRUARY 17
Page
Patman, Hon. Wright, chairman of the Joint Economic Committee:
Openingremarks 281
Javits, Hon. Jacob K., ranking minority member of the Joint Economic
Committee:
Statement on behalf of minority 281
McCracken, Hon. Paul W., chairman; accompanied by Hon. Hendrik S.
Houthakker and Hon. Herbert Stein, members, Council of Economic
Advisers 284
TUESDAY, FEBRUARY 18
Mayo, Hon. Robert P., Director of the Bureau of the Budget, accompanied
by Samuel M. Cohn, Assistant Director for Budget Review 337
WEDNESDAY, FEBRUARY 19
Kennedy, Hon. David M., Secretary of the Treasury; accompanied by
Charls E. Walker, Under Secretary, and Paul A. Volcker, Under Secre-
tary for Monetary Affairs 374
Statement of Hon. Charls E. Walker 390
Statement of Paul A. Volcker 391
THURSDAY, FEBRUARY 20
Shultz, Hon. George P., Secretary of Labor 426
MONDAY, FEBRUARY 24
Klein, Lawrence R., professor of economics, University of Pennsylvania - 489
Perry, George L., professor of economics, University of Minnesota 495
Suits, Daniel B., professor of economics, University of Michigan 497
Williams, Robert M., professor, Graduate School of Business Adminis-
tration, University of California at Los Angeles 500
ADDITIONAL INFORMATION AND EXHIBITS
Council of Economic Advisers:
Views on recommendations of U.S. Council of International Chamber
of Commerce on question of lifting controls on overseas private
investment 309
Average interest rate on national debt 332
Appendix:
Answers to questions received from Senator Javits 333
Answers to questions received from Senator Miller 334
Javits, Hon. Jacob K.:
Questions sent to Council of Economic Advisers 333
Questions sent to Budget Director Mayo 372
Letter to Secretary of the Treasury Kennedy 386
Kennedy, Hon. David M.:
Letter responding to Senator Javits' questions on (1) setting up capital
budget within Federal budget; (2) financing of Vietnam war out
of current revenues; and (3) new financial techniques such as
interest subsidies 386
Remarks made at White House, January 22, 1969 388
Appendix: Answers to questions received from Senator Miller 423
Mayo, Hon. Robert P.:
Supplementary comments on (1) proposal for preparation of more
~ comprehensive budget document; and (2) effect of anticipated
tax credit proposal on size of expenditures 369
Appendix: Answers to questions received from Senator Javits 372
Miller, Hon. Jack:
Questions sent to Council of Economic Advisers 334
Questions sent to Secretary Kennedy 423
(III)
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Patman, Hon. Wright:
"Banks Move To Open Old Loophole Will Provide Test of Tax Re-
form," Evans-Novak column from Washington Post, February
19, 1969
Shultz, Hon. George P.:
Prepared statement 426
Tables:
1. Employment status cf persons 16 years and over 434
2. Employment status of 16- to 19-year-olds by full- and
part-time status, color, and sex, 1968 annual averages~ 434
3. Major unemployment rate indicators 434
4* W~Ol~S~l~ price indexes for major commodity groups~~ 435
5. Consumer Price Index-U.S. city average 436
6. Consumer Price Index, effect on the total index, by major
category 436
7. Annual rates of change in compensation and earnings~ 437
8. Annual rate of increase in wages and wage benefits under
major collective bargaining settlements, 1965 through
1968
9. Average annual percent change in output per man-hour
and related data, 1947-68 437
10. Average annual rates of change in output per man-hour,
hourly compensation, and unit labor costs in the private
economy for selected years 437
Charts:
1. Inflationary expectations have been building up since
1965 438
2. The role of service industries in stabilizing employment~ 439
3. Payroll employment in goods-producing industries~ - - - 440
4. Payroll employment in service-producing industries_ - - - 440
5. Hours of work in manufacturing, contract construction.
and trade 441
6. Unemployed persons by reasons for seeking work, 1968
annual averages 441
7. Unemployment rates for teenages by color 442
8. Wholesale price indexes 442
9. Consumer price indexes: Commodities and scrvices - - - 443
10. Indexes of average hourly earnings, real average hourly
earnings, and the Consumer Price Index-1957-59
dollars
11. Output per man-hour, total private economy, farm and
nonfarm, 1947-68
12. Output per man-hour, compensation per man-hour, and
unit labor cost, total private economy, 1947-68 444
13. Output per man-hour and real compensation per man-
hour, total private economy, 1947-68 445
News release: "Employment situation surveyed in slum areas of six
large cities"
Response to Representative Reuss' request for statement indicating
"dimensions of a Department of Labor program designed to sop up
the unemployment caused by the slowing down of demand" 46t
Analysis: "Employment and Foreign Trade" (responding to request
of Senator Miller) 473
Letter relating to relation of wage rates in defense industries to defense
procurement costs (responding to request of Senator Proxmire)___ - 484
Suits, Prof. Daniel B.:
Extension of remarks relative to economic forecasting 512
Volcker, Hon. Paul A.:
Analysis of budget deficit 395
Table: Net "special" financial transactions in the U.S. balance of
payments, 1968 412
Information relating to contribution to ABA fund by Chase ~\`Ianhattan ~
Bank
Walker, Hon. Charles E.:
Tables:
1. Investment credit claimed, 1964 and 1965 416
2. Estimated taxes attributable to incomes of businesses, by
size of business receipts and form of organization, 1965- - - - 416
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THE 1969 ECONOMIC REPORT OF THE PRESIDENT
MONDAY, FEBRUARY 17, 1969
CONGRESS OF THE UNITED STATES,
JOINT ECONOMIC COMMITTEE,
TI~ as hington, D.C.
The Joint Economic Committee met, pursuant to notice, at 10 a.m.,
in room 318, Old Senate Office Building, Hon. Wright Patman (chair-
man of the joint committee) presiding.
Present: Representatives Patman, Reuss, Griffiths, Moorhead, Wid-
nall, Brock, and Conahie; and Senators Proxmire, Javits, Miller,
Jordan, and Percy.
Also present: John R. Stark, executive director; James `W. Knowles,
director of research; and Douglas C. Frechtling, minority economist.
Chairman PATMAN. The Joint Economic Committee will please
come to order.
Today we resume hearings on the state of the economy and the eco-
nomic outlook. We have already heard from the outgoing Council of
Economic Advisers and other officials of the previous administration
on the 1969 Economic Report of the President.
Today we welcome the new Council. You are all known to us as
highly competent and reputable economists, and you face a great
challenge in your responsibility to recommend policies to carry out
the objectives of the Employment Act, to promote maximum employ-
ment, production, and purchasing power.
I know that the members of this committee are eager to raise ques-
tions and discuss the economic policies of the Nation with you, Dr.
McCracken, and your associates.
First, I would like to yield to the ranking minority member, Senator
Javits, for a statement.
STATEMENT OF HON. JACOB K. JAVITS, RANKING MINORITY
MEMBER OF THE JOINT ECONOMIC COMMITTEE
Senator JAVITS. Thank you very much, Mr. Chairman.
Mr. Chairman, I am making this statement on behalf of the Repub-
lican members of the Joint Economic Committee, speaking as a mi-
nority with one voice.
The minority members of the Joint Economic Committee welcome
you here today for our hearings on the economic policies and programs
of the new administration for the coming year. There are several
p~ajor economic problems troubling our prosperity, left as a legacy
~f the previous administration. The Congress and the Nation will
hope and expect to receive during these hearings your current analysis
and evaluation of the economic issues facing this country and your
proposals for solving these problems.
(281)
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282
The major task for economic policy today is to halt inflation
while maintaining a high level of employment. It is true that we are
enjoying the lowest unemployment rates in 15 years, although the fact
this has been achieved during time of war reduces the pride we can
take in this feat. But, despite repeated warnings from the minority
of this committee a.nd others, the previous administration failed to
ta.ke the necessary measures to prevent rapid increases in our price
levels. Our consumer price level soared almost 5 percent last year, the
highest rate of inflation in almost three decades. Aside from redistrib-
uting purchasing power capriciously, excessive demand and the in-
flation it produces has caused major distortions in our economy.
For one, interest rates have risen to levels seldom seen before.
Recently, commercial banks lifted their prime lending rate to 7 percent,
a historical high. And the U.S. Treasury was forced to issue a medium-
term refinancing note as the highest Federal Government coupon rate
since 1865. We will want to know your assessments of the effects
of these high interest rates on financing business, housing, and public
facilities, and what the new administration feels should be done to re-
lieve these pressures.
Inflation must be brought under control, and it must be done so
in a manner consistent with ample employment opportimities provid-
ing adequate incomes-there need be no "price" in the form of sub-
stantially increased unemployment paid by society for a more stable
economy. We will be most anxious to hear how the new administration
plans to deal with this problem.
Inflation has also contributed heavily to continuing balance-of-
payments disequilibrium. In 1968, our trade surplus-for a long time
a source of strength in our international a.cco~mts-declined to the
lowest level in more than 30 years. Our overall balance of payments
for 1968 appears to show a surplus for the first time in more than a
dozen years. However, this is a "soft" surplus, purchased at the high
price of controls on our foreign investment and accounting gimmicks
in the form of "special transactions," which may not recur again.
Moreover, abnormally high interest rates in this country have distorted
normal international capital flows, providing us with an unusually
large inflow of capital last year that will not continue. So, far from
being able to take pride in our international payments position, we
must now find ways to improve our international competitive position
in a. way which will allow us to remove controls and bring our balance
of payments back into equilibrium.
After returning our price behavior and balance of payments to
order, the most important task for economic policy is planning for
the post-Vietnam war period. The transition from war to peace must
be organized so as to produce the least disruption in the progress of
our economy. We are pleased to hear tha.t the administration has ap-
pointed a special interagency study group that will address itself
to this issue. Further, what decisions are now being made to apportion
the Vietnam peace dividend-the Federal financial resources that will
be released by ending the war-among competing demands on the
Government? How much of this dividend is available for civihiaTh~
needs and not already committed to military programs?
Now is the time to plan how to best utilize these resources to meet
urgent domestic needs, especially in our cities, which have too long
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283
been ignored by the demands of financing the war, and to insure that
postwar readjustment is smooth and economic growth and stability
continuous. Of course, the economic problems of farms and rural areas
must also be attended to in any such plan for postwar reallocation of
Federal resources.
Another important economic issue is Federal tax reform. We are
gratified to hear that the new administration has placed this issue high
on its agenda. The previous administration professed a dedication to
tax reform that never materialized during its term in office. For too
long, the. Federal tax system has been looked upon as a device for
economic stabilization, and the fact that the burden for this stabiliza-
tion is not shared equitably has been ignored. We will want to know
and carefully study what specific reforms the new administration in-
tends to support to make our Nation's tax system more rational, equi-
table, and enforceable.
We also hope to hear representatives of the new administration ad-
dress themselves to better coordination and implementation of fiscal
and monetary policies. The great failure of economic policy in the
1960's was the delayed imposition of a substantial measure of real
fiscal restraint. The inflationary predicament we face today is in great
part due to the gross underestimation of the costs of the Vietnam war
and the failure of the previous administration to face up to the un-
avoidable choice between guns and butter. The resulting fiscal stimulus
of an already booming economy placed too much burden for restraint
on monetary policy, which resulted in serious distortion of money and
credit flows.
The ease in monetary policy after the enactment of the tax increase
last year appears to have been another major economic policy mistake.
The fear of fiscal overkill last year moved the Federal Reserve System
to allow money and credit to expand at increased rates. Although the
links between money and credit growth and economic activity are not
entirely clear, it is fair to say that the failure of fiscal restraint to curb
inflationary demand is due in no small part to mismanaged monetary
policy. We will want to learn how the new administration proposes to
better coordinate fiscal and monetary policies to achieve agreed-upon
economic results.
Within the framework of a fiscal policy devoted to encouraging high
employment without inflation, we will want to hear how the new
administration intends to reorder priorities to meet pressing economic
and social needs of the Nation. More specifically, how will this reorder-
ing `be reflected in changes in the budget prepared and submitted by
the previous administration?
In sum, the Congress and the Nation expect to learn how the new
administration proposes to deal with the major economic problems
inherited from the old administration. But while Government must
show the way to economic stability and increased prosperity, it can-
not achieve these goals by itself. This requires involvement of all
sectors of the economy and a dedication to making sound economic
policies and programs work.
~ We hope that these hearings will indicate the ways to improve our
various economic policies and lead to the results which have thus far
proved so elusive.
Thank you, Mr. Chairman.
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284
Chairman PATMAN. Thank you, Senator Javits.
Senator Miller, would you like to say a word?
Senator MILLER. Thank you, Mr. Chairman.
Mr. Chairman, and my colleagues, it is a great pleasure to present
to the committee the Chairman of the Council of Economic Advisers
who, along with his colleagues, are scheduled to testify.
The chairma.n, Dr. Paul McCracken, is an Iowan. He was born and
raised in Iowa and went to undergraduate college, William Penn,
in Iowa before going on to Harvard for his advanced degrees. His
parents and a brother still live in my State. He is no stranger before
this committee because he has testified before us on many occasions
especially while he was serving on the faculty at the University of
Michigan. But I am sure that it is rare indeed for a Senator from
Iowa to have the opporhmitv to present the top economist in our
Federal Government, Dr. Paul McCracken.
Chairman PATMAN. Thank you, sir.
Mr. McCracken, you have a. very comprehensive statement which
we appreciate. All the members received this 2 or 3 days ago.
They are familiar with it, and we would ask you to take about 20
minutes time, if that is sufficient; if not we will extend the time. Give
us a rósum~ of your statement, then we will ask you questions. Each
member will be allowed 10 minutes, and in that way we can probably
cover the ground just a. little bit be.tter. So you may proceed in your
own way with the understanding that your statement will be placed
in the record at this point in full.
Senator JAvrrs. Mr. Chairman, a parliamentary inquiry. Although
I have not consulted them, I believe the minority entirely approve of
the 10-minute rule, with the understanding that after the first round,
members may have another succeeding round of 10 minutes.
Chairman PATMAN. That is part of the rules.
Senator JAVITS. Exactly. I thank the chairman.
Chairman PATMAX. Any member can ask any question he wants
to if he sta.ys here long enough and the witness stays here long
enough.
All right, Mr. McCracken, we are delighted to have you, sir, and
you may proceed in your own way.
STATEMENT OP HON. PAUL W. McCRACKEN, CHAIRMAN, ACCOM-
PANIED BY RON. HENDRIK S. HOUTHAKKER AND RON. HERBERT
STEIN, MEMBERS, COUNCIL OP ECONOMIC ADVISERS
Mr. MCCRACKEN. Thank you very much, Mr. Chairman. On behalf
of my colleagues, Dr. Stein and Dr. Houthakker, I want to express
to you our very deep appreciation for this opportunity.
Your com1mttee and our Council are the two bodies set up b the
Congress and the President in discharging their responsibilities under
the Employment Act of 1946. There is certainly much to be gained
from cooperation between us. We want this morning to try to ex-
plain to you, and through you to the Congress as a. whole, and to the
American people the economic thinking that underlies the Adminis-
tration as it shapes its programs and, at the same time, we hope and
we are certain that we shall learn from von.
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285
There has always been in principle a potential problem in the rela-
tionship between the Joint Economic Committee and the Council of
Economic Advisers. The members of the Council are economists, and
like other economists they are always prepared to talk. But they also
have a position of confidence as advisers to the President, and there
may be matters which must be kept confidential. In practice, however,
as we observe the history, this problem has not prevented a quite full
interchange between the Council and the committee.
We would propose, if you agree, to operate according to the pro-
cedure that has now been established. When you invite us to do so, we
shall testify in public and on the record. If matters arise on which we
are unable to speak, either in public or at all, we shall try to explain
our inability. We hope in such circumstances that you will understand
our problem. We would expect such circumstances to be extremely
rare, however, if they occur at all.
Since the Council along with the rest of the administration has been
in office only 4 weeks, we are not prepared to lay before you a com-
prehensive program covering the enormously wide range of the Gov-
ernment's economic activities. Neither are we prepared to analyze in
detail all of the conditions and problems of the national economy.
There is much that we do not know. This will always be true, but it is
truer today than we hope it will be later. In fact, each of us would agree
that in some respects he knows less today than he knew, or thought he
knew, 5 weeks ago. Nevertheless, we think it important to report our
current thoughts, however incomplete and tentative they may be.
Great problems beset the American economy, and our statement will
concentrate on some of those problems. This is natural and proper, but
it can also be misleading if the problems are not seen in their context.
For the basic truth about the American economy is not that it has
problems but that it is highly successful. The American economy gen-
erates the highest volume of output per capita the world has ever
known. This output is far from equally distributed, but it has become
more and more widely distributed. Most Americans enjoy, by any cri-
teria, exceptionally high levels of living earned with exceptionally
little physical toil. Moreover, Americans enjoy a high degree of free-
dom in choosing both their ways of living and their ways of working.
Thirty years ago many thought there was a fatal flaw in the American
economy-the problem of instability and unemployment, which gave
rise to the establishment of your committee and our Council. Although
instability remains a problem, at least potentially, and serious pockets
of unemployment do. exist, great progress has been made since the act
was passed.
This successful performance did not just happen. It has required
the abundance of our natural resources and a highly skilled people.
But also, and even more importantly for our purposes, it has resulted
from our economic and political system. This system defies simple
description. The fact that it is so commonly called a mixed system only
reveals that. But surely the distinctive feature of this system is the
great freedom individuals have in the use of their labor, talents, and
- wealth, in associating with others for the organization of production,
and in disposing of the resulting income. This freedom is disciplined by
competition, but its restraint by tradition or the dictates of govern-
ment has been remarkably light in comparison with other times and
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280
other places. The freedom of indviduals to use their own resources is
a key factor in the success with which the American economy satisfies
the needs of individuals.
The American economic system as it. exists today did not. spring
full blown from the brow of some Scottish philosopher or Virginia
gentleman 200 years ago. It has evolved over the decades. From time
to time observers of our condition have claimed to see a radical turn-
ing point, with the system coming to be dominated eithe.r by monopoly
capitalists or by overpowering government. They have proclaimed the
advent of ominous new eras or new industrial states or roads to
serfdom. These claims have always turned out to be exaggerated. The
economy has changed in many respects, but its fundamental reliance
on freedom disciplined by competition has remained. Corporations
and labor unions are larger than they used to be, and the Federal
Government is much larger than it used to be. But the economic and
social environment within which we move has also greatly expanded.
With the growth of incomes, knowledge and mobility the opportunities
open to the average American in choosing his manner of living and
working are broader than human beings have ever enjoyed before.
We believe that freedom with competition has been and remains
a key element in the success of the American economy. This does not
mean, obviously, tha.t we see no problems requiring Government action.
But it does mean that we should seek solutions to prolilems that rely
upon and strengthen, or at least do not weaken, the free and competi-
tive character of our system. The great success of economic policy in
the last generation in dealing with large-scale unemployment shows
the effectiveness of this approach. lYhen the unemployment probleni
was at its most critical, in 1932 and 1933, there was a common belief
in the United States, shared by conservatives and liberals, that. solu-
tion of the problem would require radical change of the system in
the direction of Government planning and control. This idea persisted,
although with diminishing force, into the late 1940's. However, at the
same time we were discovering that the solution of the problem lay in
a different direction-in the use of fiscal and monetary policy to guide
the growth of total demand. This solution required thought and action
by the Govermuent, but it did not require direct Government control
of the activities of individuals and businesses. In approaching other
problems there are similar opportunities for constructive Government.
action that leaves the market process free to work.
We are also impressed by the fact that all important economic policy
decisions must be made in the face of great uncertainty, about the fu-
ture economic conditions in which policy will operate and about the
effects of policy. This should not lead to paralysis or indecision. Still.
it is a basic fact that must be given due weight in our decisions. We
cannot act as if our most probable estimates are certain. WTe must ask
ourselves not only what will be the best course if our estimates are
correct but also what will be the safest course if the estimates turn out
to be incorrect. There is a natural tendency for people to exaggerate
the certainty of their own knowledge in offering policy advice. This
leads to bad policy recommendations. Moreover, the exaggeration soon
becomes clear, and it can lead to a general skepticism which under-
mines the deliberative process. In any case, we hope to recognize for
ourselves and to reveal to von the uncertainties of information and
analysis with which economic policymaking must contend.
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287
EQUALITY AT THE STARTING LINE
We would like to concentrate here on two main problems-domestic
economic stabilization and international economic relations. However,
we must also say a few words about another problem which we regard
as one of the most critical, perhaps the most critical, now facing us.
That is the problem of bringing disadvantaged groups more fully into
the mainstream of our economic life. We are unable to say much about
this today because we, like others in the administration, are in the early
stages of reviewing the efforts that have been initiated in recent years
to deal with this problem.
At an early stage of history membership in a family or class was
considered to be a proper criterion for access to material affluence.
Then came a breakthrough as we insisted that every person should
be able to go as far as his inclinations, energy, and ability could carry
him, regardless of class or race or sex. Today we are in the midst of
another breakthrough. as we realize more fully the implications of the
fact that people begin life's race unequally positioned around the
starting line. Some begin so far back, through early cultural or educa-
tional handicaps, that latent ambition and ability never have the op-
portunity to flower and activate. The expectations of the poor and the
conscience of the community as a whole, in short, will not be satisfied
only to reap the gains for the poor yielded by continued economic
progress and high employment.
\~Te must, of course, always remember that American economic
growth has been the most effective engine in history for eliminating
poverty, and this continues to be the most basic requirement for prog-
ress here. And the maintenance of reasonably full employment will
continue to contribute to the reduction of poverty. Especially in the
short run, therefore, measures to increase the steadiness and productiv-
ity of employment can deal with only part of the problem. As poverty
is now commonly measured, over half of the heads of poor households
are unable to work, because of age or disability or because they are
mothers of small children. In the longer run increasing employment
and productivity will reduce the numbers of such people in poverty
also. But for the present we must accept the fact that there are millions
of poor for whom strong employment conditions generally will not
be the answer.
For these people income support or income insurance is necessary.
We do have systems for this, including social security and public
assistance, through which large sums of money are paid. However, the
public assistance, or welfare, system we have today does not measure
up to the goals and capabilities of the American society. In many
States the amount provided is grossly inadequate, and the terms on
which support is given are often demeaning. Also, experiments are
underway with procedures for making the determination of eligibility
more objective and less objectionable. We look forward to rationaliza-
tion and improvement of the income support system as a major ob-
jective for the Nation.
The ability to transfer money through the budget is not unlimited,
of course, for economic as well as political reasons. If we now raise
assistance for the poor in our scale of national `priorities, as we should,
we should be rigorous in trimming those budget flows which serve
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288
purposes now of lower priority. We think that a practical approach to
the poverty problem will require great firnrness in dealing with other
expenditures and with tax reliefs and privileges not related to the
antipoverty objective.
We would say one further word on this subj ect. The problems here
are deeper than income alone. It is necessary for everyone to have an
opportunity-not a certainty but a chance which individuals can im-
prove by their own efforts-to do what is sometimes called making it.
There needs to be an opportunity to attain greater independence and
status. Our antipoverty efforts have not given sufficient emphasis to
this.
THE GOALS: MAXIMUM EMPLOYMENT AND PRICE STABILITY
The Council of Economic Advisers was created by the Employment
Act of 1946 to assist in carrying out the mandate of that act which
calls the Government to use all of ~ts capabilities to achieve and main-
tain maximum employment. We, of course, accept that mandate.
But even if there were no Employment Act, anyone who has lived
through the past 40 years or knows its history muSt put maximum
employment high on the list of national goals. Although we are a
relatively affluent society, we cannot afford the loss of output that
would result, and has resulted in the past, from persisting and large-
scale unemployment. However, the main consequences of unemploy-
mnen~ are not to be seen in the statistics of output. They are seen in the
psychological injury to those individuals to whom the society seems
to say, "We have no use for you."
Of course, we no longer conceive of the possibility of unemployment
rates as high as 25 percent-the rate for 1933. It might seem that
differences of a percentage point or two in the unemployment rate
would not be a matter of major consequence. However, that is not the
case. LTnemployment is highly concentrated. In 1967, the average
unemployment rate was 3.8 percent. During the year, however, 87
percent of the civilian labor force experienced no unemployment
while 13 percent, or 11.6 million persons, did experience some unem-
ployment. For most of these t.he period of unemployment was short.
But there were 2.6 million persons, or 2.9 percent of the labor force
who were unemployed for 15 weeks or more, of which I million per-
sons-1.1 percent of the labor force-were unemployed for more than
26 weeks.
Unemployment, is not randomly distributed across the labor force.
Everyone does not have an equal risk of being unemployed. The likeli-
hood of being unemployed is much greater for teenagers, for women,
for the unskilled and for nonwhites than for the rest of the labor force.
The likelihood of being unemployed for a considerable period in any
year is especially great for the unskilled, for the nonwhite, and for the
aging. The human and social implications of this are obvious.
A recent study by the Bureau of Labor Statistics reveals how impor-
tant even a. relatively small difference in the national average rate of
unemployment may be for the disadvantaged. Between the fourth
quarter of 1967 and the fourth quarter of 1968, when the seasonally
unadjusted national average unemployment rate fell from 3.7 to 3.2
percent, the unemployment rate in urban poverty nemghborhoods of
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289
the 100 largest metropolitan areas fell from 6.9 to 5.2 percent; and
the unemployment rate of Negroes in these neighborhoods fell from 9
to 6.4 percent. Clearly we must try to reduce this concentration of un-
employment. We interpret the mandate of the Employment Act, there-
fore, as having a qualitative as well as a quantitative dimension.
The Employment Act set other goals for us in addition to maximuni
employment. The most critical of these today is expressed in the term
"maximum . . . purchasing power." This term has been commonly
interpreted by the President and by the Joint Economic Committee to
embrace price level stability and avoidance of inflation, and we see that
if we examine the Economic Report and the Report of the Joint Eco-
nomic Committee.
Thus, President Truman in his 1948 Economic Report said:
"Our purchasing power objective for 1948 should be to effect
the economic adjustments which are necess~ry to afford adequate
protection against inflation."
A decade later in his Economic Report President Eisenhower
declared:
"A clear responsibility rests on Government to pursue policies
that will help prevent inflation."
And in 1965 President Johnson said:
"I regard the goal of overall price stability as fully implied in
the language of the Employment Act of 1946."
There have been .29 annual and midyear Economic Reports of the
President. Only three of these failed to express a concern about infla-
tion and to affirm the national goal of price stability. Similarly, only
three of the annual reports of the Joint Economic Committee failed to
express concern over inflation. Each of the exceptions occurred during
a recession.
Thus the President and the Congress have not only regarded price
stability as an important national goal. They have also announced it
as a goal and have given the American people every reason to think
that it is the policy of the Government to avoid inflation. This is in
itself a fact of m.uch importance.
There are three main reasons for the continuing and almost universal
concern with inflation. The first is the random, unjustified, and inequi-
table distribution of gains a.nd losses that it ca.uses. All of us-Govern-
ment, businesses, and individuals-are constantly making commitments
for the future in dollar terms. We agree to work or to hire labor for
so many dollars an hour or year. We invest in life insurance or pension
funds which entitle us to receive specified numbers of dollars at some
time in the future. The Government undertakes to pay social security
benefits, veterans pensions, and interest in the future in specified
amounts of dollars. The Government se.ts tax rates whose height
depends on income measured in dollars.
The real value and effect of all these commitments depends on the
prices prevailing at the future time when the dollar payments are
made. Obviously a person who bought a Government savings bond or
put money in a savings deposit 3 years ago has lost 10 percent of the
real value of his investment through inflation. After paying taxes on
interest income, his "real" rate of return has been small, and for some
it was negative.
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When people enter into these commitments they have, some expecta-
tion, more or less explicit, about what is going to happen to prices.
Even if everyone were now to expect and to anticipate inflation, it
would not make the present inflation harmless. People are now living
with commitments to pay or to receive money which they had under-
taken in the expectation of much less inflation than has recently been
occurring. These people are being hurt. If we should now make the
recent rate of inflation permanent, their injury would continue for
years to come.
Just who gains and who loses from inflation is hard to calculate.
The gains and losses are to individuals and tend to offset each other
in sta.tistics about groups. Thus measures of impact based on displace-
ments of broad groups-wage earners, older people, farmers-obscure
and underestimate the hardships.
There are, however, certain things that can reasonably be said. An
inflationary environment creates more problems for the "little fellow"
than for the sophisticated investor. It. may well pose more intra.ctable
problems for the small businessman than the large corporation.
And one thing we can confidently say. Those who have taken at face
value the Government's announced policy of avoiding inflation have
lost in recent years. It is the Government's responsibility to provide
good money-money whose value is predictable. To provide good
money t.he Government must bring its actions about inflation into line
with its declarations. Since it is hardly conceivable that the Govern-
ment would declare a policy of inflation, honest treatment of its citi-
zens requires action to prevent inflation.
A second reason for concern with inflation, in addition to the in-
equities it works upon individuals, is the dist.ortion it causes in the pat.-
tern of production and in business and financial decisions. The calculus
of investment and lending decisions tends t.o become less discriminating
as people come to assume that inflation will bail out even poor decisions.
Perhaps the most important., and cert.ainly the most visible, of these
`adverse effects is on housing. In a period of actual and anticipated
inflation the demand for credit from all quarters is high. Individuals
and businesses are eager to borrow funds, which they expect to repay
later in dollars of less value, and savers become less interested in fixed-
dollar assets. Interest rates~ therefore, rise sharply, a.nd flows of funds
into institutions particularly important in financing homes are cur-
tailed. We see this today. When the new administration assumed its
responsibilities, yield rates on new FHA mortgages had pushed to the
11/2 percent zone. These high rates were a direct consequence of the
inflation that had been allowed to gather momentum.
Because of the inflation a mortgage must now be larger to buy the
same house. Because of the impact of inflation on interest ra.tes, the
monthly payments on a $20,000, 25-year mortgage must now be over 20
percent larger than three years earlier. Nor could these rates have been
relieved by a more expansive Federal Reserve policy. This would have
activated a further overheating of the economy, which would then
have given another upward thrust to interest rates. 2
The third main reason for concern with inflation is its effect on the
balance of payment.s and the international position of the dollar. While
we shall discuss this in the later section of our stat.ement, we must point
out here that the serious deterioration in our trade balance largely
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291
reflect.s the. flood of imports, which usually happens when demand be-
comes excessive and merchandise from abroad pours in to fill the gap.
MTe are the victims or beneficiaries of the past with respect to the
choices that are open to us as we confront this difficult problem of
inflation. But our successors will be the victims or beneficiaries of
what we do.
1/Ve have in this difficult situation three principal alternatives:
1. We could cut back economic expansion severely enough to stop
the inflation at once, and keep it at zero until the expectation of *no
inflation became firmly established. This would probably cause a period
of substantial unemployment.
2. We could try to continue the policies of recent years that have
produced substantial and accelerating inflation-as measured by the
consumer price index, 2.8 percent in 1967, 4.2 percent in 1968, and
at a 5 percent rate by the final quarter of 1968. Housing would be
severely affected, further serious strains would be imposed on the inter-
national economic and financial system, and profound further changes
would be apt to occur in the way savers would be willing to make their
funds available.
3. Our third alternative would be to embark upon a course of grad-
ually and persistently reducing the rate of inflation and thereby gen-
erating the expectation of diminishing rates of inflation in the future.
None of these courses is free of costs or risks. We have inherited a
difficult situation. There is no point to pretending that we have a way
to escape from this history. However, we believe that considering the
national interest in high employment, price stability, and vigorous and
on-going expansion, the strategy of moving steadily and gradually to
reverse the inflationary trend is indicated.
WThat would this do to unemployment? This is an urgent question
for all concerned Americans. So long as anyone wanting work is un-
able to find a job, we have unfinished business. These are, however,
reasons for hope that the impact would not be large. It is significant
that during the last 3 years we gained little on the unemployment front
for the ground that we lost on the price level. The unemployment rate
was the same in 1967 as in 1966 (3.8 percent), and it was 3.6 percent
in 1968; thuogli it is true, of course, that by the end of the year it was
3.3 percent. At the same time no one can assure that the distortions
from 3 years of economic overheating and price inflation can be cor-
rected with no effect on unemployment.
THE INSTRUMENTS OF ECONOMIC POLICY
The principal way by which the Government can achieve its objec-
tives for the economy is to influence the rate of growth of total spend-
ing for goods and services. This is true whether the chosen strategy
is the one we have just suggested or some other. If the objective is to
slow down the rate of inflation perceptibly but gradually so as to keep
unemployment low, we shall need to slow down the rate of growth of
total demand gradually as the means of achieving that objective.
From time to time, in the United States and elsewhere, attempts
have been made to promote the achievement of expansion and price
stability by recourse to "incomes policy." Essentially this means an
attempt by education, persuasion, exhortation, threats, or other means
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292
short of mandatory and specific controls to induce businesses and labor
organizations to hold price and wage increases below the amounts
that would naturally occur in the prevailing market conditions, mar-
ket conditions, by the way, it is worth repeating. which reflect the
Government's basic fiscal and monetary policy. The United States has
had recent experience with this kind of policy under the name of
wage-price guideposts. lYe question whether these should play much
of a role in the period ahead.
The concept of incomes policy has strong fascination for policy-
makers. It seems to promise the advantages of controls, which many
people want, without the disadvantages, which almost no one wants.
But in fact the benefits sought have been realized only to a minor
degree, if at all, and never for very long, whereas the policy has
brought many of the disadvantages of a controlled system and some
of its own. This has been true in the LTnited States as elsew-here. As
a result the short life of incomes policy has become as predictable
as the attempts to use it.
Probably the chief reason for the general ineffectiveness of incomes
policy is that it can apply only to a. limited segment of the economy.
This is the segment of centralized national unions a.nd large corpora-
tions. Even within that segment the distribution of the Government's
influence is quite uneven. And those upon whom the influence is
exerted become resentful and resistant, for understandable reasons.
They have been singled out by no relevant, criterion but only by vulner-
ability. They a.re asked to follow rules of behavior that are arbitrary
and become more arbitrary as the policy is pushed harder. The rules
have not been established by due process of law. They are sometimes
enforced by the threat of using Government powers not given for that
purpose. All of this undermines the moral basis on which the policy
originally rested. For it.s part the Government has set up rules of
voluntary behavior and is torn between seeing its rules violated and
making the behavior less voluntary.
The President has the right and dut.y to use the moral leadership
which goes with his office to achieve major national objectives. He
cannot forswea.r such action. But he must use this leadership judi-
ciously and not dissipate it by using it in circumstances where it is
unlikely to be effective or where the moral basis is not clear.
There are, however, a number of areas where the necessary and
legitimate activities of government affec.t labor or product markets
and where these activities should take into account. the national
interest in Price stability and high employment. This includes, for
example, international trade polic~ measures to promote competition,
the Government's management of its own procurement, and those
cases in which the Government. sets minimum wage rates or maximum
rates or prices. The Council of Economic Advisers is interested in the
effects of all of these decisions on economic stability. We have not
had an opportunity to bring ourselves abreast of pohic~y in these areas,
however, and will say nothin~ more about. them here.
Our present main ~concern is with slowing down the rate of growth
of aggregate demand in a way that will not cause an unacceptable in-
crease in unemployment. And beyond that we are concerned with
maintaining steady growth of aggregate demand at a rate that will
be consistent with continued high employment and reasonable price
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293
stability. The main instruments for accomplishing these objectives will
be fiscal, monetary, and debt management policies. The Joint Eco-
nomic Committee has, of course, taken the lead in teaching the country
about the instruments of economic stabilization, starting with the
notable hearings conducted by the present chairman and by Senator
Douglas almost 20 years ago. The country has now had a good deal
of experience with the use of these instruments, and it is worthwhile
to see what has been learned from that experience. We do not propose
to review this history in detail but only to summarize what we think
are its lessons.
The evidence strongly supports the view that fiscal and monetary
policies taken together have a powerful influence on the rate of
growth of total spending and on employment and prices. This influ-
ence has not always been exercised in the right direction and amount
or at the right time to stabilize the economy. But the historical rela-
tionships between changes in fiscal and monetary conditions and
changes in economic conditions, although by no means precise, are
consistent with a priori expectations of the power of these policy
instruments.
It is hard to separate and measure the distinct effects of fiscal actions
and monetary actions. Nevertheless, we believe the most reasonable
conclusion is that both are important and it would be imprudent to
disregard the overall effects of either.
There is much disagreement about the channels through which
monetary policy affects the economy and consequently about the best
measures of the direction and degree of monetary action. Specifically,
there is disagreement about whether monetary restraint or stimulus
is exerted or measured by changes in the supply of money. which can
be measured in various ways, by changes in the supply of bank credit
or of total credit, or by changes in the general level of interest rates
or in the relationships among interest rates, or in still other variables
that could be mentioned. We are inclined to the position that the
behavior of the supply of money is very important. However, we do
not regard this question as settled and have no desire to be dogmatic
about it.
We believe that fiscal policy would have been significantly more sta-
bilizing than it was in the past 10 years if it had followed a steadier
course, with smaller variations in the size of the surplus that would
have been yielded at high employment. The rise in the high employ-
ment surplus between 1958 and 1960 and the rise in the deficit between
1965 and 1967 were excessive and contributed to instability. What now
seem to have been the chief successes of fiscal policy from the stand-
point of stability-the tax reduction of 1964 and the tax increase of
1968-were both corrections of previous departures from a steady
path.
The parallel statement about monetary policy is less certain. Because
of the existing disagreement about the best measure of the restrictive-
ness or ease of monetary policy, one cannot be confident of the effects
that would have been yielded by a steadier policy in the past or about
how to define a steadier policy for the future. However, if one accepts
our opinion about the great importance of the supply of money, it is
probably true that a steadier rate of growth of the supply of money
would have contributed to economic stability.
24-S33-G9---~pt. 2-.2
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Circumstances are possible when departures from the steady path
for fiscal or monetary policy or both would be desirable. There may
be fluctuations in the private economy too strong to be constramed
within reasonable limits without extraordinary fiscal or monetary
action. Moreover, oiice fiscal or monetary policy have strayed far from
the reasonably steady path, measures of adjustment are needed to get
back to it. Our point is that frequent adjustments of policy to correct
dimly foreseen future departures from the desired path of the econ-
omy are on balance likely to be more unstabilizing than stabilizing.
To achieve a stabilizing fiscal policy, or at least avoid a destabilizing
one, we need to learn how to separate decisions about the overall posi-
tion of the. budget from decisions about particular expenditure pro-
grams and questions of tax structure. On many occasions-notably,
the long debate over the 1964 tax cut and the long deba.te over the
1968 tax increase-timely action was prevented because these issues
became entangled.
We also believe that the conduct of anti-inflationary monetary policy
is easier, and can be counted on more reliably, if the Federal Govern-
ment is not a. continuous large borrower during periods when restraint
is needed. This obstacle to sound monetary policy is not insuperable.
Nevertheless, it would be desirable to t.ry to run a surplus in the budget
at times of inflationary pressure and also to arrange the debt so that
the proportion of it having to be refinanced every quarter or year is
not. so large as at. present.
The fiscal and monetary requirements of domestic stabilization are
often consistent with the requirements of balance-of-payments equilib-
rium. This is true, at least in direction, today. But often the domestic
and international goals are not inconsistent and we need to find
better ways t.o reconcile them.
Despite limitations of knowledge and conflicts of objectives, fiscal
and monetary policy are capable of maintaining a. high degree of
economic stability-a higher degree than in the past decade. How-
ever, no one can promise precise adherence to the path of steady growth.
OUTLOOK AND POLICY FOR 1969
As we encounter the requirements of economic policy at the be-
ginning of 1969, t.he basic fact we find is that the country has run out
of the easy way of doing things.
1. Continuing rapid inflation has generated `a strong inflationary
psychology. This makes it highly dangerous to allow the inflation
to cont.inue.. At. t.he same time it makes the task of slowing down the
inflation difficult, because it increases the risk of adverse effects on
real output.
2. The credibility of t.he Government's repeatedly stated policy of
stopping inflation has been weakened. New announcements of policy,
however sincere, will not turn around the existing inflationary psy-
chology. At. least at first a new policy will have to work against, not
with, the prevailing psychology.
3. The potentialities of slowing down inflation by appealing to t.he
good behavior of business and labor have been weakened by overuse
and misuse.
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295
4. The budget, using the unified budget concept, has been brought
barely into a projected balance by the imposition of a tax surcharge
from last year's $25 billion deficit.
5. Many demands for Federal expenditure programs have been
staved off by promises incorporated in legislative authorizations, with-
out the provision of funds to meet them. The problem of establishing
budget priorities has not been met but has been allowed to pile up.
6. The prudent structuring of the debt has had to be deferred as a
result of the ceiling on interest rates for longer term securities. As a
result the average maturity of the outstanding marketable debt has
been allowed to decline to 4 years, from 5 years 4 months at the begin-
ning of the Vietnam buildup. This presents an obstacle to anti-infla-
tionary monetary policy. In its first refinancing the new administra-
tion did offer the longest maturities permitted by existing interest
rate ceilings.
There is little room for choice among feasible and desirable courses
for the economy in 1969. In general we agree with the picture for the
year as a whole drawn by President Johnson and his Council of Eco-
nomic Advisers in their January 1969 Economic Report. Gross na-
tional product for the year as a whole should be about $921 billion.
Average unemployment for the year would be less than 4 percent. The
year-to-year price increase, as measured by the GNP deflator, would
be around 31/2 percent. This would serve the imperative need to initiate
a perceptible decline in the rate of inflation. This result should be
achievable with the recommended budget and appropriate monetary
policy.
We are, however, less confident about the feasibility or desirability
of the pattern of developments expected through the year and about
the policy by which this pattern is to be achieved. The economic re-
ports are not entirely explicit about this but we believe that the picture
can be fairly summarized as follows:
The rate of expansion would slow down markedly in the first
half of 1969. The fiscal restraint initiated in mid-1968 would have
more of its expected impact and to this would be added the effects
of the social security tax increase of January 1, 1969, and the
tighter money that began in the latter part of 1968. In addition,
there would probably be some decline in the rate of inventory
accumulation. The slowdown would not be so great as to cause an
actual reduction in output, but output would grow much less
rapidly than in 1968 and unemployment would rise slightly. The
most important effect would be a decline in the rate of inflation,
which would continue to influence the trend of prices subsequently.
After midyear, according to the report, the increase of output
would quicken, but would remain at a rate below the growth of
potential. The rate of inflation would continue to decline and the
rate of unemployment would continue to rise, both slowly. The
unemployment rate at the end of the year would still be below
4 percent. The rate of expansion foreseen in the second half of
the year would require or permit some easing of monetary re-
straint after early 1969, especially since fiscal restraint would be
continuing.
Our main concern with this projection of 1969 is that it may not
bring us to the end of the year with the rate of inflation perceptibly
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2~6
declining, which we believe to be. an impor~.ant objective if economic
stability is to be reestablished. We regard some slowing down of the
rate of expansion in the first. half of the year as probable, although the
evidence is still uncertain. Much of the case for the slowdown rests on
fiscal impacts which have proved in the past to be smaller, or at least
`slower, than was expected. The effects of the monetary restraints un-
posed in the latter part of 1968 may be felt only gradually in the first
half of 1969. It is worth noting that the unemployment rate remained
at the Decembe.r level of 3.3 percent in January. The slowdown in the
first half may, therefore, turn out to be smaller than the economic
report. assumes. Particularly, it seems unwise to count on the slowdown
in the first half exerting such a cooling effect on the economy that the
rate of inflation in the sec.ond half would continue to decline even
though the rate of the economic advance generally would be accel-
erating.
The record of 1967 may be instructive. There was a bigger slowdown
in the first half of 1967 and a.n upturn in the `second half roughly
comparable to that apparently implied in the last Council's projec-
tions for 1969. Still we find it significant. and worrisome that by the
end of 1967 the ra.te of inflation was `again accelerating.
We think that the rate of expansion consistent with our economic
goa.ls in the second half of the year may be less than the economic
reports imply. The goal should be to assure that. the rate of inflation
declines persistently throughout the year. This result would be. con-
sistent with President Johnson's estimate that the unemployment rate
for the yea.r would a.verage less than 4 percent. It would also be. con-
sistent wit.h a gross national product for 1969 which would differ from
President Johnson's estimate of $921 billion by much less than the
usual margin of error for such estimates. It would, however, mean a
slower rate of expansion in the latter pa.rt of the year.
Our view of the outlook and goal for 1969 implies the need for con-
tinuation of a budget whose expenditures are a.t least matched by the
revenues from the tax system-assuming reasonably full employment.
`Whether this will require extension of the tax surcharge depends on
the outcome of the current review of expenditure programs. We are
aware of the opinion held by some that fiscal actions in general, and
the extension or expiration of the surcharge in particular. have little
or no effect on total spending, prices, and employment. However, in
the present st.ate of our knowledge, and in the present. state of infla-
tionary psychology, it would be rash to act on the assumption that the
return to a budgetary deficit would have negligible direct. inflationary
effects. Moreover, the reemergence of a large Federal deficit would
create greater strains on the economy-particularly in financial sec-
tors-in effectuating a stabilizing monetary policy. Aside from the
inflationary effects, we would be concerned about the probable con-
sequences of a. renewed Federal deficit on the supply of funds for
private investment, especially housing.
As you know, the administration is now engaged in a review of the
bwlget for fiscal 1970 submitted by President. Johnson, particularly in
a search for opportunities to cut spending. The Director of the Bureau
of the Budget will testify about this tomorrow. We want to make
only two observations on this subject. First, we do not foresee prob-
able changes from the budget submitted earlier that would have a
major effect on the economic outlook for calendar 1969. Nevertheless,
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297
even relatively small immediate reductions would relieve the strain
on private capital markets, and notably on the supply of funds for
housing. Second, even though the immediate payoff in expenditure
reductions may be small, a start on critical review of the budget is
necessary to make room for tax reduction and expansion of high-
priority expenditure programs later.
To achieve a continuous moderate reduction of the rate of inflation
during 1969 will require an appropriate degree of monetary restraint.
The last report of President Johnson's Council of Economic Advisers
suggested that sometime in 1969 monetary policy might be able to
"shift to a less restrictive stance." This seems to us unlikely unless the
expansive forces in the private sector turn out to be significantly
weaker than was indicated in the reports.
Management of stabilization policy would be assisted if the Treas-
ury had a wider range of choice in selecting the terms of new securities
to be issued. Under present law, the Treasury may not issue securities
with a term in excess of 7 years with an interest rate of more than
4% percent, which has only meant that the Treasury could not sell
long-term securities at all. It would be desirable for the administration
to have a means of absorbing liquidity, by selling longer term securi-
ties. it would also be desirable to get the structure of the Federal debt
into a longer average term, so that the operation of monetary policy
wa~ not inhibited by the constant presence of the Treasury in the capi-
tal markets as a borrower. In 1967 the Treasury asked Congress to
raise the maximum term of securities exempt from the 4%-percent
ceiling, which was then 5 years, to 10 years. Congress would only agree
to raise the exemption to 7 years. We believe that this whole subject
deserves reconsideration.
We must recognize the possibility that events will not follow the
path that we now regard as desirable and feasible. The intensity of the
built-in forces for inflation in the economy are difficult to predict
However, while the available instruments and knowledge do not allow
us to control the upward path of the economy precisely, we are confi-
dent that a determined monetary policy and steady fiscal policy will
hold variations in the course of the economy to reasonably narrow tol-
erances. There is, of course, the possibility that a slowing down of the
economy might so puncture inflated expectations as to cause a decline
which might for a time outrun the capability of economic policy to
reverse it. We see no good reason for this to happen. The Government's
intention to pursue a moderate and gradual course of cooling the in-
flation is clear. Although minor variations are inescapable, with or-
derly and steady management of economic policy the most reasonable
expectation for real output and incomes at any time in the future is
that they will be close to the path of normal growth. Still we must be
prepared for the possible need to support the economy. The Govern-
ment is sensitive to this possibility and ready to use the available fiscal
and monetary instruments.
We must be prepared for the possibilities that will be opened up
with the decline of spending for the Vietnam war when that comes.
One of these would be a decline in economic activity. WTe do not be-
lieve that a decline is necessary and are confident that with proper
advance planning the decline could be kept small and brief if it oc-
curred at all. A program is now underway, under the direction of
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the Chairman of the Council of Economic Advisers, to continue studies
begun under the previous administration to make. sure that the needed
plans are ready, and an interagency study group has been established
to consider this matter.
1. What are reasonable projections of the course of Vietnam spend-
ing as this conflict starts to be resolved?
2. What will be the differential adjustment problems then posed for
different areas, industries, and labor-force groups?
3. What policies and programs will contribute to a smooth transi-
tion for the economy and for these different parts of the economy?
4. How should the resulting room in the budget be divided among
claimants?
We must never be satisfied with any level of unemployment, and
this emphasizes the need to push on with specific measures to reduce
the normal level of unemployment and its concentration. A- great many
programs to do this have been initiated, and they have apparently
worked with different degrees of success. The administration is actively
engaged in evaluating these and considering new possibilities. We at
the Council regard this as a- matter of great urgency, as the next great
challenge flowing from the Employment Act in the present st-age of
development of fiscal and monetary policies. Since, the Secretary of
Labor will come before your committee later, we shall not pursue these
matters in detail here.
We do, however, want to make one further comment. If something is
deemed to be socially desirable, things will usually work out better
if incentives are arranged so that this is also in the interest of the
people themselves. As you know, the administration is intensely inter-
ested in the use of tax incentives to promote the training a-nd employ-
ment of hard-to-place workers. Well-designed tax incentives could
have the advantage of placing workers directly into the economic sys-
tem-which is, of course, a powerful machine for training and employ-
ing people-rather than into Government programs, with all the
prcthlems of management they entail. We should be able to use tax
incentives to promote objectives of highest present priority while
clearing the tax structure of special privileges that no longer serve
an important social objective.
The ra-pid flowering of new manpower training programs in recent
years, mainly financed a-nd planned from Washington but run locally,
has created an unmanageable system. It is difficult to -assure that the
policies determined by Congress and the administration are being
carried out, that all categories of needs are being met, and that dupli-
cation is being avoided. The Department of Labor, in consultation
with other agencies affected, both Federal and State, is now making
plans for improving the administration of the manpower programs.
The Secretary of Labor is also examining possible improvements
of the unemployment compensation system, including ways to reduce
the obstacle the system now places in some States to retraining the
unemployed. Other related effort-s are being directed to improvement
of the employment service and to the development of statistics on job
vacancies which can be used as a guide for national manpower policy.
What we have to report to you in this area. is only a beginning, but
we wa-nt you to know that we give the subject the highest priority,
and we intend to pursue it actively.
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THE UNITED STATES AND THE WORLD ECONOMY
In our international relations we seek to obtain the `benefits of effi-
cient use of our productive capabilities and capital through inter-
change with others in a system where others realize similar benefits,
and to assist others-notably in the poor countries-to advance their
own economic development. In some respects, especially in the aggre-
gate flow of trade and investment, the performance of the international
economic system has been highly successful. This has been a reflection
of the growth of national economies in the industrialized countries,
which has itself been promoted by favorable policies adopted around
the end of World War II, and steps taken since.
Even where progress has been greatest, however, the potentialities
of international economic relations are far from being fully realized,
and there is danger of retrogression. In our own balance of `payments
and in the `international monetary system as `a whole we have been
living with continuing problems which have been prevented from
erupting into crisis by ad hoc measures, which provide no permanent
solution. Our economic relations with the less developed countries,
often a source of frustration on both sides, must also continue to he
of special concern to us.
Some of our problems here are directly rel ated to developments in
our own economy. In the last 10 years the U.S. balance of merchandise
trade-as reported in the balance-of-payments accounts-rose from an
unusually small surplus of $0.1 billion in 1959 to a surplus of $6.6
billion in 1964, and then fell to a $0.1 billion surplus in 1968. During
this period, exports grew at an average annual rate of 9.2 percent
from 1959 through 1964, and 7.2 percent per year from 1964 through
1968. The change in the trade balance has come mainly from imports,
which grew at au average annual rate of only 4 percent from 1959
through 1964, but surged to an average growth rate of 11.6 percent
from 1964 through 1968.
While there were some specific structural factors affecting the trade
balance, much of the improvement in the trade balance from 1959 to
1964, and its subsequent deterioration, can be traced to movements in
U.S. income and prices relative to those of our major trading part-
ners. Changes in domestic business activity and income affect im-
ports fairly quickly through changes in demand, and more slowly
through the lagged effect of price changes. As long as income grows
steadily in line with the capacity of the economy, imports tend to
grow fairly steadily along trend. The growth of exports is mainly
determined by foreign demand conditions, unless hampered by a
squeeze on domestic production capacity. When the growth of domes-
tic demand for output overshoots capacity, shortages appear in some
industries, delivery lines lengthen, domestic price increase, and im-
ports tend to rise sharply. In 1967, for example, the demand for out-
put in the United States rose by 5.6 percent, and 3.6 percent of the
increase went for the purchase of merchandise imports. In 1968,
gross national product increased 9 percent, and the rise in imports
was 8.9 percent of the rise in gross national product. Thus, part of
the explanation of the surge in imports since 1964 has been the high-
indeed, inflationary-growth of domestic demand. It also appears,
however, that since World War II our imports have tended to in-
crease more rapidly than gross national product.
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Another major factor behind the movement in the trade balance
since 1959 has been U.S. pric.e performance relative to the other in-
dustrial countries. From 1959 to 1964, prices in the United States were
fairly stable, while prices in Europe, the United Kingdom, and
Japan rose markedly. This relative price improvement, operating
through a long and som~times unpredictable lag process, contributed
to the improvement in the balance of trade during those years.
Since 1965, however, U.S. prices, under the pressure of excess de-
mand. have, risen somewhat faster than in most industrial countries,
contributing to the deterioration in our trade balance. From 1964 to
1968 the U.S. export unit value index has risen by 8.9 percent, while
the import unit value index has gone up by only 3.8 percent. Even if
the domestic demand for output is slowed in 1969 and 1970, the lagged
effects of past and continuing price increases will continue to pose
problems for us.
The growth in U.S. merchandise exports-9.2 percent in 1959-64 and
7.2 percent in 1964-68-covers a divergence between the growth rate of
exports of manufactured goods, which rose in the latter period, and
that of foodstuffs and crude materials, which fell sharply.
After growing at a rate of 10.2 percent per year from 1959 to 1964,
the rate of growth for food exports began to fall in 1965 and 1966.
These exports have actually declined in the last 2 years, falling by
1968 to about the 1964 level of $4.6 billion.
This abrupt halt in the growth of foodstuff exports, which were 18
percent of total exports in 1964, has slowed the total growth of exports
even though the growth rate of manufactured goods exports has picked
up. One of the factors is the increase in grain production in some of
the less developed countries, which is welcome in itself. Of greater
concern fcr our food exports in the coming years is agricultural policy
in the European Economic Community (EEC), now again being clis-
cussed in Europe. The EEC system of high internal support prices,
variable import levies, and export subsidies for agricultural products
results in the retention of unneeded resources in farm productioii. in-
creasing agricultural surpluses within the Community, and intensify-
ing price competition in third-country markets. As long as the EEC
continues this system, it is hard to visualize any major gain in U.S.
agricultural exports, though the United States, with its highly efficient
farming, ha~s a strong comparative advantage in many important agri-
cultural products.
A structural factor operating both on imports and exports is the
United States-Canada Automotive Products Agreement which permits
free trade in autos and parts across the United States-Canadian border.
The rationalization of procluctioii that this agreement has encouraged
has increased both exports and imports, but imports ha.ve so far shown
the larger increase. The automobile manufacturers are still adjusting
to the possibilities opened by the agreement, so its effects on exports and
imports can be expected to continue for some time.
When we turn to U.S. earnings on investment abroad, we find a more
reassuring picture. These earnings have shown steady and rapid
growth throughout recent decades. During the 1960's, the average
annual rate was about 12 percent. This is somewhat greater than the
growth rate of U.S. direct investment abroad, which reached $59.3
billion at the end of 1967. The total foreign investment in the United
States reached $2 billion at the end of 1967. Almost 60 percent of the
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total value of U.S. direct investment abroad at the end of 1967 was in
Canada or 111 the less developed countries of Africa, Asia, and Latin
America, including all the major oil-producing countries.
Beginning in 1965 it was judged necessary to discourage the out-
flows of investment funds which generate these important earnings,
first through a voluntary and then through a mandatory control pro-
gram. Much attention has been given to the "improvement" in the bal-
ance of payments under the 1968 mandatory program. To the extent
these improvements were achieved by reduction in plannned invest-
ment, they may be transistory, involving reduced investment income in
future years.
The outlook for our external payments during the coining year de-
pends to a considerable measure on the buoyancy of domestic demand
for output and on credit market conditions here relative to those
abroad.
If we are successful in slowing down the rate of inflation, this should
result in some reduction in the growth of imports and ultimately con-
tribute to the competitiveness of U.S. exports. In addition, the adverse
balance-of-payments effects of the steel and copper strikes of 1968 will
not be repeated in 1969, though there may be some unfavorable effects
of the prolonged dock strike. Some improvement in the n'ierchandise
balance may thus emerge during the coming year, possibly resulting in
a small increase of the 1969 trade surplus over 1968.
At the same time, it would be imprudent to assume that the capital
accounts, whose performance. was exceptionally favorable in 1968, will
be equally helpful in 1969.
Beyond measures to strengthen our external payments positmon gen-
erally we shall also need to give attention to trade policy. Here our
basic objective must be to continue the progress made during the post-
war period toward a more liberal and open international trading sys-
tem, one from which we and our trading partners receive the mutual
benefits of international specialization and exchange. Not only does
trade make a direct contribution toward a more productive use of our
resources and consequently toward a higher level of living, but it is
also one of the strongest stimulants to healthy competitive behavior in
the domestic economy. The restraining influence which world competi-
tion places on our domestic prices is of particular importance in infla-
tionary periods such as this.
In the postwar period great strides have been made toward reduc-
ing tariff impediments to international trade. Much remains to be done
in reducing the nontariff barriers such as quotas, taxes, unjustified
health and sanitary regulations, and discriminatory government pro-
curement policies which have limited the access of our exports, par-
ticularly of agricultural products, to foreign markets.
It is particularly important for its part that the United St.ates not
take actions which would prejudice our negotiations for a general liber-
alization of nontariff barriers, a liberalization which would benefit us,
and we must be especially conscious of the effects that our remaining
trade barriers have in denying less developed countries access to our
markets and those of other advanced countries.
Economic growth and improved living standards in the world's poor
countries are essential to a stable world order and an expanding world
economy. There is much that t1a~ flnited States can do to assist this
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302
development effort. Reduction in trade barriers is one important ap-
proach but capital transfer and technical assistance are also essential.
The administration has been given a congressional directive to re-
view U.S. foreign aid programs. In making recommendations for
change, we must profit by experience under the existing program,
preserving its good features, and developing new ways to increase the
effectiveness of our foreign assistance efforts and gain them greater
public support.
Among the new departures to be considered are proposals system-
atically to promote increased private investment in less-developed
countries. Significant progress in this direction has been made by
AID's Office of Private Resources, which assisted some 250 corpora-
tions and nonprofit groups in fiscal 1968. The book value of U.S.
private direct investment, in less-developed countries was about $17
billion in 1967, but 50 percent of this was in petroleum or in mining
and smelting. Only 25 perceimt was in manufacturing. While this was
a significant increase from the 15 percent share of manufacturing in
1960, even more should be done to increase the total flow of private
investment funds and to direct these fmmds into nonextractive indus-
tries. Governmental programs of foreign aid will, of course, also con-
tinue to be desirable..
A quarter of a. century ago an international conference convened at
Bretton Woods, N.H., and agreed to set up a new system of world
finance. With the trade and financial chaos and warfare of the 1930's
fresh in their memories, the participants were determined to create
a trading world that would be conducive to national growth and freer
exchange among nations. Unlike the classical gold standard, which
had been in operation for some decades prior to World War I, the.
Bretton Woods system sought to free countries from the necessity to
correct externa.l deficits by excessive internal deflation. The conferees
also wanted to resurrect the. climate of confidence and overall stability
that had accompanied the classical gold standard in its heyday. Con-
sequently, they wished to avoid the unpredictability of exchange rates
which had exerted a debilitating effect on trade and capital move-
ments, but they also recognized that orderly procedures for changes in
rates were necessary to keep the system close to a durable equilibrium.
The system that was then established, after lengthy deliberations,
has often been discussed before your committee, and therefore needs
no further description. It is enough to say that it has served its Imr-
poses with an astonishing degree of success. International tradle and
investment has expanded rapidly. B and large international coopera-
tion gained the upper hand over inward-looking nationalism. And
there has been no postwar parallel to the economic warfare that had
prevailed during the 1930's.
It is clear that a. system which permitted these impressive achieve-
ments has great merit and strength. The system has actually proved
to be capable of considerable adaptation to changing needs, especially
to the increased need for reserves. The ever-growing need for liquidity
is itself a result. of the growth in international transactions under
the Bretton Woods system, but it is also related to difficulties in the
adjustment process. In the private sector the Eurodollar market con-
tinues to be an important source of liquidity. In the realm of official
reserves the Special Drawing Rights facility should promptly be
brought. to the stage of activation on an adequate scale.
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Less progress has been made in another important problem area,
namely the adjustment process. To maintain an appropriate equili-
brium in its foreign transactions, any country should look first of all
to its domestic policies. If it runs an external deficit as a result of
internal inflation, its first efforts should evidently be to cool down its
economy; conversely a country with unemployment and a balance-of-
payments surplus should stimulate the demand for output. In these
cases there is no conflict between the goals of internal and external
balance.
But the situation is not always so straightforward. Sometimes a
country has both unemployment and a balance-of-payments deficit-
this was our position in the early 1960's-or it has both high em-
ployment and a balance of payments surplus-this has been the case
in certain foreign countries. At the moment, of course, there is no
question that a reduction in our rate of inflation, which is necessary
for domestic reasons, will also strengthen our balance of payments in
the long run and help to maintain confidence in the dollar as a reserve
currency.
It is nevertheless a serious misconception to believe that domestic
measures aimed at full employment without inflation will always be
sufficient automatically to assure external equilibrium. "Discipline"
is necessary for good domestic policy, and usually helpful to the
balance of payments, but it cannot always be relied upon to balance
the international accounts. This was recognized in the Bretton Woods
agreement., but its adjustment procedures have been rarely used, at
least by the major countries. Nevertheless these procedures were in-
tended to cope with a real problem and the virtual abandonment has
left a gap in the arsenal of instruments for economic policy. In the
absence of more suitable instruments, several countries-including the
United States-have turned increasingly to direct controls, which
detract from the benefits of free international exchange and rarely
offer a durable solution. Yet a system that lacks appropriate devices
for correcting disequilibria is clearly at the mercy of adverse develop-
ments-and of these there is no shortage, as the recent international
monetary crises have shown. The search for improvements in the ad-
justment process must therefore be pursued with vigor. Some of the
possibilities are discussed in the Council's 1969 Report, and the work
of this committee has been valuable in focusing attention on new
thinking in this entire area.
In our very understandable concern about improving the world
trading and financial systems, however, we must keep squarely before
us the central importance of good domestic economic policies. With a
reasonably stable price level and orderly, vigorous growth of our do-
mestic economy, this Nation can make its most basic contribution to
world economic stability. If we cannot manage our own economic af-
fairs in an orderly way, our advice about organizing the world econ-
omy is apt to receive the limited attention it would then deserve.
CONCLUSIONS
We are now in the early stages of an era whose economic potential
is unusually bright. If it is to be an era of reasonably full employ-S
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304
ment, new jobs must be created at the rate of 11/2 million per year.
Real incomes a.nd output should rise 50 percent during the next decade,
and the fruits of this progress will be diffused more broadly to all
our people. Levels of living throughout the world will also be rising,
not only for the "miracle" economies such as Japan or Taiwan, but also
for the developing nations. With the more diversified patterns of
output and demand that accompany economic progress, opportunities
for enlarging world trade should continue to grow more rapidly than
national incomes. This is the promise we face. It can be realized if we
rise to the challenge and pursue economic policies that encourage
orderly economic growth and reasonably full employment at home,
and a more free and intergrated economy in the world at large.
Mr. Chairman, this concludes our statement.
Chairman PAT~L~x. Thank you, Dr. McCracken. You have given
us a very thought-provoking statement. lYe appreciate it. You are
always constructive. I know.
You have appeared before this committee many times and you have
always been helpful to the committee in your statements.
I would like to ask you first about the "Quadriad." Did the President
appoint the Quadriad this year or was he just accepting the Quadriad
as set up? I n.m talking about monetary policies, and interest rates,
and things in that area.
Mr. MCCRACKEN. Yes. The Quadriad, as I understand it, in recent
years has been a somewhat informal institution for consultation among
the Secretary of the Treasury, the Chairman of the Federal Reserve
Board, the Director of the Budget, and the Chairman of the Coun-
cil of Economic Advisers.
We have met once or twice. I would guess that we shall continue.
I am not aware that there has been any directive or any procedure
for formalizing this as an institution.
Chairman PATMAN. Now then, there is a. committee appointed by
the President as I understand it, a President's Committee on Economic
Policy, as an overall group: is that correct?
Mr. MCcRACKEN. That is correct..
Chairman PATMAN. Mr. Burns is Chairman. Mr. Arthur Burns-
Mr. MCCRACKEN. The Chairman or the presiding officer of that
Committee is the President.
Chairman PATMAN. The President is the presiding officer? Let me
see if I have their names correctly.
Mr. MCCRACKEN. Yes.
Chairman PATMAN. The President is the presiding officer and Mr.
Burns is next to him, I assume?
Mr. MCCRACKEN. Well, there are eight members in addition to the
President. These would be the Vice President, Secretary of Treas-
ury~
Chairman PAT3IAN. Secretary of Agriculture, Secretary of Coin-
merce, Chairman of CEA; and Director of the Bureau of the Budget.
Why is it that Mr. Martin is not on that. committee?
Mr. MCCRACKEN. The Cabinet Committee on Economic Policy is
a committee within the administration.
Chairman PATMAN. I see.
Now, it is an overall committee, that means it will have priority
over the Quadriad. In other words, if there is a. difference of opinion
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305
between the Quadriad and this new Cabinet Coimnittee on Economic
Policy as an overall group, the overall groups' policy will prevail,
is that correct?
Mr. MCCRACKEN. The Cabinet Committee and the Quadriad will
have somewhat different responsibilities and, of course, they are~
Chairman PATMAN. I know; but suppose there should be a difference
between these groups, as it was with President Johnson in 1965 on
December 6, and the Quadriad wanted to raise interest rates, and
this overall group didn't want to raise interest rates. Who would
have the decisionmaking power?
Mr. MCCRACKEN. In other words, if there was a difference of opin-
ion on monetary policy-
Chairman PATMAN. I am not talking about that so much. I am talk-
ing about who has the power now? Would the overall group have it
or would the Quadriad have it?
Mr. MCCRACKEN. The Cabinet Committee on Economic Policy is, of
course, concerned with policy issues within the administration.
Chairman PATMAN. I am talking about interest rates now, and the
suppiy of money-monetary policy. If that issue comes up now, who
will have the decisionmaking power?
Mr. MCCRACKEN. The Federal Reserve in this case.
Chairman PATMAN. The Federal Reserve. Why, the Federal Reserve
is not even on the overall policy committee.
Mr. MCCRACKEN. The Federal Reserve is the organization with the
responsibilities for monetary policy.
Chairman PATMAN. Do you believe the Federal Reserve2 without
regard to the President in power, should fix monetary policy, including
interest rates? They are not elected by the people, not one of them.
Even a justice of the peace has to be elected. Of course, the President
has been elected by the people, and the Congress has been elected by
the people, and you are going to say that somebody who never has
been elected, have 14-year lifetime terms, will pass upon these impor-
tant questions like interest rates and supply of money, notwithstand-
ing the `objection of the administration :in power.
Mr. MCCRACKEN. Well, I think there are two questions here. One is
the question given the way the Government is currently set up and
given the authority which has been delegated to the Federal Reserve
by the Congress-
Chairman PATMAN. May I respectfully dispute that. You can read
the law, the Federal Reserve Act, you can read all the hearings before
Congress at that time, House and Senate, and you will not find one
reference to the fact that the Federal Reserve would be independent
from the Government and act independently from them. You will not;
will you?
Mr. MCCRACKEN. No; not independent of the Government.
Chairman PATMAN. All right.
We are in accord with that. So there is nothing said in the legislative
history of the Federal Reserve Act that it would be independent. It is
not in the law that it is independent. It is just like any other law that
is passed by Congress and the Constitution says shall `be executed by
the President. Wouldn't you agree with that?
Mr. MCCRACKEN. Well, I can't speak in regard to the legal aspects
of this.
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Chairman PATMAN. WTe11, I will. Of course, the 10 minutes apply to
the chairman as apply to the other members, which I will respect. I
will have to make my comments a little briefer.
Do you consider, Dr. McCracken, that the interest, the aggregate
interest, paid by the American people today in all respects and forms,
such as the interest on the national debt, and the public and private
debt-do you consider that the amount in the aggregate is too much?
Mr. MCCRACKEN. Well, that-no.
Chaii~rna.n PATMAN. Not necessarily?
Mr. MCCRACKEN. It is a very difficult question to answer.
Chairman PATMAN. All right.
Mr. MCCRACKEN. I think interest rates-I am unhappy that interest
rates ha.ve risen to the levels they now have.
Chairman PATMAN. Now, of course, I. can't discuss it too much, but.
I want to invite your attention to the fact that under the Federal
Reserve we are paying our debts twice sometimes, a.nd more. You
take, for instance, the fact that the Federal Reserve didn't want to
have to come to Congress for its appropriation to do business. All
other a.gencies of the Government do. But out of the 100-and-some-
odd agencies of the U.S. Government., t.he Federal Reserve agency
does not.. That agency found a way to get around it, and the way
they do it is, they take the Bureau of Engraving and Printing money
over here, which is also a. Government obligation, and trade it for
Government bonds that are outstanding and due in the future, interest
bearing, which in effect cancels those bonds because it is one Govern-
ment obligation paying for another Government obligation; and Mr.
Martin, the Chairman, has admitted to me a number of times in
public, in testimony, that that meant the debt was paid.
Now, of course, when it was a billion dollars or 3 or 4 billion, it didn't
mean much, but now it has reached over $50 billion that we have paid
for, I mean we have paid for once and we are paying interest on them
at the rate of almost $2 billion a year just the same as if they had never
been paid for.
Now, obviously, the object of doing that is that the Federal Reserve
can take that interest and spend as much of it as they want to. They
have got a $2 billion amount available to them every year to spend
any way they want to and there is no accounting, not even an in-
dependent audit. The General Accounting Office has been refused
permission to audit their books; no way to determine whether it is
honestly done or not. All right. Out of that $2 billion they pay out
about $250 million for the private banks, and for their own expenses,
with no audit of these funds. ~\Te don't know exactly where it goes.
But the rest of it goes into the Treasury, as it should go.
So my point is, don't you think there should be an audit of those
books?
Mr. MCCRACKEN. That is a matter on which I would not have an
expert opinion.
Chairman PATMAN. I will not insist on it, but I will urge you to do
this. You are in a very important position, representing the President
of the United States. I don't know that the President could have
found a better one; you stand mighty well with this committee. We
have confidence in you. But I urge you to look into that and see if
we can't cancel that $53 billion (that has been paid for once, save $2
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billion a year, reduce our national debt by that much which would
certainly help this inflationary situation. See if you can't come up with
something, Dr. McCracken. Will you give it consideration?
Mr. MCCRACKEN. We shall.
Chairman PATMAN. Talk to your colleagues about that. We would
appreciate it.
Now, regarding the reference you made a while ago to the debt: that
long-term debt should be eased; are you advocating taking off that
4˝-, 41/4-percent ceiling that was passed over 40 years ago?
Mr. MCCRACKEN. Yes; some modification of it.
Chairman PATMAN. Will you put in the record the modification that
you have in mind?
Mr. MCCRACKEN. I wouldn't have a specific proposal. I think it
would be better for that to come from the Treasury.
My concern as an economist is that with this limitation the debt
has been piling up at the short-term end, and this has complicated
the problem of economic policy.
Chairman PATMAN. All right. Thank you very much, sir. My time
is up.
Mr. Javits?
Senator JAVITS. Dr. McCracken, I would like to join the chairman
in expressing our confidence in you and the satisfaction we have in
your appearing today.
Now, do you bespeak the policy of the administration when you
say in your statement, "However, we believe that considering the na-
tional interest in high employment, price stability, and vigorous and
ongoing expansion, the strategy of moving steadily and gradually to
reverse the inflationary trend is indicated"?
Mr. MCCRACKEN. Yes; I think so.
Senator JAVITS. And does that mean that you have chosen the third
alternative of your own paper, which says, "Our third alternative
would be to embark upon a course of gradually and persistently re-
ducing the rate of inflation and thereby generating the expectation of
diminishing rates of inflation in the future."?
Mr. MCCRACKEN. Yes; this would be our position.
Senator JAVITS. Do you believe that this will have a measurable ef-
fect of increasing unemployment above the figure of 3 to 4 percent at
which it has generally hovered over the last year?
Mr. MCCRACKEN. In our judgment, this policy can be pursued with-
out pushing "unemployment," to use your term, substantially above
that zone within which it has moved in recent years.
Senator JAVITS. Does the administration intend to pursue this policy
even if it does result in increasing unemployment measurably above
4 percent, or will it undertake a change in direction if it sees it going
out of that ball park, so to speak?
Mr. MCCRACKEN. I am sure this administration will always be
watching very closely the problem of unemployment as one of the
major objectives of economic policy. We shall want to feel our way
along here, and if policies seem to be producing an impact, then we
would certainly want to take this into account.
Senator JAVITS. In order of priorities, will the administration fol-
low this doctrine in economic policy wherever it leads or will the ad-
ministration give the priority to keeping unemployment within reason-
able levels?
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Mr. MCCRACKEN. I think I would put it this way. Our concern is
to try to have the maximum employment and output in growth in
the long run. It seems to us at this particular juncture we have to
give some attention to the price level, but certainly the matter of high
unemployment will continue to be a very major concern for the
administration. Certainly we would not counsel watching the price
level to the exclusion of any concern about unemployment.
Senator JAVIT5. Pursuing that philosophy of gradualism, which is
what it is, the implication is, given in your statement, that you would
look with favor upon a continuance of the tax surcharge. I call your
attention to the statement. "Aside from the inflationary effects, we
would be concerned about the probable consequences of a renewed
Federal deficit on the supply of funds for private investment, espe-
cially in housing" and so on. "Moreover the re-emergence of the large
Federal deficit would create greater strains on the economy-par-
ticularly in financial sectors-in effectuating a stabilizing monetary
policy."
Do you contemplate, because this is very important in view of
the President's pre-election position, the real possibility that in view
of your, the administration's policy of gradualism in respect to fiscal
policy, that we may have to continue the tax surcharge?
Mr. MCCRACKEN. I think I would answer that question this way.
In our judgment, it is quite important that we not allow another major
deficit to emerge. The budget on the expenditure side is being reviewed
by the Director of the Budget now. Whether we can maintain an
essential balance without the surcharge or whether that must be con-
tinued, I suppose, will depend on the outcome of this review. But it
is quite possible-it is quite possible that economic and budgetary
conditions will require the continuance of this tax.
Sena.tor JAVITS. Now, do you state the policy of the administration
when you say: "Real incomes and output should rise 50 percent during
the next decade, and the fruits of this progress will be diffused more
broa.cflv to all our people."
Mr. MCCRACKEN. Yes; I think that would be a. fair statement of
what I understand the Administration's objective to be.
Sena.tor JAVITS. That is their objective.
Now, moving to foreign economic policy: Do you agree with the
recommendation of this committee which was made last year that there
ought to be reforms in the international monetary system, and that
one of these reforms is to negotiate a change in the present fixed
exchange system that would permit wider fluctuations in exchange
rates under the IMF different from the present one percent?
Mr. MCCRACKEN. As we indicated in our statement we are impressed
with the way the international economy has flourished under the
present system, but we are also concerned about the growing trend
toward controls here and abroad.
We consider that we would be derelict in our duty not to explore
various modifications of this system which might be helpful.
As to which ones specifically will ultimately turn out to be the
desired course that remains to be seen. It depends a great deal, of
course, on developments and on sentiment around the world. We are
not interested in unilateral action.
Senator JAvIT5. Rather than not be interested in unilateral action,
aren't we interested affirmatively in multilateral action?
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309
Mr. MCCRACKEN. Correct.
Senator JAVITS. Isn't the objective of our policy going to be the
endeavor to have the whole international community carry the burden
of international credit for international trade?
Mr. MCCRACKEN. And to share the benefits, of course, too.
Senator JAVITS. And share the benefits, of course. But we certainly
do not shut our minds, therefore, in this administration to a change
in the Bretton Woods Agreements?
Mr. MCCRACKEN. We certainly want to explore any ideas that may
turn out to be helpful.
Senator JAvrrs. Now, on foreign trade policy, I have just one ques-
tion. Do you feel that the efforts of the administration, announced as
trying to obtain a voluntary agreement to restrict textile imports, will
not inhibit the administration in resisting other protectionist pres-
sures, whether in steel or other commodities?
Mr. MCCRACKEN. I am hopeful that that will not have this effect
of inhibiting a general movement in that direction. I do think the
interconnection between our domestic economy and our external pay-
ments here is a part of the problem.
Our domestic overheating has produced a substantial flood of im-
ports, and this tends to create some of these pressures for protection-
ism. But the basic problem is, of course, to deal with our problem of
domestic economic policy.
Senator JAVITS. Just one last question, if I may, Mr. Chairman.
On the matter of U.S. private investment overseas, I am delighted
that you have indicated the strong benefits of that to the United
States. Will the administration examine very seriously and critically
the recommendations for discontinuing or materially reducing the
interest equalization tax and otherwise lifting restraiiits on U.S. over-
seas private investment?
Mr. MCCRACKEN. I think I can assure you that this whole range of
problems is going to receive careful attention and study.
Senator JAVITS. Will you give for the record-and I ask unanimous
consent that it be included at this point-a written reply as to the
views of the Council of Economic Advisers on the recommendations
of the U.S. Council of the International Chamber of Commerce on
this question of lifting controls on overseas private investment? Could
you give it to us later in writing?
Mr. MCCRACKEN. We will give it to you.
Chairman PATMAN. IVithout objection, it will be received and made
part of the record.
(The following was subsequently supplied by the Council of Eco-
noniic Advisers.)
We share the United States Council's disiike of investment restraints, and
look forward to their relaxation and elimination at the earliest possible date.
As their paper notes, "these measures were originally introduced for temporary
periods." It is important that they not be allowed to drag on indefinitely.
While sharply criticizing the controls, the International Chamber of Corn-
rnerce refrains from suggesting that they be abruptly eliminated. Rather, the
Chamber stresses that, in working towards a relaxation of the controls, two
objectives should be kept in mind. The risk of serious damage to the balance
of payments should be limited, and the greatest possible gains in terms of
simplification and flexibility should be sought. We `share these two objectives.
The desirability of reducing the controls should be obvious to all. At the
same time, `an abrupt elimination of controls would raise a number of difficulties.
Not only would there be the possibility of a marked adverse movement in the
24-S33-G9-pt. 2-3
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310
balance of payments, but there might also be very undesirable inhibitions on
domestic policies. In particular, it is undesirable for the United States to be
under strong pressures to keep interest rates high for international purposes.
As we squeeze the inflationary psychology out of the economy. we may safely
look forward to some decline in our interest rates. For domestic purposes, and
in particular for the health of the housing industry, it is important that we
maintain our option to have lower interest rates.
In terms of simplifying our investment control program, there is perhaps more
to be gained by concentrating our efforts at relaxation on the foreign direct
investment program rather than the interest equalization tax. At the same
time, we would agree with the observation of the Chamber that the relative
position of interest rates in the U.S. and abroad reduces the need for an interest
equalization tax of 1)4 percent.
The capital control programs are currently under review as part of the Ad-
ministration's balance of payments study, and it would be inappropriate to
discuss the specific suggestions of the United States Council in greater detail at
the present moment.
Senator JAVITS. I thank the chairman.
Chairman PATMAN. Senator Proxmire?
Senator PRox~IIn~. Chairman McCracken, I want you to know I
share with the chairman of this committee and the ranking Republican
their pleasure at your appointment. This was a splendid appointment
by President Nixon and I know you will do a great job.
In the President's Economic Report,* on page 94, the following is
stated:
It is doubtful whether acceptable levels of unemployment and reasonable price
stability can both be achieved without the successful implementation of struc-
tural anti-inflationary measures and a voluntary cooperation in wage and price
decisions.
Now, you just rejected quite em~~hatically in your statement two or
three times, in fact, the notion that you should be involved in wage-
price guidelines. Mr. Shultz yesterday on television was even more
emphatic. President Nixon said the same thing in his first press confer-
ence so I think we are getting the message that you are not going to use
wage-price guidelines in this administration.
At your confirmation hearings before the Senate Banking Commit-
tee, I think it was Mr. Houtthakker who stated that antitrust policy
would not be an effective means of stemming inflation in the next 2
years. It might be in the long run you are for it but it wouldn't be help-
ful in the short run.
You are opposed to wage and price controls; you are opposed, I
presume although you haven't explicitly said it, at the present time to
credit controls.
Now, that leaves fiscal and monetary policy and our experience in
relying on fiscal and monetary policy to control inflation in the past
without wage-price guidelines and without any of these other meas-
ures has indicated we had to go to as high as 6 percent unemployment
before we were able to turn down the rise in the cost of living.
What is there in the present economic situation that persuades you
that we won't have to do that again?
Mr. MCCRACKEN. Let me begin, first of all, on the specific matter of
our position on wage and price guidelines. I think we have arrived at
that position simply because in reviewing the experience we are not
*Economic Report of the President together with the Annual Report of the Council of
Economic Advisers. H. Doc. 28, 91st Cong., first sess.. January 1969. Available from the
Superintendent of Documents, U.S. Government Printing Office, Washington, D.C.
PAGENO="0035"
311
impressed that these can have a substantial and particularly a con-
tinuing effectiveness.
I do believe myself that the enunciation of the guidelines had some
value. It certainly had some educational value. In the hearing this.
committee conducted commemorating the 20th anniversary of the
Employment Act I stated in a paper~-
Senator PRoxl\IIRE. They had a great record of performance 196~
to 1966. We had reasonahie price stability in a time of falling unem-
ployment, and remarkable production gains.
Mr. MCCRACKEN. And there was also slack in the economy. But the
difficulty there is that once your price level comes unstuck, as it did
after 1965, it becomes then extremely difficult to know what the opera-
tional rules of the game are. It is significant that in the Economic
Reports the specific figures then were dropped out. There was a retreat
to the more general language that people should take into-
Senator PROXMIRE. There is a new proposal to modify that perhaps
with a 5 percent guideline.
Mr. MCCRACKEN. Yes, to have wage agreements such that the na-
tional average would be a little less than 5 percent and a corresponding
rule on the other side for pricing. But the difficulty there once again
is that in pricing a specific commodity and in a specific wage negotia-
tion it is very hard to know what is right for this specific price or wage
to be consistent with the overall average.
Now, looking at this basic problem, I would approach it a little
like this. I think we have here a parallel to discussions in the early
1960's as to whether unemployment was a structural problem or
whether it was a deficiency of aggregate demand.
My view at that time was that I really didn't know what the propor-
tions were, but it was perfectly clear that there was unemployment
as a result of a deficiency of aggregate demand. And, therefore, one
had to attack the problem from that point of view.
Now, at the current time our problem happens to be the reverse,
and clearly a significant part of our problem in recent years has come
about because we have had an excessively rapid rate of demand.
Senator PR0XMIRE. Do you see anything in the situation now that
is so different from the situation in the 1950's-will we be able to turn
around inflation or slow it down without going to a high level of un-
employment, 6 percent or so, as we did before, and if so what is it?
Mr. MCCRACKEN. I think we have to feel our way along here. We
have to deal with the basic fundamental always of an inflationary
demand for output. This is the problem we must deal with first.
Senator PROXMIRE. Now, the Business Council is said to believe we
might have to go to a level of 5˝ or 6 percent of unemployment in
order to secure a reasonable degree of price stability. If this estimate
turned out to be true would you actively-in the councils of the Presi-
dent-oppose economic policies designed to achieve price stability at
that cost in unemployment?
Mr. MCCRACKEN. I would take into account both. In the determina-
tion of policy unemployment, price level developments, rate of growth
in output, the unemployment problem-I would be concerned about
all of them.
Senator PROXMIRE. I certainly hope so, because, Dr. McCracken,
you are our hope on this score. We look at the Quadriad, they are
wonderful people, I am sure they have big hearts and they are sym-
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312
pathetic but they are. all bankers. The Budget Director is a banker,
the Secretary of the Treasury is a banker-the same bank inciden-
tally-Mr. Martin also in the Quadriad is a banker. You alone of the
four members of the Quadriad are not a banker. The bankers are fine
people, the bankers, I am sure want employment to be as full as possi-
ble, but they are especially concerned with the price level.
Mr. MCCRACKEN. If there is any generalized problem of unem-
ployment these official would be greatly concerned about that, too.
Senator PROXMIRE. In your statement you say, "We do not foresee
probable changes from the budget submitted earlier that would have a
major effect on the economic outlook for calendar 1969." That trans-
lated to me means you don't expect to reduce the budget very much-
the Johnson budget for 1970-maybe a billion, 2, or 3 here and there,
but not the kind of big reduction that would enable us to have a sur-
plus without extending the surtax?
I can't understand why this administration doesn't come down hard
on the side of reducing spending. We have public works spending
projected in this budget of over $10 billion and during the depression
it was at a peak of a billion dollars a year. Then it was a matter of
putting people to work who were unemployed. Now, it is inflationary.
We have a space budget, which is just as big as it has been before
although we have achieved our aims, or will this year. In any view we
have a highly swollen military budget, and I think that is where the
big expenditure cuts will have to come. The majority leader of the
`Senate has indicated he feels we will have to cut that military budget
somewhat.
In your position as top administration advisers do you gentlemen
`feel that the spending will be at the same level as before? Is this your
~position or do I misconstrue your position?
Mr. MCCRACKEN. Yes. In our statement, we do, indicate our view.
`Certainly this administration is taking a very stern policy on expendi-
tures.
On the other hand, there is enormous viscosity in the budgetary proc-
ess. What we do say here is that even relatively small immediate re-
ductions would relieve the strain in the capital market, and moreover
this is a. part of the process of beginning to accomplish the kinds of
things that you are talking about.
So that-
Senator PROXMIRE. Very stern is a good word and I think we would
all applaud it but very stern appears not to be the kind of action
which is going to result in a $10 or $15 billion budget for you say in
your statement that budget reduction is not going to have significant
economlc impact.
Mr. MCCRACKEN. In the current year.
Senator PRox~n~. In the coming year, in the fiscal 1970 budget; I
am talking about the fiscal 1970 budget.
Mr. MCCRACKEN. We were talking here about calendar 1969.
Senator PROXMIRE. It is half of the fiscal 1970 budget.
Mr. MCCRACKEN. The expenditures which we are going to see in the
months ahead are going to be expenditures from decisions already
made. This was the basis for our judgment that we weren't in the very
nea.r term going .to affect a. displacement of Federal expenditures which
would warrant a major reevaluation of the economy.
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313
Senator PRoxMniE. I do think you underestimate the attitude of the
Congress and the American people. I have just been home for 10 days-
many Members of Congress have-and I have never seen people so con-
cerned about spending and high taxes, it is just uniform. They are
against increasing on anything, even the things I favor, like education
and so forth. They think they have had it up to here and this is a univer-
sal feeling I find everything, so I do hope you will consider this as a
possibility and I know you are not locked in on anything but not to
lock yourself in on the extension of the surtax.
You say-well, my time is up, I will come back.
Chairman PATMAN. Mr. Widnall?
Representative WIDNAIJL. Thank you, Mr. Chairman.
Mr. McCracken, I ~ would like to welcome you and your colleagues
before the committee and I am sure that the Council is in good hands
and I wish you well in your position.
Mr. MCCRACKEN. Thank you.
Representative WIDNALL. You note that housing has been a major
victim of inflation because of the increased cost of mortgages. With
the deceleration of inflation which you indicate you anticipate, would
you expect a significant increase in private investment in housing
construction?
Mr. MCCRACKEN. Yes, I think that would be a reasonable expecta-
tion. If we can cool off the inflation situation I would then expect
~nore favorable interest rates, and financing conditions generally
for housing.
Representative WIDNALL. Would you expect that increased invest-
ment in housing to go all the way through the housing industry or
just pertain to commercial activity and multifamily housing?
Mr. MCCRACKEN. I think that it would be fairly generally spread
across the spectrum.
Representative WIDNALL. I am just hopeful that takes place. I hope
it is not going to be again a complete reliance on Government guaran-
tees and other such things, but that we l1ave a program that seems
to warrant action with some real investment, with the utilization of
Government guarantees.
Several surveys last fall, both private and governmental, of busi-
ness capital spending plans for 1969, indicate capital spending may
rise 8 percent or more this year compared to a 4.7-percent increase
last year. How can you account for those ambitious intentions in
the face of a general economic climate that seems inauspicious for an
expansive attitude toward new productive facilities?
Mr. MCCRACKEN. That is a very good question, and it touches on
some of the imbalances which a long, sustained inflationary situation
can produce. For example, the question is raised as to whether this
rate of expansion in investment, how long that will continue if the
relatively flat trend of retail sales we have seen in recent months
were to continue.
see here a combination of a great many things. In the first
place there are always many industries needing to expand their
facilities. Secondly, there are those who because of the pressure on
costs are having to replace equipment with more efficient productive
machinery. One can't avoid facing the question as to the extent to
which the expectation of continuing inflation has in some cases nudged
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314
investment decisions in the favorable direction even if capacity
temporarily would be a little on the ample side.
Representat~ve WIDXALL. It seems to me that Government is the one
that should show the way in the. reduction of this planned spending
and hold the line or to decelerate the inflation that had. been taking
place. and I think that Senator Proxmire made some very valid
comments in this connection, calling attention to the amount that was
conftmplated for public works by the Government.
Mr. MCCRACKEN. Yes.
Representative. WIDNALL. The report of the Cabinet Coordinating
Committee on Economic Planning for the end of Vietnam hostilities
estimates that of the $29 billion currently being spent on Vie:tnam $10
billion would be required for other military uses in peacetime.
Is it true that one-third of the peace dividend has already been
committed for military programs?
Mr. MCCRACKEN. This is a matter that we want to look into very
carefully, and a subcommittee of the Cabinet Committee on Economic
Policy has just been formed, as we indicated in our statement here, to
review the. planning which has already been done, and to carry it
further. One of the claimants for the elbowroom that would be pro-
vided once the Vietnam conflict is resolved would be non-Vietnam de-
fense spending. ,Just how it. would fit in and what its priorities would
be relative to the other claimants is something that we want to explore.
Representative IVIDNALL. I heard some testimony not long ago
which seemed rather valid that about $20 billion of the $29 billion has
actually already been put in the pipeline in one way or another to take
effect immediately. Part of that was by the military, and part by othe.r
agencies of the Government which have postponed action on programs
where they did have authorizations. I hope that the American people
have not been sold on the idea. that with peace in Vietnam there is going
to lie a. pot. of gold just waiting there to be dipped into to carry out
ei-erv conceivable kind of idea that people of good will have for
the future of the United States.
Do you know what the military programs are that will be considered
as necessary io continue military spending? I understand some of
them would be in connection with naval vessels, airplanes, updating
of various types of equipment, and that these programs are already
in the wind, and downpayments have actually been made in many in-
stances. Are. you familiar with any of those as yet?
Mr. MCCRACKEN. Not in detail. This is an aspect of it which we shall
want. to be exploring carefully.
Representative 1VIDxALi~. `We have been through a period in which
I feel the American people have been promised too much. WTe have
had some great goals, sort of pie in the sky, and yet the perform-
ance has never measured up to the promise, and I am terribly worried
that. we mi&it. continue to do that and especially with the idea if we
reach a peace in Vietnam all our troubles are over and we can then
concentrate on many different directions to which we have anplied no
real large effective ~spending in order to cure our city problems, and
other problems fac.in~ the country.
Which do you believe would be more effective in restraining an in-
flationary economy, increased Federal taxes or restraints on Federal
spending?
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315
Mr. MCCRACKEN. What is necessary here is a broad-based approach.
As between these two I would consider a dollar's worth of lower Fed-
eral expenditures to have a greater restraining effect than a dollar's
worth of increased taxes. This would also carry with it certain implica-
tions for monetary policy.
Representative WIDNALL. As you know, within the last 2 years
we had quite a fight between the Executive and the Congress as to
the use of either increased taxes or decreased spending, and we finally
came out with sort of a compromise. Do you feel that the two should
work side by side, and the emphasis should still be on decreasing the
amount of Federal spending but also increasing taxes, if necessary,
in order to balance the budget?
Mr. MCCRACKEN. We have to keep a budget where the revenues
at reasonably high employment are going to cover outlays. The strat-
egy has to be to examine very carefully the expenditure side of the
budget. But given outlays, we have to have a flow of revenues which
w-ould reasonably cover them.
Representative WIDNALL. We have just had a statement issued
covering the balance-of-payments situation that certainly is far more
favorable than it has been in the past few years. Do you think that this
can be continued or do you believe it is largely due to some unusual
circumstance during the last year?
Mr. MCCRACKEN. We are all, of course, grateful for good news
here. I think one must say, however, that the fundamental improvement
in our balance of payments is not anything like what might be implied
by the swing in overall position from a large deficit to a small surplus
in the liquidity balance.
The thing that must be a continuing source of concern is that we
don't have strength in our balance of payments on current account.
Representative WIDNALL. Thank you, Mr. Chairman. My time is up.
Chairman PATMAN. Mr. Reuss?
Representative REuss. Thank you, Mr. Chairman.
A splendid statement, Mr. McCracken. You are off to a fine start.
On wage-price guideposts, one of the parts of your presentation with
which I do not agree, the majority of the Joint Economic Committee
for some years has been urging the outgoing Council of Economic Ad-
visers that in addition to sound anti-inflationary fiscal, monetary, and
debt management policies, it should use the additional weapon of
wage-price guideposts, and specifically we have said "have a rather
specific guidepost, work it out initially with labor and management so
that they have a proprietary interest in it, and thirdly, evolve some
mechanism for focusing public attention on transactions which tran-
scend those guideposts, particularly in the concentrated industries
such as steel and automobiles." We got nowhere with that except on
January 17, when the outgoing Council got out its report and, sure
enough, our advice was all in there. We were delighted, but then on
January 20 they went out of business and now you tell us, as I guess we
expected, that you disagree.
I would have just one question in addition to what you told Senator
Proxmire. In your statement, you set forth the mandate of the Employ-
ment Act of 1946 as one that "calls the Government to use all of its
capabilities; to achieve and maintain maximum employment."
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316
Well now, in fact, the mandate of the act of 1946 has the additional
language "with the assistance and cooperation of industry and labor."
I know you are familiar with that, but doesn't that additional lan-
guage give you at least a negative mandate not to throw out the window
right at the beginning the possibility that wage-price guideposts, prop-
erly administered and cooperatively arrived at, can shave a fraction of
a percentage point off of inflation ~
Mr. MCCRACKEN. Yes. Indeed the language in section 2 of the Em-
ployinent Act is, of course, quite flexible and quite general. It certainly
does not exclude this kind of exploration.
We have had two or three concerns here. One of them is that. as
things have worked out there has been a somewhat erratic incidence.
Certain areas that have been the targets. Others which actually have
been a major part of the rise in the price level, as the Economic Report
this year points out, have been largely outside the guidelines..
We don't, of course, foreswear doing our educational job here. We
~emain open-minded on this. As we indicated in our statement, after
a month we are perhaps more impressed with what we don't know
about many of these things than we were a month ago. And this may
well be another item on this list.
Representative REuSS. On the matter of international monetary re-
form, I like what you said about the need to explore better methods
of adjustment.
As you know, this committee has come out for an earnest explora-
tion of somewhat more flexible exchange rates. I believe Dr.
Houthakker, your colleague, wrote a very persuasive article in Decem-
ber, on the need for serious consideration of things like the crawling
peg, achieving a little bit more flexibility in exchange rates.
Just in the last few days the Under Secretary of the Treasury was
quoted as saying that this matter of more flexible exchange rates "is
being considered by the academics, and that is where it should stay."
Now if that is an accurate quotation I hope you would not agree with
that.
Mr. MCCRACKEN. The Under Secretary, I think, has just now re-
turned from Paris. I believe he will be before this committee.
But as I indicated in my statement, we consider that here and in
many other problem areas is our responsibility to explore carefully
the whole range of ideas-many of which, of course, we may conclude
for a variety of reasons are not desirable or feasible, but we certainly
will explore them.
Representative REUSS. In your paper you stress the need for eco-
nomic development assistance to the poorer countries. Are you in favor
of or opposed to the proposal to replenish the Internatinal Develop-
ment Association and to put more money into the Asian Development
Bank?
Mr. MCCRACKEN. I am not sure that I can be quite that specific as
yet. We are impressed with the importance of finding channels by
which these resources can be effectively utilized in the underdeveloped
areas.
As we indicated here this whole area has been a source of concern
and frustration both to the developed countries and to the under-
developed countries.
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317
Representative REUSS. In recommending that the 41/4 percent ceil-
ing on Federal securities of over 7 years maturity be either abandoned
or markedly limited, you have in mind, of course, the fact that today
the Treasury can't market a long-term security at 4% percent, by a long
shot, and it is your view that for reasons of monetary management it
would be well to lengthen the debt.
Now, if the Congress did that, if it did repeal the almost half -cen-
tury-old limitation, and the Treasury moved to use this new author-
ity, this would put pressure on the long end of the credit market, the
home mortgage, and the State and local borrowing end, which is now
exhibiting the most distress, would it not?
Mr. MCCRACKEN. That, of course, is the dilemma. Any substantial
amount of long-ter1n financing presumably would create additional
pressure. At the same time the scenario, it seems to me, reqmres that
we take actions to try to cool the inflation and the inflation-mindedness
w-hich pervades the economy-because this is part of our high interest
rate problem.
Representative REUSS. To cool it though without bringing additional
agonies to home building, small business, and State and local govern-
ment borrowing, I would hope.
Mr. MCCRACKEN. Yes.
Representative REUSS. What would you think of a congressional re-
action to this proposal to remove the 41/4 percent ceiling, like the one
we dreamed up 10 years ago when the last Republican administration
asked for its removal? How about asking the Federal Reserve to cush-
ion the impact of this by taking into its portfolio alt least reasonable
amounts of these new long-term Treasury securities so that the impact
on the housing end of the spectrum is not disastrous?
In this connection, before you answer, it was interesting for me to
note, as I looked at the Federal Reserve portfolio last night, that though
for years `this committee was urging the Fed to lengthen its $52 billion
portfolio, and for years they told us that the world would come to an
end if they did, nevertheless, in this last year whereas at the start of
1968 they had practically zero of long terms 5 years and up, now they
hold more than $10 billion in the 5- to 10-year range. If they could do
that without suffering the bends, it seems to me `that they could accom-
mnodate future Treasury incursions into the long-term market.
What would you think about my proposition?
Mr. MCCRACKEN. This would help the strains in the market in which
these long-term issues might be offered. At the same time it would
correspondingly reduce the effect of offering these securities on the
liquidity of the economy outside the Federal Reserve and the Treasury.
Representative REU5S. I thought, though, that your concern for hav-
ing a greater mix of long terms was so that the Treasury didn't have
to go to the money market every 5 minutes and thus require the Fed
to temporarily forget its true function and go into the market sup-
porting business.
Mr. MCCRACKEN. Yes-
Representative REUSS. If that is so, some Fed help on the long terms
isn't going to interfere with that desired end?
Mr. MCCRACKEN. it is both. It is important that the Federal Reserve
not have this problem of continuous refinancing to the same extent as
now. Also presumably, if we could lengthen the average maturity of
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318
the debt held by the public, this would have an effect of reducing the
liquidity in the hands of the public. There are two dimensions of
this.
Representative REUSS. Thank you, my time is up, Mr. Chairman.
Chairman PATMAN. Senator Miller?
Senator MILLER. Thank you, Mr. Chairman.
Dr. McCracken, I appreciated the very fine statement submitted by
you and your colleagues, Dr. Houthakker and Dr. Stein.
I was very interested in the point made wherein you state that dur-
ing the last 3 years we have gained little on the unemployment frojit
and we have lost considerably on the price front.
During those last 3 years, I am told, that there were 180,000 more
Federal civilian employees added to the payroll, 657,000 more mem-
bers added to our Armed Forces, and that upwards of 2 million are
estimated to be working in defense industries because of the war.
WTould it be fair to conclude that this war has had a considerable
impact on that low unemployment rate as a result of those figures I
have given you?
Mr. MCCRACKEN. Yes, I think it probably has. It has had the effect
of removing from the normal civilian employment those people to
whom you have alluded. There has been some direct employment pro-
vided by the defense industries.
The basic thing that has happened here, in the last few years, is
simply the pressure of demand on our productive facilities which has
kept employers also looking for labor, reexamining their skill require-
ments, and educational requirements.
Senator MILLER. WTell, what concerns me is the thought that pos-
sibly, although we may be very euphoric about the low rate of unem-
ployment over the last 3 years, because of the direct impact of the war
on this low unemployment rate, we may not have really come to grips
with the underlying causes of unemployment, at least to the point of
being able to eliminate them, so that when the war in Vietnam is over,
we will be able to meet the crisis in the unemployment that would
arise.
Do you believe there are areas in this unemployment problem we
really haven't come to any grips with?
Mr. MCCRACKEN. Oh, yes. As we have said in our statement we
consider this to be one of the most critical problems facing this
country.
Senator MILLER. Roughly, I understand the gross national product
has increased around $31/2 billion in the last 8 years, and there is a
lot to be said about this dramatic increase. But I am also advised that
according to the economic indicators that our total debt, Federal,
Sta.te and local, and private, has gone up just about double that figure.
One doesn't hear much about that side of the coin, but to me that is a
troublesome side of the coin.
Do you think this is a healthy situation when the total cle:bt of this
country goes up about twice as fast as the gross national product?
Mr. MCCRACKEN. I think the ratio between total debt outstanding,
public and private and gross national product has historically been a
llt.tle-something like 1.8 or thereabouts. In other words, about ~1.S0
of debt outstanding per dollar of gross national product.
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Senator MILLER. That may be the historical ratio, but is this a
healthy ratio? It appears to me that we have had an awful lot of eco-
nomic problems while this history is being made, especially in the
form of inflation. I think it is worth noting that purchasing power
of the dollar during that period in history has declined from a hundred
cents in 1939 to 39 cents today. I just wonder if there might not be
something wrong with this kind of a ratio, that we shouldn't try to
do something about it.
Mr. MCCRACKEN. I think the major problem is the one to which
you have just alluded. The excessive rate of credit expansion has been
a part of the inflationary pressure which, in turn, then gives ~OU the
inflationary rise in gross national product which tends to validate the
ratio.
There I think has been the nub of the problem.
Senator MILLER. Well, I agree. I am just wondering if the Council
would look into this matter of the ratio, this historical ratio, to see
whether it is a sacred cow or whether it really ought to be improved.
Mr. MCCRACKEN. Surely.
Senator MILLER. In your statement you say-
But often the domestic and international goals are not inconsistent and we
need to find better ways to reconcile them.
I do not quite understand the word "not" and I wonder if it should
not read the international and domestic goals are inconsistent and we
should find better ways to reconcile them. Should the "not" be in
there?
Mr. MCCRACKEN. Are not consistent, yes, I think that is a typo
there.
Senator MILLER. Thank you.
Then, a little further on No. 4, you pointed out that the unified
budget concept shows that we have come pretty close to a balance., but,
at the same time, I know that in President Johnson's Economic Report
he estimated there would be an increase of $6˝ billion in the national
debt. You will find that on page 494 of that document.
That would mean then that the administrative budget, as distin-
guished from the unified budget, would show a deficit of roughly $61/2
billion, would it not?
Mr. MCCRACKEN. I presume. it would. I don't have those figures in
mind though. This is on the basis of the new unified budget, yes.
Senator MILLER. Well, I am wondering if the Council is satisfied
to pay attention only to the unified budget or if the Council is going
to be concerned about the operating budget, the administrative budget,
and if the Council will not be concerned about the fact that the operat-
ing budget shows a $61/2 billion deficit. Would not the Council be con-
cerned about that?
Mr. MCCRACKEN. Dr. Stein is a distinguished student of budget
policy, and I would like to ask him for his comments.
Mr. STEIN. Well, I think we have to look at the budget from the
standpoint of several interests. From the standpoint of estimating the
effects of the budget on the overall behavior of the economy the unified
budget is probably superior. However, the condition you mention in
which the unified budget is in `balance whereas the administrative
budget is not suggests that the general funds are in effect borrowing
from the trust fund and this is a situation which has to be considered
PAGENO="0044"
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not with respect to its effects on the overall economy but whether we
want to run a situation in which the contributors mainly to social secu-
rity are making large advance payments, so to speak, to finance the
rest of the Government.
Now this may be an unwise situation. But for the purposes of the
analysis in which we are engaged, the analysis of the effects of the
budget on inflation, unemployment, and so on, we do think that some
more comprehensive view which takes into account the effects of the
trust funds is essential.
Senator MILLER. Well, would it be fair to say that on operating
budget deficit of $61/2 billion would case concern to the Council over
the inflationary potential this would lay a foundation for?
Mr. MCCRACKEN. It is very difficult to take any single dimension of
the budget as a measure of the inflationary impact on the economy.
Certainly for many budgetary reasons we do want to look at the
operating budget, and in our own budgetary analyses we look at all
of these.
Senator MILLER. But there would be no particular difference between
the administrative budget and the unified budget so far as the infla-
tionary potential to deal with it is concerned.
Mr. MCCRACKEN. Well, it seems to me that as a first measure of the
impact of t.he budget on the whole economy, one has to examine the
total outflow of expenditures on the one hand, and the total receipts
of the Federal Government, on the other hand, regardless of the
account. There are economists who will differ a little bit about this,
by the way, beca.use many of them would feel that the budget on a
national income accounts basis would really be a better first approxi-
mation of the economic impact of the budget. This is a little. different
from the unified budget. because the unified budget-well there are
several differences.
I think, in my own view, the unified budget is probably the best
rough measure if one is talking about the impact on the overall
economy.
Senator MILLER. But on inflation.
Mr. MCCRACKEN. Well, even possibly on inflation. It seems to me in
the issue of the operating budget versus the unified budget, the major
significance comes in this question of the desirability of having the
social sec.urity contribut.ions in effect financing t.he operating aspects
of the budget.
Senator MILLER. Thank you. My time is up.
Chairman PATMAN. Mrs. Griffiths?
Representative GRIFFITHS. Thank you very much. I think it would
be very unfair if I left the idea that you belong exclusively to Iowa.
As a Representative of Michigan, I would like to point out that the
University of Michigan has been happy to have two out of the last
three Chairmen of the Council.
I never realized there was such a glamorous future until I sa.w a
picture the other day of your ex-colleague, Gardner Ackley, dancing
with Gina Lollobrigida in Rome. Probably the recruitment will
pick up. .
Is it fair to ask, is this budget based on the theory that Vietnam will
not be in this year?
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Mr. MCCRACKEN. This is-incidentally, may I say I hope Dr. Ackley
is establishing a tradition for ex-Chairmen. [Laughter.]
This is my ~mderstanding-that the projections in the budget do
assume a continuation of the conflict.
Representative GRIFFrrIIs. Do you-I don't remember whether the~
bill is for a period of a year or we would have to renew it-but are
you personally for the expiration of the controls over everseas invest-
ments?
Mr. MCCRACKEN. I took the position as a private citizen when these
were put into effect that I thought fundamentally we were going down
the wrong road here, that it was another dimension of the world's
moving toward direct controls in order to preserve the machinery of
of the system. Indeed, in a paper of mine a year or so ago, I said that
we have to countenance these only reluctantly. One of our basic long-
run objectives here, as elsewhere, is to try to move toward a dis-
mantling of these controls and toward a more liberal international
system.
Representative GRIFFITHS. But wouldn't this be one of the wise
things to permit to wait until Vietnam is over?
Mr. MCCRACKEN. This is one of the questions which has to be looked
at very carefTully. Vietnam is itself a leakage in our external accounts.
Representative GRIFFITHS. I noticed that you mentioned also the
problems of the EEC. Now, as a matter of fact, you need a renewal
of authority to negotiate with the EEC. One of the problems last year
in renewing that authority was the great danger that you would at-
tach so much protectionist legislation to it. Do you see any real reason
to believe that there is any less danger this year, than when that bill
is opened up there will be additional protectionist legislation?
Mr. MCCRACKEN. That is a very real problem. I see no diminution
of protectionist sentiment. Quite possibly it is going the other way.
Representative GRIFFITHS. So that on any of these situations you are
going to have increasing problems with balance of payments, and no
matter which remedy you seek to impose, you are going to open up
other great problems; is that not true?
Mr. MCCRACKEN. I think that is true.
This focuses on the basic importance of cooling our domestic econ-
omy. We must attain a basic balance-of-payments position which is
not causing the flows of imports that we have had in recent years-
which, in turn, do create direct pressure for protection.
Representative GRIFFITHS. May I ask you specifically how you in-
tend to get more money into the homebuilding market?
Mr. MCCRACKEN. The most fundamental resolution of this problem
has to be to deal with concern about the price level in order to get in-
terest rates down to a somewhat more normal level. We must achieve
a situation where people have more willingness to put their funds
where they will flow into housing. This is a firndamental approach to
this problem.
Until we do that, we have to reconcile ourselves to the fact that
housing and construction are going to be adversely affected by our
present conditions.
Representative GRIFFITHS. Do you intend absolutely to balance the
budget, and if you do, which route are you going? Are you going to
do it by cutting expenditures or by taxes or by a mix?
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Mr. MCCRACKEN. In my judgment, economic conditions now do
make a balanced budget mandatory.
Now, as to which route. The budget is, of course, being reviewed at
the present time. The first line of attack has to be on the expenditure.
If, given what apparently can be done there, the retention of the sur-
tax or some part of it is necessary in order to avoid a deficit, then
we shall have to continue the surcharge.
Representative GRIFFITHS. So you are going to have some deficit
even if you retain the 10-percent surcharge.
Mr. MCCRACKEN. I would not then expect a deficit. The budget as
it has been projected shows a small surplus for this year and next,
but the expenditure assumptions there are currently being reviewed.
Representative GR~'FITHS. Thank you very much, Dr. McCracken;
thank you, Mr. Chairman.
Chairman PATMAN. Mr. Brock?
Representative BROOK. Thank you, Mr. Chairman. I have enjoyed
your testimony. I particularly appreciate the emphasis you seem to
place on the fundamental nature of our problems as opposed to the
rather superficial laying on of additional patches of the quilt,
legislatively.
You mentioned, I think you stated, "to achieve a continuous, mod-
erate rate of inflation will require an appropriate degree of monetary
restraint." That is sort of a. nebulous phrase, "appropriate monetary
restraint." I wonder if you can be a little more specific. What are we
talking about? Are we talking about the continuous expansion of the
money supply at a reduced rate or are we talking about a leveling off
of the money supply, at least that part of it controlled by the Federal
Reserve in its activities?
Mr. MCCRACKEN. I would interpret that to be a reduced rate of
expansion.
Representative BROOK. I think the reason I raised the point is be-
cause several members here have talked about home building. We
had a rather dramatic experience with excessive monetary restraints
back in 1966 when we used monetary policy simply because the Con-
gress and the executive branch were unwilling politically to face the
necessity for fiscal restraint. We had an out of balance policy.
You emphasize throughout here the necessity of a dual approach,
and it seems to me the current interest rate level would indicate that
we have just about exhausted the tool of monetary restraint and
must place greater reliance on fiscal policy; is that a fair statement?
Dr. MCCRACKEN. If we can-certainly no one wants a repetition
of what happened in 1966 when monetary restraint was pushed too
far. Also to have a proper balance we do have to have a budget which
is fundamentally in balance. This is essential in order to keep the
pressures in money and capital markets from driving interest rates
too high.
A part of the current high interest rate levels is the repercussion
effect on interest rates from the inflation which began to develop
about 3 years ago. So this is the fundamental thing which has to be
attacked.
I would never counsel pushing so hard on the brake pedal that the
wheel would be locked.
Representative BROOK. I think it is a fair analogy.
PAGENO="0047"
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Let's take it one step further then. We were unable to act politically
for various reasons in 1966 to achieve fiscal restraint. We did put
successive emphasis on monetary policy and it did create primary-
dislocation primarily in home building, and I would hope that this,
that your group would give a great deal of thought of recommending
to the Congress whether or not we should allow the President some
tax discretion, for example, a pius or minus adjustment of 5 percent
in tax rates so that we could have a little more immediate effect on
the fiscal end. It is very difficult because they have expenditures
over a period of 4 or 5 years, money is in the pipeline and there
is very little you can do about it. There is very little you can do
about monetary policy without creating dislocation. It seems to me
the only third and remaining tool has to be your tax policy, and I would
hope that you would place some serious attention on this possibility
of offering the executive the same latitude in discretionary tax ad-
justment within a range of 4 or 5 percent.
Let me add another thought or ask another question and verify
~rny opinion of you on the matter of the ceiling of 41/4 percent on
long-term debt.
I think the obvious reaction when you take off a ceiling is that
that would cause interest rates to rise but it is not so if we took off
the ceiling on long-term debt that the possible result could be a re-
duction in the rate of interest paid on total Federal debt.
Mr. MCCRACKEN. Because of the peculiar shape of the yield curve at
present. Yes, that is a possibility. The shape of the yield curve at the
present time is that long-maturity interest rates are lower than they are
for shorter term issues.
Representative BROOK. So the net effect there could be a reduction in
our interest payments if we took off the interest ceiling or certainly it
would ease the pressure of short term.
Thank you.
Chairman PATMAN. Mr. Moorhead?
Representative MOORHEAD. I would like to join my colleagues in
thanking you for an excellent and far-ranging statement.
I would like to follow up on the statement by Mr. Brock about giv-
ing the President some discretionary tax flexibility. President Ken-
nedy, of course, in 1962 requested the power to increase or decrease
taxes as might be necessary. The Congress has refused to provide the
President with this power because it is the prerogative o~ the Congress
and, furthermore, an unscrupulous President could use this power just
before an election to reduce taxes and which would certainly enhance
ins chances for reelection, or in an off year for the reelection of mem-
bers of his party in the Congress.
I think that the Congress learned in 1964 that cutting taxes can be
politically popular and effective economically.
One of my alternatives, and I would like to have your comments on
it, is for the Congress to provide discretionary tax flexibility which
would give the President the power only to raise taxes within a given
range and subject to a congressional veto.
Mr. MCCRACKEN. There is in some of my prose in previous years
support for this position of giving the President some limited discre-
tion for changing tax rates, subject to a veto by the Congress.
After our experience with this proposal in the early 1960's, I rather
lost interest in it, but this would be a possibility.
PAGENO="0048"
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I think if I were going to move in that direction my first inclina-
tion would be, however, to give some flexibility on both sides, both
down and up. There is always the question of the extent to which the
Congress would be willing to delegate the responsibility, but if I were
going to go clown that road my initial inclination would be to go both
ways.
Representative M00RHEAD. The reality of politics is SUCh that we
might be persuaded to delegate the unpopular but we would not be so
willing to delegate the opportunity to do the po~mlar thing and there
is, I believe, a good government aspect of this because there is a re-
straint on the President. He won't want to do the unpopular thing
either and he would only raise taxes if it were really necessary.
Mr. MCCRACKEN. Yes.
Representative MOORHEAD. The other way there is no constraint.
Mr. MCCRACKEN. Yes; that is a good point.
Representative MOORHEAD. I would like to ask you gentlemen if you
think that the fiscal policies adopted last year, and I refer particularly
to the Revenue and Expenditure Control Act, have begun to make
their effect felt. I cite particularly, that the rate of growth of the
GNP-in instant dollars-dropped to 3.5 percent in the fourth quar-
ter compared to a rate of 6.3 percent in the second quarter. Personal
consumption dropped from a first quarter high of 10.3 percent to
- .3 percent in the fourth quarter, retail sales dropped off significantly
in the last quarter of the industrial production index of the Federal
also indicates a cooling off.
Mr. MCCRACKEN. Yes. I think last year our views on this issue were
swinging over entirely too wide a range. This seems to be the age
of instant cereal and we also want instant fiscal policy. We passed
a tax increase on June 28, and we apparently expected to be able to
read about the effects in the next day's paper.
The fact of the matter is that these things do influence the. economy
with a substantial lag.
If you look underneath the basic current data, there are some in-
dications that possibly we are seeing some effect here.
Retail sales increased, seasonally adjusted in January, but still were
not above the level of the third quarter, and the rise in gross national
product, as you indicate, was a little less in the third quarter. These are
things which one would begin to expect to show up at about this stage,
given substantial tax action in mid-year.
Representative MOORHEAD. Fine. Mr. Stein, would you or, Mr.
Houthakker, have you any comments on that?
Mr. Si~IN. I would agree with that.
Representative MOORHEAD. You point out that the present inflation
in the economy can't be corrected without some adverse effect on
employment. I am trying to determine your trade-off ratio. In your
statement you said that a 2.5-percent rate of unemployment was
unacceptable; however, I am not sure if I understand what rate short
of 2.5 percent you think is acceptable as a trade-off for stability.
This, it seems to me, is a critical issue, especially considering the
social problems that are bound up in this unemployment rate. I think
I recall the statistics that if the unemployment rate increases from
the present 3.3 percent to 4 percent that 300,000 to 500,000 people will
be out of work. I think we all have a very good idea where this impact
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occurs. This is a high price to pay; however, I do agree that inflation
is a cruel tax, but I'm not sure how cruel vis ~t vis unemployment.
The elderly and the poor do suffer, undoubtedly, from inflation,
however, a recent study has shown that social security benefits have
more than kept pace with inflation over the present expansion and
the poor who are in debt and who are employed at the margin do reap
some benefits from inflation. I do agree there is a trade-off here, but
we should have a clear idea of the net social costs and benefits that
surround the problem of controlling inflation before we bear down
too hard.
Mr. McCuAcI~EN. I wish I could be more confident myself about
our technical information on the statistical nature of the trade-off here.
We are hopeful that if we pursue a careful and gradual approach to
this problem that the adverse effect oii unemployment will not be
large.
I cannot confidently say what rate of unemployment would be con-
sisteiit with what rate of increase in the price level. I think these
factors themselves change over time.
All I can say is that we shall certainly continue to be extremely
sensitive aiid extremely concerned about the employment problem.
Representative MOORHEAD. Now, on the international monetary sys-
tem, in your testimony you point out that for 20 of its 25 years this sys-
tem has worked very well aiid it should be given respect.
But it seems to me that you have accorded it a little too much respect,
because in a 12-month period, from the time of the pound devaluation
through the March gold crisis to the November franc crisis, we have
had three serious crises. Coupled with the fact that the system is 25
years old it may need more than just a few minor adjustments.
It seems to me that we should, as you say, pursue changes with
vigor, but that was only one sentence out of the whole section, and
I suggest to you, sir, we need more emphasis on the international
monetary system than I believe your statement indicates that you
are going to give it.
Mr. MCCRACKEN. Well, we certainly remain very much concerned
about the kinds of problem that you allude to.
Representative MOORHEAD. In your testimony you state the impor-
tance of reducing the concentrations of unemployment. But I don't
find in your statement any indication of the methods or programs that
you are advocating for, reducing these concentrations.
Mr. MCCRAOKEN. We did not, of course, here outline in detail new
programs. As a matter of fact, the Secretary of Labor will be before
the committee later in this series of hearings.
However, in our statement we do allude to the kinds of approaches
to this problem which would seem to be in order.
Representative MOORHEAD. Thank you, Mr. Chairman. My time has
expired.
Chairman PATMAN. Senator Jordan?
Senator JORDAN. Thank you, Mr. Chairman.
Mr. McCracken, I, too, want to welcome you before this committee
in your capacity as Chairman of the Council of Economic Advisers
and I want to commend you for the very fine statement you have
given us.
24-883-69-pt~ ~
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In view of the fact that the two restraints for inflation, the mone-
tary and fiscal, have different degrees of responsiveness in the tune
they can be applied due to the fact that monetary restraints can be
applied almost instantaneously, and fiscal restraints are dragged out
sometimes ahnost interminably, do you think there is a likelihood
that we have over-compensated in monetary restraints in trying to
control inflation in the past?
Mr. MCCRACKEN. As one looks at the history of this in the last
several years, there is some evidence that we have overconcentrated
on the one instrument. This certainly would be a reasonable inference
to draw from 1966.
Senator JORDAN. In other words, if we had had some fiscal restraint
perhaps a year earlier it is quite possible we wouldn't have to go so
high in monetary restraints, interest rates and so on, is that what you
are saying?
Mr. MCCRACKEN. Yes; if we could have had the tax increase a. year
earlier, we could have avoide.d that critical fiscal year 1968 $25 billion
deficit which certainly played a role in drawing monetary policy
itself off course.
Senator JORDAN. There would be an earlier solution to the inflation
problem.
Mr. MCCRACKEN. Yes. We would have had a more balanced ap-
proach.
Senator JORDAN. Doctor McCracken, do you believe that the two
goals of zero inflation and full employment are possible?
Mr. MCCRACKEN. I think looking at experience we would have to
say that the technology of economic policy at the present time is not
up to giving us those two goals simultaneously.
Naturally we want zero inflation and we want zero unemployment,
but we don't. yet know how to achieve them.
Senator JORDAN. So then it is going to be a judgment matter as to
how we trade one off against the other to achieve the least inflation
and the fullest, employment.
Mr. MCCRACKEN. Yes, and sometimes one is a more urgent and
pressmg matter than the other. Unemployment was a pressing matter
in the early 1960's. The l)rice level problem is urgent now.
Senator JORDAN. You made a good statement about the effects of
inflation. You pomt out, and rightly so, that inflation hits the little
fellow the hardest and the sophisticated investor is able to insulate
himself against it more or less.
To what extent would you believe or would you think that inequi-
ties in our tax structure would contribute to this situation.
Mr. MCCRACKEN. That is, contribute to-
Senator JORDAN. To the fact that the little fellow gets the worst
of it in inflation, the sophisticated investor in this case is better able
to take care of himself.
Mr. MCCRACKEN. There are some aspects of our tax system which
would tend to work in that direction. To the very small saver taking
capital gains is not as valuable as to more affluent people. One could
think of illustrations like that, yes.
Senator JORDAN. About 20 years ago the lower 20 percent of the
people receiving incomes in the United States received less than 4
percent of the total income, and those in the upper 20 percent received
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about 46 percent of the total income. Those ratios haven't changed.
With all of the fine tuning and with all of the effort that has been
put in to try to equalize things. and I am not just talking about level-
ing everyone to a common denominator, but we haven't macic too
much progress along that line.
Do you have any idea how we can achieve a little better equity in
this matter.
Mr. McCRAcI~Ex. My guess is that if we had absolutely accurate
and relevant statistics in regard to this, that the equalizing which
has occurred is probably a little greater than the statistics them-
selves might imply.
I suspect prices of things the wealthy buy more of have probably
increased a little more rapidly than others but that is just a judgment.
The fundamental approaches here certainly have to be through edu-
cation to make `sure that each person entering the work force is going
to be able to realize his full potential.
We have to recognize there are certain people for whom merely the
provision of employment opportunities is not the full answer, and we
indicate that in our own statement.
The general thrust of economic progress itself would tend to push
us further in that direction. It is, of course, in the poor economies that
you find the greatest extremes in the distribution of income and
wealth. So it is a matter of economic progress generally and specific
measures to make sure that there aren't disadvantaged people
stranded.
Senator JORDAN. So it points up the need for concentrating on those
hard-core situations that may require substantially more effort than
the general level.
Mr. MCCRACKEN. Yes. I would agree.
Senator JORDAN. I am glad to hear you say that because I am con-
vinced this is where we have been falling down. We haven't put
enough effort in the right places.
Dr. McCracken, we have about a 4i/2-percent inflation in 1968, is
that correct? Is that the figure you use-about 4˝ percent?
Mr. MCCRACKEN. Yes, it is a little more than that with the Con-
sumer Price Index-
Senator JORDAN. What is the normal annual increase in population
in the United States?
Mr. MCCRACKEN. The labor force is growing about 2 percent, close
to 2 percent, per year now. The population growth is less than that,
about one and a quarter percent.
Senator JORDAN. One and a half percent.
Then with a 7-percent increase in gross national product one must
take into account that 4˝ percent of it is inflation. We have a popu-
lation increase of 1˝ percent, you say, and we have got an increase in
productivity of labor of that segment of the gross national product
which is allocable to labor. Would you agree with me that a 7-percent
gross national product increase under those conditions is no increase
at all.
Mr. MCCRACKEN. Well-
Senator JORDAN. In real terms.
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328
Mr. MCCRACKEN. A 7-percent increase in gross national product
with, we will say, a 4-percent increase in prices, does leave about a
3-percent growth in total real output.
Senator JoimAx. Yes.
Mr. MCCRACKEN. Then with a ll/2-percent. to a 1%-percent rise in
population we get 23/4-percent rise in output per capita.
Senator JORDAN. Ye.s.
Mr. MCCRACKEN. Now- we could if productivity is rising at about
that amount, we could achieve that with roughly a constant labor
force which is why, looking ahead, the ongoing longrun growth path
that the economy should be on ought to be moving along something
like about a 4-percent-per-year rate of growth in real terms.
Senator JORDAN. In real terms.
Mr. MCCRACKEN. In real terms.
Senator JORDAN. Yes.
Thank you. My time is up.
Chairman PATMAN. May I ask you a question, sir. If we were to
decide to not ask for a session this afternoon after we have two more
members who would like to ask you questions, would it be all right
for you to answer questions that any member of the committee sub-
mitted to you before you looked over your transcript, if you would
answer the questions when you examine your transcript, would that
be satisfactory?
Mr. MCCRACKEN. We would try to be responsive.
Chairman PATMAN. Thank you, sir.
Senator Percy?
Senator PERCY. Thank you, Mr. Chairman.
Dr. McCracken, I would like to ask one or two questions of you
and then see if we can't put your associates to work also this morning.
I have a couple of questions in their area of interest.
Mr. MCCRACKEN. Good.
Senator PERCY. I would like to first ask you about the budget. We
will have, of course, a chance to go over that in detail tomorrow but I
sense from the tone of your comments today that you would like to
see us cut back the last Johnson administration budget. even more.
How important would it be that we really put major emphasis on
this as we did in the Congress last year to see if we can't really iush
the rate of Federal expenditures back significantly, not just in very
minor shaded areas but in significant cutbacks? How important is it
to the economy of the country that we try to undertake this jointly,
the administration, Budget Bureau, the agencies and the Congress.
Mr. MCCRACKEN. It is important that we start to make progress.
The question is, of course, how do we make progress? The first re-
quirement is that we get clear in our minds what the low- priority items
are that can give us the elbow room either to lower levels of total
spending or for new programs which we consider high priority. This
operation takes time and it can't be done instantly. But we do have
to recognize that levels of expenditure at present are beyond the rev-
enue producing capacity of our tax system unless we retain the sur-
charge.
So there is our overall problem unless we continue the surcharge in
order to balance out the budget.
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329
Senator PERCY. But at any rate, unless we are able to cut programs
like public works, defense, possibly space, and other items that Sen-
ator Proxmire mentioned earlier, there is not much of a chance to
increase expenditures in the humanitarian programs, such as social
programs affecting the cities, rural poverty, hunger, and others.
Mr. MCCRACKEN. The elbowroom there is very limited. We have
already a projected rather small surplus.
Senator PERCY. I understand while I was out of the room that you
had commented there was increasing protectionist sentiment in 1969
as against last year. We can all feel it here, I think, in the Congress.
How important, in your judgment, would it be for us to resist
opening a Pandora's box by having a little quota protection for one
industry that might have a particularly articulate group of advo-
cates in the Congress and in the country, and simply say that we can't
afford to open this avenue now for greater protection on imports if we
are to maintain a position of a great exporting country without re-
taliatory measures instantly being taken abroad against American
products that we need to export abroad.
Mr. MCCRACKEN. I think we need to keep in mind our basic objec-
tive here, which is to work toward a freeing up of our international
trading and financial system, rather than moving toward a system of
growing controls. `We all recognize that in this process there are spe-
cific problems that come up from time to time. `We can't be unmindful
of those problems. But I would hope in general that the basic thrust
of our policies in the years ahead can be in the direction of opening
up further opportunities for trade, and minimizing the impediments
to trade that we have.
Senator PERCY. Do you, in your judgment, feel the textile industry
has any unusual overriding factors involved in its situation that would
cause it to be singled out as a specialized case to be treated separately
from shoes, steel, fish nets, clothespins, and a multitude of other prod-
ucts, all of whose interests would like greater protection if they can
get it?
Mr. MCCRACKEN. I really don't know. I haven't got, I haven't ex-
plored that that carefully. It is quite possible that there is a specific
problem here. There probably is more exposure to displacements in
tins industry than in others and this is something that would have
to be looked at very carefully. Employment here may well be concen-
trated in areas where alternating job opportunities are not readily
available.
Senator PERCY. Dr. Houthakker, last week at the OECD meetings
in Paris, I believe Dr. McCracken said that the oniy reason the U.S.
balance of payments was as good as it was in 1968 was due to the
foreign investments capital flow into the United States and the drop-
off in capital flow out of the United States. What do you think will
be the capital movement picture in 1969.
Mr. HOnTHAKKER. Well, Senator, I think that in 1968 there were
three factors which helped to keep the capital account very favorable
even though the trade account deteriorated.
One was our high interest rates relative to those abroad, in particu-
lar the fact that our interest rates structure had at last caught up with
the European structure and this is still the case at the moment.
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The second factor was the direct investment control program which
is still under consideration. The third factor which made the accounts
favorable was a large increase in special transactions. Those as you
know are transactions in nonliquid investments with foreign govern-
ments and other official bodies. Now the exact nature of these special
transactions is always somewhat obscure because to some extent for-
eign governments may have been more willing to buy those CD's and
similar-securities because of our high interest rates. So I would say
that these are the main factors.
However, there is still another one which is perhaps even more un-
certain; namely, the large purchases by foreigners of American equi-
ties, and in the case of equities we just do not have much knowledge on
which to base any prediction as to what might. happen in 1969 and the
following years.
WTe know from the past records that equity purchases are quite
volatile and I think that therefore we cannot be very sure that this
kind of large movement will continue.
I think that also in the case of the other securities which contributed
to the favorable capital account that there may have been something
of a-once-and-for-all movement since our interest rates moved up rather
suddenly in parity with European interest rates, approximate parity,
this may have caused s-once-and-for-all move of purchasers and there
again our knowledge is not-is very imperfect, and I think it is very
difficult to predict our capital account. movement.
Senator PERCY. Would you, Dr. Stein, or Dr. McCracken, state as to
what our trade account balance of payments is likely to be in 1969?
Mr. HOUTHAKKER. There is, I t.hink, not complete unanimity as to
the outlook for the trade account. I think any slowdown in our rate of
growth will have a favorable effect.
The increase of 23 percent in imports which we had in 1968 over 1967
is certainly an abnormal one a.nd cannot be explained by any of the
studies that I am aware of. In other words, 23 percent is much more
than seems to be in line with previous experience. So we can certainly
look forward to considerable reduction in the ra.te of growth of
imports.
Now whether this reduction will be enough to bring the growth of
imports in line with the growth of exports I think is not clear but I
believe that a consensus on the trade accounts would be that there
might be some small improvement..
Senator PERCY. Dr. Stein, would you want to comment on the
question?
Mr. STEIN. Well. this is not a field of my activity but I agree in
general with what. Dr. Hout.hakker has said.
Senator PERCY. Thank you, Mr. Chairman.
Chairman PATMAN. Now, we have one other member who would like
to interrogate, and we have some alternatives. If we proceed after that.
I think we will be obligated to have an afternoon session. if one can
be arranged, and at which time other members will come back. Or
since we have permission for any member to ask questions in writing
to be answered in the record we could let that suffice; the third alterna-
tive would be if there should be a demand from the members to have
you gentlemen back later, at some time that is mutually satisfactory,
if it can be. arranged
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331
Mr. MOCRACKEN. We shall certainly try to cooperate with the
committee.
Chairman PATMAN. Thank you, sir. We have our newest member on
the Joint Economic Committee, Representative Conable. Mr. Conable,
we are glad to have you, sir. You may proceed.
Representative CONABLE. Dr. McCracken, it would be presumptuous
for me to welcome you before this committee because my membership
on this committee is shorter than your chairmanship of the President's
Council. So my questions are necessarily modest, sir.
I am interested in the surtax, however. As I understand it, as an anti-
inflationary device it has two major impacts. First of all, it reduces
the deficit which is itself inflationary and, second, it tends to reduce
the total demand for goods and services in the private sector.
Now you said, in answer to a question earlier, that you preferred
the expenditure reduction route from an economic viewpoint, and I
assume that was because it has a more immediate impact on the total
demand for goods and services. Is that right, sir?
Mr. MCCRACKEN. My comment there was that I thought the anti-
inflationary impact of reducing expenditures by a dollar would prob-
ably be somewhat greater than increasing taxes.
Representative CONABLE. Is that because of the very high level of
savings at the present time? Do people tend to clip into their savings
to pay increased taxes rather than reducing their demand for goods
and services'?
Mr. MCCRACKEN. Yes, that is a significant part.
Representative C0NABLE. And is that one of the reasons why there
has been a lag in the impact of the surtax on our economy generally?
Mr. MCCRACKEN. This, I think, has been a part of it, and the sav-
ings data show that.
Representative CONABLE. So we can anticipate, can we, a greater
impact from the surtax, let's say in April, when people find out they are
under-wititheld, than there has been up to this point.
Mr. MCCRACKEN. I would expect there will be some unpleasant news
there which will have an effect on consmner spending.
*Representati~Te CONABLE. What I am trying to decide in my own
mind, sir, is whether the surtax then is likely to have a greater eco-
nomic impact as we extend it, assuming that is necessary, than it did
initially. Have we drawn down on savings to any extent or is the
rate of saving continuing `at this same high level that it was?
Mr. MCCRACKEN. The savings rate declined in the second half of
1968. It was, I think, a little, it was back within the normal spectrum,
though still `a little high by standards of the early 1960's.
I think the extension of the surtax would probably more or less
continue the status quo. Research on consumer `attitudes would suggest
that anything which is "more of the same" is not apt to have a sig-
nificant displacement effect.
Of course, if the surtax were to be reduced this might well be
interpreted as good news which could produce quite a substantial rise
in spending.
Representative CONABLE. I am wondering whether continuing the
surtax at a reduced level would have the same economic impact in terms
of inflation that putting it on at 10 percent last year had in light of last
year's savings level.
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332
Mr. MCCRACKEN. Or in other words, what would be the effect of
allowing part of it to expire.
Representative CONABLE. Yes. If there is a timelag in the impact of
these things, and it is just beginning to catch up with us, does this
mea.n that at a lower level we would have the same effect we had
initially at the higher level or not?
Mr. MCCRACKEN. The adjustment to that lower level would also
take some time, just as the adjustments here has taken time.
Representative CONABLE. One other question in a different area, sir.
What is the average interest on our national debt now, despite the 41/4
percent ceiling?
Mr. MCCRACKEN. You mean the average rate-
Representative CONABLE. The average rate we are paying on the
overall debt of $365 billion if that is approximately what it is.
Mr. MCCRACKEN. I am not sure I have this figure.
Representative CONABLE. Well, I don't insist on having it right here,
sir, if it can be supplied.
Chairman PATMAN. Would you supply it for the record?
Mr. MCCRACKEN. Yes, sir; we will be glad to do that.
(The information requested and subsequently filed follows:)
The gross Federal debt at the end of the fiscal year 1989 is estimated to be
~365 billion, not all of which is interest bearing. The latest figures from the
Treasury Department indicate that the interest bearing portion of the debt
was ~35T.6 billion as of January 31, 1969. The average interest rate at that time
on the interest bearing portion of the debt was 4.684 percent. The rate at the
end of fiscal year 1968 was 4.499 percent.
Representative CONABLE. Those are the only questions I have,
Mr. ChairnTa.n. Thank you.
Chairman PATMAN. We will reserve the right to ask you gentlemen
to come back if the committee should want you to come back at some
time mutually convenient for tile committee and for you. Will that be
satisfactory, Mr. McCracken?
Mr. MCCRACKEN. It will.
Chairman PATMAN. I believe then, that we can adjourn for the day.
Tomorrow morning we have the Director of the Bureau of the
Budget, Mr. Mayo. I will be unable to be here because I will be a
witness before tile Ways and Means Committee, but the Vice Chair-
man, Senator Proxmire, has agreed to serve as chairman, which I
appreciate very much.
So, the coimnittee will stand in recess until 10 o'clock tomorrow
morning.
(`Whereupon, at 12 :50 p.m., the committee was recessed, to recon-
vene at 10 a.m., Tuesday, February 18, 1969.)
(Appendix follows:)
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APPENDIX
The following answers to later questions from Senator Javits were
subsequently submitted for the record by the Council of Economic
Advisers:
Question 1. It is generally agreed that the Federal Reserve prematurely
eased monetary policy alter the tax surcharge and expenditure ceilings were
enacted last year. To what extent did this easing vitiate the restraining effects
of the fiscal measures?
Do you believe this easier monetary policy the result of poor coordination be-
tween the Federal Reserve and the Administration?
What measures can be taken to reduce the possibility of fiscal and monetary
policies working at cross purposes in the future?
Answer. The intention of the Federal Reserve to ease money conditions upon
the enactment of the tax surcharge and expenditure ceilings in June 1968 is
clear from the policy record of the Federal Open Market Committee. Thus, at
its meeting of June 18, 1968, the Committee voted to maintain "generally firm
but orderly conditions in the money market; provided, however, that if the
proposed fiscal legislation is enacted operations shall accommodate tendencies
for short-term interest rates to decline,..." In fact, interest rates did decline
until about September, after which time they rose sharply. On the other hand,
the money supply remained fairly constant from the time the surcharge was en-
acted until late October, when it began a rapid rise. Thus it is difficult to tell
whether or not monetary influence in the few months after enactment of the
surcharge was "easier." In any case, it seems unlikely that either the fiscal ac-
tion at the middle of the year or the monetary action which follow-ed it had
much influence on the overall behavior of the economy in the second half of
1968. Their effects have only recently begun to be felt. Insofar as the second
half of 1968 was influenced by policy it was the policy of earlier months, in-
cluding the expansion of the money supply in the first half of the year.
We are not privy to the discussions that went on between the Federal Re-
serve and the Administration in 1968 and therefore cannot be sure whether
there was a lack of coordination between them. As far as we can judge from
the public record coordination was not lacking. The Administration and the
Federal Reserve seem to have had a common view of the economic situation
and of the appropriate policy. Although there may be a need for better co-
ordination that is not the main lesson of 1968. The main lesson is the need for
better understanding of the consequences of both fiscal and monetary policy.
Question 2. During the last two decades, the balance of employment has shifted
dramatically from manufacturing industries to service industries. Whereas at
the end of World War II, four out of every ten American workers were employed
by service industries, now six out of ten work there. Even in manufacturing,
the portion of employees in service-type jobs has doubled. Is it true as some
maintain, that this change has increased general employment stability, since
service-type jobs have proved relatively safe in economic slowdowns?
What does this mean for the so-called "trade-off" between unemployment and
inflation?
Answer. In 1950 about 59 percent of nonagricultural employment was in the
service-producing industries. Today the figure is 65 percent. Over the next decade,
about 85 percent of the new jobs in the economy may well be created in this
service sector. Employment is more stable in the service-producing industries
than in goods-produdng industries. During the four post-war recessions service
employment rose, with the exception of a slight decline in 1957-58, while employ-
ment in goods-producing industries declined from 3 to 7 percent. The continued
shift to service employment leads the Council to expect a corresponding increase
in stability of total employment.
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334
Since there is no fixed relationship or "trade-off" between unemployment and
inflation, the Council cannot predict the effects on it of the increasing stability
of the price level. While on the one hand, the growth of the service-producing
sector should help reduce the incidence of unemployment, on the other hand,
it may contribute an inflationary force in the economy. Productivity gains, as we
measure them, are low in some of the service-producing industries, while wage
gains are among the highest.
Question 3. The previous Council of Economic Advisers maintained in their
last Annual Report that eacessive demand was a "well balanced ewcess" in 1968,
and. not attributable to any one sector. Do you agree with this?
If so, doesn't this mean that any program placing the burden for restraint on
one sector of the economy relative to others, such as repealing the investment
ta~x credit, would be unfair and unwise?
Answer. We do not find the concept of a "well balanced excess" of demand
helpful. It is true that the main components of demand increased more or less in
proportion during the year, but this tells us little about whether one sector was
leading and the others closely follow-ing. Neither does it tell us whether the
division of total demand was well balanced in the sense of being sustainable or
in the sense of conforming to national objectives. With respect to sustainability
several points might be noted. The rate of inventory accumulation in the fourth
quarter of the year was higher than is likely to be sustained for long. The rate
of imports was probably unsustainably high relative to exports. The ratio of
Federal spending to the gross national product was made sustainable only by a
temporary tax surcharge. Whether the distribution of the total produce was
w-ell balanced with reference to national objectives is of course a matter of
judgment. Certainly opinion could be found that it was not.
For the future it seems to us desirable to restrain demand in as general and
neutral a manner as possible, allow-ing free market choices to determine the allo-
cation of the restraint except w-here clear conflicts with national objectives are
involved. We do not think that repealing the investment credit would be wise. If
the repeal were permanent it would remove a stimulus to econOmic growth that
the country can well use in the longrun. If the repeal were not permanent, there
would be a temporary effect on investment spending; but its timing and amount
w-ould be hard to predict (with some evidence to suggest that it might have dis-
appointing short-run results). We do not think that initiating such a disturbance
would be consistent with the gradually decelerating course we should like to
follow.
Question 4. In your statement, you note, "The rapid flowering of new manpower
programs in. recent years. . . has created an unmanageable system." What is
your reaction to consolidating the many separate programs into a comprehensive
Federal manpower program, administered and funded by a single Federal agency?
Answer. The Council supports the position that a comprehensive manpower
program should be developed by the Department of Labor. It should be "designed
to make centrally available to the unemployed and the underemployed a full
range of Federal job-training and placement services. Toward this end, it is
essential that the many Federal manpow-er programs be integrated and co-
ordinated."
The following answers to later questions from Senator Miller were
subsequently submitted for the record by the Council of Economic
Advisers:
Question 1. Reference page 28 of testimony, line 1.5. Does this refer to the
"unified budget"? If so, would it not be preferable to refer to the "operating
budget"?
Answer. The relevant sentence in our statement is: "Our view of the outlook
and goal for 1969 implies the need for continuation of a budget whose expendi-
tures are at least matched by the revenues from the tax system (assuming rea-
sonably full employment) ." The reference is to the unified budget. We believe
that for the subject there being discussed, namely the effect of Federal finances
on the w-hole economy, the unified budget is the best single measure. The main
difference between the unified budget and the operating (administrative) budget
is that the former includes, while the latter excludes, social security contributions
and benefit payments. These contributions and payments have effects on the level
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335
of business activity similar to the effects of many taxes and expenditures included
in the operating budget. A better picture of the total effect of Federal finance is,
therefore, obtained from the more comprehensive budget. This, of course, implies
nothing about the wisdom of balancing the unified budget by running a deficit in
the operating budget offset by a surplus in the trust funds.
Question 2. Reference page 36, last paragraph. Is it not true that, although
over the last few years the rate of inflation in major competitor countries has
been higher, the rate of inflation in the United States (applied to a higher wage
base which has increased at least in an amount to reflect inflation) has dimin-
is/ted our competitive position in world trade?
Answer. Since 1965, our price level has risen more rapidly than in most indus-
trial countries, and our competitive position has tended to deteriorate. Prior to
1964, our inflation was less rapid than in the industrial countries, and this tended
to improve our competitive position.
Our high absolute wage rate does not in itself mean that wage increases will
necessarily involve a decline in our competitive position. Even though our wages
are higher than in other countries, an equivalent percentage increase in U.S. and
foreign wages will not in itself cause a deterioration in the U.S. competitive posi-
tion, provided that the rate of increase in productivity in the U.S. is as great as
the increase abroad. Should the relationship between wage and productivity
increases in the U.S. diverge from the relationships in foreign countries, there
would be some tendency for price movements to differ among countries, with a
consequent change in competitive relationships.
Competitive positions are, of course, affected by costs other than wages, and,
at any rate, general price indexes do not give a very precise indication of changes
in competitive positions. At this level of generality, however, it is true to say
that changes in competitive positions occur, not because of the absolute level of
wages as such, but because of changes in relative prices, behind which may be
international differences in the percentage rise in wages, or in the percentage
improvement in productivity, or both.
Question 3. Reference page 40, line 14. Would retaliation on our part against
the EEC's recent proposal to tax our soybeans be regarded as "prejudicial" to
suelt negotiations so that the Council would oppose such retaliation?
Answer. Any step which adds to the barriers to international trade, whether
in the form of tariffs, quotas, or other nontariff barriers, raises the potential
problem of retreat from the policy of trade liberalization which has been pursued
by administrations of both political parties in recent decades. The danger exists
whether the trade restriction is initiated with the objective of protecting a
domestic industry, or whether it constitutes retaliation against objectionable for-
eign practices.
At the same time, a measured retaliation to foreign actions prejudicial to our
exports may persuade foreign countries to modify these actions. Thus retaliation
may, under certain circumstances, be instrumental in protecting our access to
foreign markets, and contribute to the overall freedom of international trade.
However, retaliation should not be undertaken lightly. It is most desirable, by
international discussions and negotiations aimed at achieving mutually acceptable
solutions. to avoid retaliation.
A number of European agricultural policies, both actual and proposed, involve
obstacles to U.S. exports. This is conspicuously true of the proposed soybean tax.
We consider it a matter of grave importance that the EEC, in their farm pro-
grams, make provision for U.S. agricultural exports.
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THE 1969 ECONOMIC REPORT OF THE PRESIDENT
TUESDAY, FEBRUARY 18, 1969
CONGRESS OF THE UNITED STATES,
JOINT EcoNoMIc COMMIrrEE,
Washington, D.C.
The Joint Economic Committee met, pursuant to recess, at 10 a.m.,
in room 318, Old Senate Office Building, Hon. William Proxmire (vice
chairman of the joint committee) presiding.
Present: Senators Proxmire, Miller, Jordan, and Percy; and Rep-
resentatives Reuss, Moorhead, Widnall, Brock, and Conable.
Also present: John R. Stark, executive director; James W. Knowles,
director of research; and Douglas C. Frechtling, minority economist.
Senator PROx1\IIRE. The committee will come to order.
Today we resume our hearings on the state of the economy, and the
administration's economic policies.
I would like to welcome our witness, Mr. Robert P. Mayo, in his
relatively new capa.city of Budget Director. Mr. Mayo has been a
witness before this committee in the past and has always impressed
us with his competence and cooperativeness. We are glad to have you
with us today.
It is obvious that the Federal budget occupies a crucial place in
economic policy. Of our gross national product of $900 billion, almost
$200 billion passes through the Federal Government in the form of
tax receipts and expenditures. I am deeply impressed with the urgent
need to reduce expenditures by asserting priorities. There are many
low-priority items in the budget, and, in the aggregate, they total many
billions of dollars. I intend, later on, to discuss the subject more specifi-
cally, Mr. Mayo.
I note that you have a fairly brief statement, which we welcome.
After you have completed it, we will proceed to raise questions with
you under our 10-minute rule.
You may proceed.
STATEMENT OF HON. ROBERT P. MAYO, DIRECTOR OF THE BU-
REAU OF THE BUDGET, ACCOMPANIED BY SAMUEL M. COHN,
ASSISTANT DIRECTOR FOR BUDGET REVIEW
Mr. MAYO. Thank you, Mr. Chairman, and members of the Joint
Economic Committee.
I welcome the opportunity to review with you the budget outlook for
fiscal years 1969 and 1970. The Joint Economic Committee's contribu-
tions to better public understanding of economic policy issues have
earned for it the respect and gratitude of the Nation. The increasing
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338
appreciation of the importance of economic policy in the United States
is attributable in no small pa.rt to the efforts of this committee. I am
pleased to join in your continuing discussion of this important subject.
Yesterday, the Chairman of the Council of Economic Advisers dis-
cussed with you the economic outlook for 1969. Tomorrow, the Secre-
tary of the Treasury will discuss various aspects of economic policy.
My testimony covers the budget outlook, an outlook which is now
undergoing a thorough review; so it cannot today be as precisely
defined as you and I might like.
We have learned much about how to conduct economic policy since
the passage of the Employment Act of 1946. But. the basic lesson, which
led to adopt.ion of the act, remains the same. Balanced economic
growth at a pace consistent with optimum utilization of our resources
does not just happen. WTe cannot merely wish away inflationary pres-
sures, the rise in interest ra.tes, or our bal ance of international payments
problem. Nor will wishing lead to a healthy rate of economic growth
an.d job creation. Our fiscal, monetary and other policies, working in
harmony, must uctively support basic economic objectives-while
respecting and preserving the individual freedoms that are so essential
to our economic progress.
For fiscal policy, .this means that we should aim to provide restraint
by achieving surpluses in t.he Federal budget in both the current and
the coming fiscal year. Recognizing that action was required, t.his
administration moved immediately to support the type of fiscal policy
that emphasizes restraint-recognizing the need for both extension of
the income tax surcharge and a diligent, effort to reduce outlays.
In letters sent to the heads of executive depa.rtments and agencies
almost 4 weeks ago, I stated the philosophy underlying this policy:
In view of the critical role of fiscal policy restraint in today's inflationary
economic outlook and our continuing heavy financial requirements for military
operations in Southeast Asia, we-like our predecessors-must now plan for-
extension of the income tax surcharge beyond its July 1, 1969, expira-
tion date, and
a budget surplus for 1969 and 1970.
However, a prime objective of our administration is the removal or the tax
surcharge as soon as economic conditions and defense needs will permit.
At the President's request, I also asked each agency head t.o make
an intensive review of the budgetary consequences of all Federal pro-
grams under his jurisdiction. This review is now underway.
The review of the budget is urgent. This administration is now
considering ways of reshaping the Government's programs in light of
its own policies. lYe do not merely intend to pile new programs on top
of old ones. We must, therefore, be in a position to a.chieve reductions
or even elimination of lower priority programs. This will entail careful
program evaluation on our part. We must examine the costs and the
benefits of Government programs for only then will we have the data
on which to make wise priority decisions. With the cooperation of
the Congress, we hope to provide room-some in 1970, but particularly
in the 1971 and later budgets-to introduce our own initiatives a.nd
proposals to meet the challenges of a constantly changing economy.
Unless we act prudently now, our ability to move in these new direc-
tions will be severely limited by existing program and financial coin-
mitments.
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Budget controllability always poses a problem. In the very short
run, the President and his Budget Director have few choices. Flexi-
bility, even in the 1970 fiscal year, is distinctly limited. It is only when
we look farther down the road that significant room for maneuver
appears. WTe must appraise our actions now in the context of that
future-which will be upon us all too swiftly, and which will foreclose
our options if we are not watchful now.
Federal department and agency heads have been asked to send the
Bureau proposals for specific revisions of their budget estimates within
the next week or so. The proposals will be reviewed by the Bureau, and,
along with our recommendations, submitted to the President for deci-
sion. He will then transmit formal budget amendments to the Congress
in accordance with law and established procedures. This is also in ac-
cordance with the expressed wishes of the chairman of the House Com-
mittee on Appropriations. I am optimistic that this review will produce
real savings. I am realistic enough, however, to appreciate that over-
all savings are not likely to be dramatic either for the few remaining
months of 1969 or for 1970.
Until this process is completed, I have no basis on which to provide
complete overall revised budget figures. The following discussion of
the budgetary outlook for fiscal years 1969 and 1970, therefore, deals
with selected factors which have thus far emerged apart from the
review.
FISCAL YEAR 1969
In January the outgoing administration presented. a budget which
showed estimated receipts of $186.1 billion in fiscal year 1969, outlays
of $183.7 billion and a modest surplus of $2.4 billion. This is a tight
budget, one born of restraint growing out of the expenditure ceiling
enacted last June. Its comparison with the budget deficit of $25.2 bil-
lion a year ago shows dramatic improvement.
The need for a surplus-however modest-in fiscal 1969 is clear.
But there are enough uncertainties in the estimates to suggest that the
indicated surplus may turn out to be more modest than was indicated
in January. Let's turn first to expenditures.
Outlays. Limitations estaiblished by the Revenue and Expenditure
Control Act of 1968 (P.L. 90-364) cover about half of the total esti-
mated 1969 outlays. The budget transmitted last month estimated that
outlays for the covered programs would be $8.3 billion below the Jan-
uary 1968 estimate, which is $2.3 billion more than the reduction re-
quired by Public Law 90-364. Outlays for programs excepted from
the limitations established by the act were estimated at $6 billion
higher than those in the January 1968 budget.
The outlay estimate of $183.7 billion for the year was described as
tight, given the programs it was intended to finance. It already appears
to be overly tight in the sense that some of the expenditures, not all,
but some of them, appear to be very conservatively estimated.
One reason why outlays are increasing is the unrelenting strong
demand for credit. Interest rates are nOw higher than was assumed
when the budget was prepared. Outlays for interest on the public debt,
therefore, have risen significantly and will consume a part of the
estimated 1969 surplus shown in the January budget. Moreover, as
a result of the strong demand for credit, private banks may wish to
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hold a lower volume of farm Price-support loans or they may require
a higher discount rate on these loans than had been anticipated by the
previous administration. In either event, Federal outlays would be
higher than estimated. Also in the agricultural field, we are faced with
$168 million of increased outlays on advanced Pa~~ments under the
feed-grain crop-diversion program. We have had to incur this un-
expected expenditure because in our judgment the failure of the previ-
ous administration to announce this reduction publicly and well in
advance imposed an unjust burden on those farmers who had been
participating in the program.
Furthermore, past commitments may result in higher outlays this
year, especially in such areas as highway construction. And also,
receipts from offshore oil leasing-which are offsets against outlays-
appear to be falling short of the Interior Department budget estimates.
We expect, of course, that outlays for some activities will fall short
of the budget estimates. Revised estimates of the effect of removing
Federal intermediate credit banks and banks for cooperatives from
the budget when the Federal capital investment in them was retired
indicate that the resulting reduction in outlays will be a little greater
than estimated in the budget. In addition, lower than anticipated un-
employment is likely to result in lower outlays for unemployment
insurance.
I am confident that the budget review currently underway will
produce other reductions in 1969, but I cannot define those at this
time. Fiscal year 1969 is now nearly two-thirds over; so our ability to
make substantial reductions in 1969 outlays is very limited. Nonethe-
less, we will not fail for want of trying. We are not looking for
deferrals or stretchouts which would have to be made up later. Our
goal is to build a sound base for future redirections of Federal
programs.
Receipt8. We are all quite aware that revenue estimates hold pitfalls
for us, too. The modest budget surplus would be either doubled or
wiped out if the receipts estimate were off by as little as 1˝ percent.
Our margin of error is thin indeed.
In any event, we already know of one specific reason to expect
lower fiscal 1969 receipts than are shown in the budget. If-as appears
likely-the tax surcharge is not extended by early April, receipts from
corporation income taxes will be less than estimated, because quarterly
payments that would be due on April 15 would not reflect the early
extension of the surcharge that was assumed in the budget. Moreover,
an additional deferral of receipts will occur if the extension does not
occur in time to affect the following quarterly due date on June 15.
Extension of the surcharge after ,June 15 will postpone $300 million
of receipts from fiscal 1969 into 1970.
FISCAL YEAR i970
In our prospective economic environment, a. policy of continued
fiscal restraint is certainly appropriate for the next fiscal year. The
forces that threaten our economic health are still moving too con-
sistently toward inflation. They are moving with too much momentum
to be left unrestrained. We will be alert to changes in economic condi-
tions that make changes in fiscal policy appropriate. In the absence
PAGENO="0065"
341
of any significant change in our commitments in Southeast Asia and
in the state of our economy, however, we continue to support extension
of the surcharge as an appropriate and necessary fiscal policy in our
efforts to stem the forces of inflation.
The January budget estimated a $3.4 billion surplus for fiscal 1970,
the difference between receipts of $198.7 billion and outlays of $195.3
billion. The element of uncertainty is, of course, greater with respect
to these estimates than for the 1969 estimates.
Outlays. The outlay estimates for fiscal year 1970 also appear to re-
flect considerable restraint and, again, some of the estimates seem to
be at the lower end of a reasonable range, thus making budget reduc-
tions that much harder. 1-lere again the intensive review of programs
now underway should produce savings which can be used to finance
our redirection of programs, and, hopefully, will add to the much-
needed surplus. I would expect, of course, that the effect on the com-
position, if not the total, of 1970 outlays will be sigmficantl.y greater
than on 1969 outlays. We look forward to working closely with the
Congress in this redirection of programs.
I should point out that the 170 budget assumption that the personnel
appointment limitations required by section 201 of the Revenue and
Expenditure Control Act of 1968 would not be effective beyond June
30, 1969. This asssurnption is being maintained for purposes of our
current budget review. But I have asked for views of the department
and agency heads on this point to aid the administration in developing
its own position on this matter. I am expecting constructive sugges-
tions from the agency heads about the personnel ceiling, not just nega-
tive expressions. The President is firm in his conviction that there
must be strict control of personnel in the executive branch of the Gov-
ernment. I have so instructed the department and agency heads to do
what they can to keep personnel under strict control.
As we look at 1970, we must also remember that achievement of
the estimated surplus rests to a considerable extent on legislation pro-
posed by the prior administration. Outlays will be over $1 billion
higher if several major proposals are not enacted, specifically: $500
million in postal receipts-an offset against postal service costs. I refer
specifically to the half billion dollars in postal receipts in the budget,
which, of course, is an offset against postal service costs.
Three hundred million dollars in Farmers Home Administration
outlays, which would be saved by shifting some of the direct farm
operating loans to a proposed insured loan program.
Another $300 million in outlays for education, the saving to be
achieved by adjusting entitlement for school assistance in areas af-
fected by Federal activities.
And another $100 million in veterans benefits and services resulting
from elimination of some duplicate burial benefits and compensation
for arrested tuberculosis benefits and reduction of pension payments
by the amount of railroad retirement income received.
These and other legislative proposals included in the 1970 budget
totals are being studied as part of this administration's budget review
preparatory to determining our position on them. We must also note
that here again higher interest costs threaten to shrink the 1970 esti-
mated surplus, and by a larger amount than in 1969 if present interest
rates continue.
24-S33-----'69-pt. 2-5
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342
Receipts.-About $11.9 billion of the estimated $198.7 billion re-
ceipts in 1970 depends upon the passage of legislation. Of this-
$9.0 billion would come from extension of the 10-percent tax
surcharge;
$500 million from extension of current excise tax rates;
$300 million from a shift to quarterly collections of unemploy-
ment taxes;
$1.7 billion from higher social security taxes; and
$0.4 billion in proposed user charges-airways, highways, and
so forth.
Our administration's current position is to support the proposed ex-
tension of the surcharge and the excise taxes. The remaining proposed
legislation, which would produce $2.4 billion, is currently being re-
viewed. The proposed social security and user charges legislation would
also increase outlays by $1.7 billion, and those were not in the figures
we were talking about before. Thus, $700 million of the estinmted 1970
surplus of $3.4 billion is contingent on the passage of legislation af-
fecting receipts from other than the surcharge and excises.
\~\Te call attention to the fact that these receipts are contingent on
new legislation merely to emphasize the uncertainties associated with
the 1970 receipts estimates. WTe do not mean to imply opposition to
these proposals. The administration will develop its position on the
proposed legislation during the course of its review of all the legisla-
tive proposals in the 1970 budget.
Your committee is well aware that budget receipts and expenditures
are heavily dependent on the behavior of the economy. If the rate
of economic expansion is slower than was forecast when the budget
was submitted, receipts in fiscal 1970 would almost certainly be lower
than was estimated at that time. The effects on expenditures would be
mixed, but the net result is quite likely to be higher. On balance, there
would almost certainly be a reduction in the surplus for fiscal 1970.
Moreover, even aside from the problem of forecasting economic ac-
tivity, a~s I have said before, there is always some uncertainty in the
estimates of receipts.
\\Te are just beginning our task of reviewing the financial condition
of the world's biggest enterprise. It is an awesome task, combining
challenges of organization, management, planning, and fiscal respon-
sibility which are without parallel. We shall do our best, and we know
you will help us in every way s-on can. That goes in both directions.
Senator PROxMIRE (presiding). Thank you very much, Mr. Mayo.
You say that if the tax surcharge is not extended by early April
there will be a postponement of about $500 million in receipts from
fiscal 1969 to fiscal 1970. Now, do I take it from that that the adniinis-
tration may urge the enactment of the surtax shortly ~ After all, ~f
we are going to act by April, it is going to take a position on the part
of the administration within the next week or two, I would think.
Mr. MAYO. Well, two points on that. First of all, I am describing in
that context the budget of the outgoing administration, which as-
sumed that the surtax extension would occur before April 15. Some
revenue will be lost to fiscal year 1969 if extension does not occur be-
fore April 15: an additional amount will be lost to fiscal 1969 unless
the surcharge is extended before June 15. To realize the one-half bil-
lion c'aimed in the budget as revenue for fiscal year 1969, you would
PAGENO="0067"
343
have to have enactment of the extension before April 15. To answer
your question about this administration's plans, it is unlikely that we
shall be prepare.d to ask for an extension of the surtax as early as the
budget assumed. We will not have our budget review completed, sir,
in time to permit necessary congressional action by April 15.
Senator PROxMIRE. Can you give us an idea roughly of when you~
would be prepared to let us know your position definitively on the
surtax?
Mr. MAYO. That depends to a large :extent, Mr. Chairman, on how
we progress in the budget review that is underway right now.
Senator PR0xMIRE. Have you made any estimate as to what the tim-
ing would have to be in order to assure that Congress would have time
to hold hearings, the House and Senate both, to act so that you
could have it certainly by July 1?
Mr. MAYO. We have not made an estimate in detail on that. And I
would respect your point of view, Mr. Oh'airrruan. As a practical mat-
ter, I would think that we certainly would have to be up there in the
neighborhood of late April or early May. It takes time for legislation
to go through the Congress; we appreciate that. And we would want
the extension, obviously, before the surtax expires on June 30.
Senator PRoxMnui. In the course of your remarks you indicate that
this surplus of $2 or $3 billion could either be a little more than that,
or even be a deficit. Does this imply that this is about what you an-
ticipate? Do you feel that this is about right from an economic stand-
point, to have a very small surplus, or do conditions require that, if
possible, we should work on expenditure control and try to have a
bigger surplus?
Mr. MAYO. I think that we are in the ball park here with the type
of surplus that you are describing.
Senator PR0xMniE. Yesterday the Chairman of the Council of Eco-
nomic Advisers `indicated that because of the inflationary situation he
expected that monetary policy would have to be tight, interest rates
high, throughout this present year-something all of us deplore. Your
statement here today apparently indicates that you are not going to
take the fiscal action. And the administration has pretty well dis-
carded the other instruments of inflationary control, in the short run
at least, to do much about this.
Mr. MAYO. I wouldn't say we discarded them. We recognize that
they have limitations, Mr. Chairman.
I would say that the achievement of a balance in the budget and the
very modest surplus that we are describing here is, in conditions of
the economic boom we find ourselves in, perhaps a neutral fiscal
policy.
Senator PRox1~iniE. It really isn't a restraining policy: it is a neutral
policy. When you say it could be a little over or a little under a `budget
balance, it is going to be close to it. It might go a billion or two dollars
either way.
Mr. MAYO. There is restraint in this budget, if only for the fact-
again, may I observe-of moving from a $25 billion deficit to a small
surplus.
Senator PROXMIRE. That is a very important point.
Mr. MAYO. I think that this movement can properly be called re-
straint, Mr. Chairman. In looking at it just by itself, without the
dynamics for the moment, it might be called neutral. But, of course,
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the situation must be viewed dynamically, and to that extent it is a
restraining budget.
Senator PR0xMIRE. Of course, that restraint is being exercised right
now, it wouldn't be exercised in 1970, that movement, because right
now, as I understand it, we are operating at a level of give or take
$1 billion or $2 billion surplus or deficit, that is, in-
Mr. MAYo. There are lags in the economic effect of this, as we all
well know. It isn't a turn on and off sort of proposition.
Senator PR0xMIRE. You described this as a tight budget, and per-
haps an overly tight budget, which is surprising if not shocking to
me, coming from your administration. What would happen if the
Congress should do precisely what it did last year and use the same
figures last year? In other words, supposing we should set a ceiling
on expenditures at $183.7 billion, which was the expenditure of last
year, I guess, or close to that, what would be, in your view, the diffi-
culties that would develop if Congress should take that action?
Mr. M~o. Well, two points. First of all, I was referring in the
overly tight description-to the budget of fiscal year 1969 as we face
it right now.
Senator PROXMII~E. What I am talking a.bout is maintaining that
level of spending for 1970, if Congress should do that.
Mr. MAYO. The question of maintaining a level of spending such
as you suggest raises two problems in my mind. First-I don't want
to sound like a broken record, because I think this has perhaps been
overused-there is the problem of commitments and contracts and so
forth that have already been made. The Congress could do a great
deal on this through its appropriation mechanism to keep expendi-
tures at a lower level next year. Second, we do have built-in increases
which are rather significant, the pay increase, interest on the debt,
and so forth. This raises the question as to how control over the
budget should be exercised, whether it is primarily or almost entirely
through the appropriation process, in terms of what is done on author-
ity to spend, or whether we need additional restraint to be exercised
through the debt limit, as we have had-sort of ex post-for many
years, or through outlay controls such as were enacted last year.
Senator PnoxxnnE. I am asking you, supposing we follow the
Williams-Smathers amendment of last year, which many people seem
to feel was quite effective. Secretary Barr of the Treasury, for example,
has written a recommendation to the Congress that we follow this kind
of line. He didn't recommend that we have the same level, of course, as
last year, but he thinks that this is something that Congress can do
which is effective. And there are a few things that we can do in this
spending area which gives us a feeling that we are having a really
definitive effect on the amount that is expended. That kind of action
seemed to have considerable effect-giving the administration the dis-
cretion to spend within that ceiling, and perhaps for the moment lay-
ing aside the manpower limitations, which I understand that the
President opposes quite strongly-at any rate, confining you strictly to
the dollar amount with flexibility.
Mr. MAYO. Well, I might say again, the ceiling does exercise re-
straint. I believe I reflected that in this statement. One of the questions
that I am still seeking the answer to is how the restraint can be handled
so that it is not arbitrary with regard to programs that are pretty
PAGENO="0069"
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much fixed, where you can't do much, as against programs where you
have more leeway.
Senator PR0xMIRE. Let me ask you about another area. Some of us on
this committee and in the Congress are very much concerned about mili-
tary spending. We are also concerned about the failure of the Budget
Bureau in the past to take the kind of sharp look at it that they seem to
take at other areas of the spending. Mr. Zwick was quite frank in say-
ing the Bureau doesn't go into the same detail for military spending
as for civilian spending. And, of course, the amount involved is so
great. This is an area where we can make sharp reductions if the
policy choice persuades us that we should do it.
One of your senior staff members, Richard Stubbi, wrote a paper
entitled "Improving the Acquisition Process for the High-Risk Mili-
tary Electronics Systems." His conclusions were very shocking, as you
may recall. He pointed out that the performance record of these multi-
billion-dollar procurements made, by the Defense Department in the
1950's and 1960's were both bad, and in the 1960's they were so bad that
six of the 11 major weapons procured reached a performance level of
less than 25 percent of their specifications. He said that they cost. on the
average 200 to 300 percent more than the Pentagon expected and told
Congress they would cost when they started. He said they were on the
average 2 years late in delivery. He pointed out that the profits of these
firms had not relationship to their performance; that in one case a
firm which had failed to meet its specifications on five out of seven of
its weapons systems had profits 40 percent higher than the rest of the
industry, `and 50 percent higher than nondefense industries in this
country. That in another case you had a firm that failed on all-every
one-of its procurements, and in this case their profits were higher
than average.
Now, under these circumstances it seems to me that this is an area that
certainly ought to be explored with considerable critical detail here.
And I can't understand why a dollar spent in defense shouldn't be as
carefully scrutinized as a dollar spent in nondefense areas.
Mr. MAYO. I share your concern, Mr. Chairman. I am quite aware
of my predecessor's statement in this regard, and the statements of some
of his predecessors. I feel that we have very competent analysts and
program people on the defense budget within the Bureau of the Bud-
get. I have been very impressed with their ability. 1 believe, however,
that we'need something a little more than that in terińs-
Senator PR0xMIRE. It is good to hear it. . .
Mr. MAYO (continuing). In `terms of a separate, highly competent,
highly skeptical look `at the defense budget. And it was with this spe-
cifically in mind that I appointed about 2 weeks ago James Schlesinger,
who was head of strategic studies for RAND, `as an Assistant Director
of the Bureau, with the specific purpose of having him advise me on
this very subject. I think this is terribly important, to have a man of
this competence separate from line responsibility people to actually
dig into areas that I can't possibly do myself, either from the stand-
point of time or technical competence, and to make an impact on the
very problem that you `are talking about. He has already started work
in this direction.
Senator PRox~1IRE. My time is up. But let me just say. it has been
~iy impression, and an impression that I have confirmed by talking
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346
to a number of people that have been in the budget in the past, some
in very high positions, that the Defense Department has had a peculiar
relationship with Presidents in the past, that the Defense Department
and the Presidents seem to work together on this, without the very
useful discipline and the wholesome discipline of a forceful Budget
Bureau, making the kind of independent critical analysis. After all,
the Defense Department has its own interest and its own reason for
wanting to fight for a higher budget, as every department does. So
I am delighted to hear that you have made this appointment, and that
you have this view that every dollar spent by the Defense should be
as carefully scrutinized as nondefense dollars. And I do hope that you
will have just as forceful an attitude toward waste in Defense as you
have anywhere else.
Mr. M~o. That is my intention, sir.
Senator PROXMIRE (presiding). Mr. Widnall?
Representative WIDNALL. Thank you, Mr. Chairman.
Mr. Mayo, I was really delighted by your answer to Senator Prox-
mire's last question. And I think it promises us a wholesome approach
in the future toward military spending.
I have heard former Budget Bureau Director Charles Schultze
speak on several occasions about projected spending for the military.
And he has estimated that post-Vietnam military spending will rise
to $70 billion for fiscal 1971, and $76 billion for fiscal year 1974. He
characterized these projections as conservative, and said that they
assume a significant stretchout and deferral of the number of existing
weapon systems procurement programs. Do you agree with his pro-
jections?
Mr. MAYO. I haven't ha.d the opportunity, Mr. Widnall, to look into
those figures. I share the concern that I think is Mr. Schultze's message
here, that there are built-in increases in Defense program costs. We
have undertaken, as Mr. McCracken may have told you yesterday, a
careful study of the post-Vietnam economy to consider not only transi-
tion within industries, and so forth, but also possible uses of what has
been loosely called the peace dividend. This latter aspect of the study
will be concerned with the choice between public expenditures and
private sector tax reduction-not just the surcharge, but other possi-
bilities as well. Careful attention must be given to the various claims
that will be put on the so-called peace dividend-not only increased
military spending, but also the needs of our cities, of science, and of
other programs of the Government.
Representative WIDNALL. What is very interesting, of course, in the
projections of Mr. Schultze, is that the Defense spending exclusive of
Vietnam support in the current fiscal year is about $52 billion. And his
estimates have gone to $70 billion for fiscal 1971 and $76 billion by
fiscal year 1974, a very large increase.
Mr. MAYo. They are, sir, if I may observe, estimates that are based
on weapons systems that were approved by the former administration.
I have no knowledge at this point as to whether that context is still
appropriate for us. These are all being reexamined, too, as you know.
Representative WIDNALL. Do you think that such a large increase in
the next 2 to 5 years is inevitable?
Mr. MAYO. I do not think it is inevitable; no.
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Representative WIDNALL. The small budget surpluses predicted for
both fiscal 1969 and 1970 result from approximately $10 billion surplus
in the trust fund account, primarily from social security. Since these
trust funds are locked up and can be used for only one purpose, we, in
fact, have a substantial deficit for both years; is that not true?
Mr. MAYO. There is a deficiency in what you might call Federal
funds as oJ~posed to trust funds; that is correct. We have taken the
point of view expressed by the Commission on Budget Concepts, of
which I happened to be Staff Director, that the unitary budget concept
will be followed in this administration as it was in the last two budgets
because it eliminated much of the confusion in the public eye, and if I
may say so, in the eyes of the Congress and the administration, as to
how to present the budget. In no way does the combining of trust funds
with Federal funds affect the sanctity of the trust funds.
Representative WIDNALL. Do you foresee the time when we will have
a balanced budget regardless of the trust fund balances?
Mr. MAYO. This would depend on so many conditions I wouldn't
care to guess at it today, sir. I can't answer that.
Representative WIDNALL. Mr. Zwick, in his appearance before us a
month ago, said the total fiscal 1969 outlays were then estimated at
$183.7 billion, but that the information from the first 5 months indi-
cated that outlays ran at an annual corrected rate of $181 billion. He
said that we could have a rate of $187 billion for the rest of the year
and still hit the estimate. Is it possible we might have even a larger
surplus by spending at a lower rate than he suggested for the rest of
the year?
Mr. MAYO. I would say that statement is a little on the optimistic
side, Mr. Widnall. We have had some evidence already-one that comes
to mind immediately is advance payments on feed grains programs
that I mentioned in my statement, where there is $168 million to be
spent-of higher spending than was estimated in the budget. There
are other instances involving a great many programs where there may
be a little more spending than was in that budget. Again, Mr. Zwick's
statement was, I think, in the ball park, and was a proper statement
when it was made. I would be a little less optimistic today, however,
than Mr. Zwick was.
But let me ask Mr. Cohn, who is with me here today, ~whether he sees
any other qualifications that he might like to make on those annual
rates.
I am always a little afraid of annual rates, because of the way things
jump around in Federal spending, Mr. Widnall.
Mr. COHN. Mr. Widnall, I share Mr. Mayo's pessimism about the
outcome as Director Zwick laid it out on the basis of data he had
through November. For one thing, the farm price support program
has, through the great efficiency you get out of computerization, de-
veloped a new technique for paying bills. And the whole seasonal pat-
t.ern has changed. And we have no experience as to what that seasonal
pattern `is. In an attempt to simplify the situation, Director Zwick
made an assumption which gave him a seasonally corrected figure. The
expenditures that we now see, `based on December data, and the effect
of the dock strike, which has tied up wheat shipments so that we are
not able to sell abroad as much wheat as we had anticipated, Mr. Zwick
did not foresee. As a result spending will be higher, I have no doubt.
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for farm price supports than he thought it would in the second half
of this fiscal year. I think we would be very lucky indeed to end the
year with expenditures at the $183.7 billion level. The pressure seems to
be a little bit in the other direction.
Mr. MAYO. This is all subject, of course, Mr. Widnall, to our review
that we are undergoing right now. But as I said in my opening state-
ment, I am hopeful, but I am also realistic. This narrow area of flexi-
bility closes in on you very fast on the closing months of the fiscal year.
Representative WIDNALL. The Department of the Treasury publica-
tion indicates that the budget ran a deficit of more than $10 billion for
the first half of fiscal 1969, and the Treasury borrowed about $10 billion
from the public to finance it. However, the budget surplus of $2.4 bil-
lion is projected for all of fiscal 1969. Doesn't. this mean that the Treas-
ury will have to return about $12 billion to the money markets in the
final 6 months of fiscal 1969?
Mr. MAYO. This wouldn't be a return to the money markets. As to
whether the size of that swing will be as large as you suggest depends
on several factors. One of them, of course, is the ultimate size of the
surplus. But also, the swing must reflect other changes in the Treasury
picture, such as changes in the cash balance, and securities, changes in
nonmarketable se~urities, and so forth.
To come back to my opening sentence, there is a return flow here
which should be encouraging to all of us as one factor at least working
in the direction of a little lower interest rate. Whether it will be offset
other places, I don't. feel I am in a position to judge, but at least that is
one factor working in the direction of lower rates.
Representative WIDNALL. My time is up. I would like to ask this one
short question right now. Do you anticipate that the drastic Govern-
ment turnaround from being a large net borrower to a large net sup-
plier of funds will have at least a destabilizing effect on the money
market in the economy?
Mr. MAYO. No, I do not. I think this can be controlled quite satis-
factorily.
Representative Wmx~ii~. Thank you, Mr. Mayo.
SenatOr PROXMIRE (presiding). Mr. Reuss?
Representative REUSS. Thank you, Mr. Chairman. Welcome, Mr.
Mayo.
As 1 understand your testimony, if Congress does not by early April
extend the 10-percent surtax, there is a likelihood that about half a
billion dollars of receipts will be taken from the fiscal 1969 budget and
instead be deferred until the fiscal 1970 budget, the first Nixon budget.
Mr. MAYO. That is correct.
Representative REUSS. And thus will have the salubrious effect of
making the first Nixon budget look better.
* Mr. MAYO. Well-
Representative REUSS. I just wanted to assure you of my all-out
support on that.
Mr. Mayo, is the gold budget your job, or the job of the Secretary
of the Treasury-our foreign exchange balance-of-payments pre-
diction?
Mr. MAYO. Well, I would say that this is something of concern to
the Quadriad-the Troika plus Chairman Martin. We do basic figures
in the Budget Bureau on the gold budget, that is true. We are not the
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349
source for the basic figures that are involved. We do a basic recasting
of those.
Sam, am I saying that properly?
Mr. COHN. I think, just so we understand each other, Mr. Reuss, I
ought to define "gold budget" the way I mean it, and the way we use the
term in the Bureau of the Budget. The gold budget is the budget that
describes the impact of the Federal Government's transactions abroad,
its spending abroad, and the receipts it obtains from abroad. In that
sense we in the Bureau of the Budget do a gold budget.
Prior to the time the Director and the President focuses on the
annual budget, we run through the agency proposals in terms of what
their impact would be on our balance of payments, just the Federal
sector apart from all others. This is then woven into a much broader
picture on the balance of payments and possible demand on gold. That
broader survey is conducted, as Mr. Mayo said, by the Troika and the
Quadriad, and involves the Secretary of Commerce, the Secretary of
Agriculture, and others involved in balance-of-payments problems.
Representative REUSS. Couldn't this possibly be a case of what is
everybody's business is nobody's business? I don't find anyone project-
ing our balance-of-payments situation for the coming year. Who is
supposed to do this? You have had to get out, and your predecessors
have had to get out, a very sharp pencil indeed on the domestic budget
receipts nnd expenditures, as you have done this morning. Who does
it with respect to our foreign position?
For example, we had hearings last month at which the Pentagon
casually admitted that they were roughly 100-percent wrong on their
predictions of the cost of our foreign military involvement, that in-
stead of the $41/2 billion figure that they have been putting down, it
was closer to double that. But this all seemed very casual. And I won-
der where in our Government responsibility ~is lodged~ ~for projecting
our balance-of-payments position and deciding how we are going to
manage it.
Mr. MAYO. I would say, first of all, the type of estimate that we are
talking about here is more in the nature of un economic estimate than
it is of a more precise budget estimate that has a basic accounting
structure beneath it. Even the actuals are in some sense estimated. As
you know, you have a great big discrepancy every year in this, because
we are not quite that smart, even on the actuals on the whole balance-
of -payments picture.
I say this merely to illustrate the point that the data we are talking
about are economic forecasts, and the Federal Government is somewhat
cautious about putting out official forecasts. True, the Government does
put out projections of gross national product and corporate profits.
You will not find, I believe, official administration estimates of pin-
pointed figures on unemployment, prices, or a great many of the other
economic indicators involved. I submit that on balance of payments
some of these same characteristics obtain.
But to come back to the responsibility angle, I would say that the
basic responsibility for keeping on top of the balance-of-payments situ-
ation-and there certainly are estimates being made all of the time in a
rough order of magnitude to help keep on top of this situation-falls,
I would say, primarily on the Secretary of the Treasury. There are
other parts of this that do affect the Department of Commerce. But if
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you had to have a single locus in mind for this responsibility, I would
say that it does belong to Secretary Kennedy.
Representative REUSS. I am disturbed by the fact that I had to ask
the question I did this morning. I also question whether the whole
matter of balance-of-payments accounting is as amorphous as you
suggest. Certainly, in the biggest single item, the military, if the mili-
tary is capable of figuring up the domestic budgetary cost of our
210,000 troops in continental Europe, which comes to around $6 billion
a year, I believe, it could also figure up the foreign exchange costs,
which come to around a minimum of a billion and a half a year.
Mr. MAYO. Estimates could be made.
Representative REtrss. These figures are never projected in the f or-
eign exchange field, yet if anything they are more critical than the
domestic budgetary figures.
Mr. MAYO. I understand the problem.
Representative REuss. We can get into an awful lot of trouble with
a $4 billion balance-of-payments deficit, whereas frequently we can
accept with equanimity a $4 billion domestic budget deficit.
I wanted to raise this because I think this committee and you, sir,
have to think about it. I am not satisfied with our present method of
projecting our balance-of-payments position.
I have one more question of, I suppose, a philosophical nature. There
is much talk in the a.ir among citizens and taxpayers about our national
priorities. A great many people think that the swelling military spend-
ing, the supersonic transport plane, the space program, agricultural
subsidies to large corporate farms, could well be reduced and more
spent on such things as education, particularly in slum areas, man-
power training, better air and water pollution control, for example.
Under the Nixon administration, whose job is it to set these priorities?
Mr. M~o. In the last analysis, this is the job-the biggest job in
my book-that the President has himself. It is up to me to advise him
on the figure side. On the program side, he has set up, as you know, the
Urban Affairs Council. He has strengthened the National Security
Council. He is working closely with his Science Adviser. There are
three who would help him on the program side come to this basic
decision of allocation of national resources.
There is no place short of the President where this can be completely
focused. Perhaps my role is greater than that of any other single
person. But this is a responsibility of the President himself.
Representative R.Euss. Thank you.
Senator PROXMIRE (presiding). Mr. Brock?
Representative BROCK. Mr. Mayo, I have enjoyed your remarks. I
sympathize with you. It is very difficult to respond to some of these
questions in the very short time that you have had to analyze the
budget. But where we can get some answers, it would be of some help
to us.
Mr. MAYO. Of course.
Representative BROCK. I am concerned about this fiscal 1969 budget.
I am concerned when I see the figures that we spent at the rate of, I
think, $99 billion in the first 6 months, and have had receipts of some-
where around $90 billion. And it is a little hard for me to understand
as a businessman how you can end up with the total figure of only $182
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351
or $183 billion, which would mean 15 percent reduction over the level
of spending in the first 6 months, and do it in the next 6 months.
Mr. MAYO. We do always have a seasonal factor in the way the
budget deficit or surplus runs in this country, largely attributable to
the receipts side, of course. Our receipts are a little on the lean side,
in the period from July to December, and are more ample in January
through June.
Representative BROOK. I am aware of that. But I am talking about
expenditures.
Mr. MAYo. Well, on expenditures, again the figures for the first 6
months do not lead us to believe that any cutback would be necessary
to achieve the total for the year. Now, we talked earlier about my prede-
cessor's statement that we could run at a higher rate in the next 6
months, and balance off a lower rate in the first 6 months and still
come out at the figure shown in the budget. Both Mr. Cohn and I ex-
press some reservation as to whether we would come out quite that well.
But I do not think that there would be any reduction in the rate of
spending implicit in the budget for the remainder of this year.
Sam, what were the figures for the 6 months, July-December?
Mr. CohN. The first 6 months were $93 billion out of the total of
$183.7 billion that was projected in the budget. I might add that that
$183 bilion includes a large sum for farm price supports which are
normally high in the first 6 months, and especially with the new com-
puterized system I talked about, would be higher than usual in the
first 6 months.
The dock strike was a factor that we hadn't considered at the time
that earlier estimate was made.
A second factor that Director Zwick brought out before the coin-
mittee a month ago was that the first 6 months contain a seasonally
higher spending rate for Federal construction programs such as the
highway program and the Corps of Engineers. Construction spend-
ing is usually higher in the first 6 months of the fiscal yea'~ ~nan later in
the fiscal year. So that there is some seasonality on the expenditure
side, not as marked as on the revenue side, but there is a small one on
the expenditure side. Therefore, $93 billion in the first half of the
year and $91 billion roughly in the second half wouldn't be far from
normal.
Representative BROOK. Then the figure of $99 billion is incorrect?
Mr. COHN. I am looking at the monthly Treasury statement for
December, and it comes to about $93 billion for the first'6 months.
Representative BROOK. Thank you.
Let's talk about the action that the Congress took last year, and
relate it to Mr. Reuss' question about priorities.
We imposed a budget ceiling regardless of the appropriation process.
It could have been $300 billion. We put a ceiling on total expenditures
in an effort to reduce the impact of Federal spendino'. Is this over the
long haul a rational approach? How do we balance t~be interest of the
two directly related branches of the Government, the executive and the
legislative, in terms of obtaining a sense of priorities and a sense of
overall budget policy and its impact on the Nation's economy? Where
does the primary responsibility lie in your mind? If it lies with the
Congress, what specific areas can we attack in order to achieve a better
balance of programing?
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I don't think we have any such priorities at the present time. I donUt
think we have had any in the 6 years I have been in Congress. And I
wonder if there isn't some way of obtaining a better sense of direction.
Mr. MAYO. We both have responsibilities in this regard. The admin-
istration has the responsibility in the first instance in preparing its
budget. to give its appraisal of relative priorities. That is what the
budget is. It is a financial plan, it isn't just a collection of figures.
The Congress has a very important responsibility, too. The Congress
decides upon the President's recommendations and molds those recom-
mendations into specific program authorizations through the actual
appropriation of funds. For many, many years we have taken the
position that it is the appropriation process which is the ultimate
arbiter of national goals and priorities.
Once the Congress has spoken, and the President has approved the
bills in question then that establishes the dimensions of the spending
process that have been established-although there may be differing
spending patterns depending on what type of program you are talking
about.
I think this is still the right way to approach it. The decision was
taken last yea.r to put in a further control. We have had experiments
around the edges of this in the past, and really, the debt limit in a sense
is an attempt at an overall budget review. But debt control is after the
fact.
The attempt to impose outlay ceilings reflects a feeling of frustra-
tion, perhaps, in trying to get all of these things united together,
beca.use it is such a complex job.
Representative BlocK. Isn't it a little bit hypocritical for the Con-
gress to impose a debt ceiling or to impose an expenditure ceiling and
then go ahead and vote two or three times as much for appropriations?
Isn't that having your cake and eating it too?
Mr. MAYO. It does create some difficulties. It is like the ad for the
car that is now kind of out of date-bigger on the inside and smaller on
the outside. You can only go so far. You can't have a negative wall on
your car. And neither can you have an appropriation process that holds
candy out to the baby and then proceeds to take it a little further away
after many commitments have been made. Such a procedure tends to
divert your spending restra.int.
We all agree, there must be spending restraint. But a ceiling tends
to divert restraint toward the things that are more easily cut off. And
you are much harder put in many instances to take a big project that
is part way along and incur the extra costs of having to postpone that.
You have to make a judgment there. It may cost the Government
many, many-depending on the projects-hundreds of thousands of
dollars more to postpone and then to start it up again, or even more to
just dump it and say, well, that has gotten too low a level of priority.
Representative BROCK. But I take it that the sense of your response
is that you would be reluctant to advocate a.nother similar ceiling?
Mr. M~i~o. I would be reluctant. It doesn't mean necessarily that we
may not find it necessary to agree with the Congress as to the need of
such a ceiling, but I wOuld like to rely more on the appropriation
process in the first instance as the controller of the ultimate level of
the Federal spending. It is easier to turn the faucet off at the boiler
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353
than it is to stick your finger in the spiggot at the end of the line. The
pressure is kind of tough at that point.
Representative BR0CK. I agree
Thank you very much.
Senator PROXMIRE (presiding). Mr. Moorhead?
Representative MOORHEAD. Thank you, Mr. Chairman.
Mr. Mayo, I appreciate very much your helpful and candid state~
ments here.
I would like to follow along the line that Mr. Reuss was discussing
with you, which was your function in helping the President set prior-
ities among the various demands of the budget.
Mr. MAYO. Yes.
Representative MOORHEAD. In your statement you say "We must
examine the costs and the benefits of government programs, for only
then will we have the data on which to make wise priority decisions."
Is it your belief that you can determine the relative net social benefits
which accrue from a dollar spent on education versus a dollar spent on
agricultural supports versus a dollar spent on public works?
Mr. MAYO. We ~re trying to work little by little in this direction. It
is obviously still going to be a judgmental appraisal, regardless of how
good the data base is, when you get down to the ultimate decision. But
we find it helpful, and so does the Congress, to make a relative ap-
praisal among, let us say, reclamation projects, or whatever it may be,
one versus another.
Representative MOORHEAD. I can see how the analysis is relevant and
meaningful concerning one reclamation project versus another. But
what about reclamation projects versus education?
Mr. MAYO. Exactly. The next step is, how about reclamation prices
versus agricultural price support? This gets a little tougher. And ob-
viously, it gets even more difficult when you get to the stage of compar-
ing defense and nondefense in the process of trying to decide what is
required to make America strong. Well, we have un inadequate data
base to make such an appraisal. And we probably always will have,
because in the last analysis it will have to be the judgment of the
President and the Congress as to what we mean by keeping America
strong.
I would also suggest that we have quite a long way to go in getting
toward this goal. We will never quite make it. But just as statistics
have been helpful over the years in letting us learn an awful lot that
we didn't know 30 or 40 years ago, so I think the process of program
evaluation can make a real contribution when properly directed.
Representative M00RHEAD. Mr. Mayo, yesterday Dr. McCracken put
a very high priority on moving disadvantaged people back into the
economic mainstream of America. As you propose revisions to the
budget, in what form do you see this priority taking-education, job
training, improved health, a better functioning labor market?
Mr. MAYO. I have an open mind on this. I am quite conscious of the
problem. I did work in the Chicago financial community within the
past 6 or 8 months specifically on trying to get banking resources and
talent diverted to helping the entrepreneur in the ghetto. I am also
quite conscious of the President's serious concern about the way in
which Federal programs are oriented toward our urban problem. How-
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354
ever, this is part of the budget review and the program review that is
going on right now, and I shall not prejudge it.
Representative MOORHEAD. As a budgetary matter, and in your role
as the Director of the Bureau of the Budget-don't you foresee diffi-
culties in being able to report as to the effectiveness and longrun wis-
dom of a ta.x incentive program for job training? Don't you fear that
what is today socially desirable to put into the tax system may be the
loophole of tomorrow, especially at a time when we are talking about
meaningful tax reform?
It seems to me that as the Staff Director of the Budgets Concepts
Commission and now the Budget Director, that it would be highly in-
consistent to favor tax incentives rather than demanding that these
expenditures be on the expenditure side of the budget so we can tell
exactly how much this program is going to cost us.
Mr. MAI-o. I understand the question that you are raising very well.
And I think we must be watchful of it.
Representative MOORHEAD. I hope you a-re. Also, in your statement
you suggest that $1 billion on the expenditure side and at lea-st $0.7
billion on the revenue side of the budget are contingent upon the pas-
sage of certain legislation by the Congress.
Mr. MAYO. Yes.
Representative MOORHEAD. Has the administration taken a stand
recommending this legislation, or will the administration take such a
stand in the near future so that the budget will show a restraining
surplus that the previous administration presented?
Mr. MAYO. This is part of the review that is going on right now, sir,
as to what the administrations' position will be on each of these issues.
The Postmaster General is looking at the problem of rate increases.
The Department of Agriculture is looking at the Farmers Home Ad-
ministration programs. And so fo.rth. It is too early for administra-
tion policy positions to be taken on some of these issues yet.
Representative MOORHEAD. Will the budget surplus be dependent on
the Congress acting on these measures by June?
Mr. MAYO. Well, I believe the assumption in the budget is tl1at they
would be enacted in this session of Congress-and I would assume
before June 30. Certainly on something like postal receipts, an early
date is rather critical if we are going to realize the figure that is in
Mr. Johnson's budget.
Representative MOORHEAD. As the chairman pointed out, in the best
of Congresses there is an administrative lag time between the time the
proposals come up and hearings are held and action taken by the com-
mittees, and the two versions passed by both Houses are reconciled.
And I just think that we need to discuss-
Mr. MAYO. It takes time.
Representative M00RHEAD. We want to cooperate with you, but we
do have some institutional limitations here, as you know.
Mr. M~&yo. Right. And we want to take enough time to study these
matters. Many of us are new in many parts of this, although we have
had experience that will be helpful.
So we are balancing the time factor here against the desire to wait
until we are sure that we have the right answers. If one does the latter,
he may wait forever, and be a complete failure.
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So I think we want to get this neat balance, and we will do it as
quickly as we can.
Representative MOORHEAD. Thank you, Mr. Mayo.
Thank you, Mr. Chairman.
Senator PRoxMI1u~ (presiding). Senator Jordan?
Senator JORDAN. Thank you, Mr. Chairman.
Mr. Mayo, the previous administration has spoken of uncontrollable
civilian budget outlays totaling more than $90 billion in 1969. In
the limited time you have been Director of the Budget are you able to
agree that this figure is high or low or about right?
Mr. MAYO. As an appraisal of uncontrollable-
Senator JORDAN. Of uncontrollable civilian.
Mr. MAYO. The figure itself-$98.8 billion is listed as relatively un-
controllable civilian outlays for fiscal 1970. This is the figure you have
reference to?
Senator JORDAN. I asked for fiscal 1969.
Mr. MAYO. $90 billion in 1969.
Senator JORDAN. Do you agree that they-
~\1r. MAYO. This is a tremendous figure, and it gives you great pause,
as you look at the job of the Budget Director, to be perfectly candid
about it. In other words, if this figure is correct it gives you a feeling
of frustration right off the bat. Well, in truth this is a tabulation of
items that are either what might be called fixed costs, which grow out
of commitments, or costs which are firmly anchored in legislation, cer-
tainly as far as fiscal 1969 is concerned, I think you would probably
agree with me, very little is going to be done to them in fiscal 1969.
We are not going to turn over price support programs and say that
they are going to terminate on March 31. I use the price support pro-
gram case just to illusti~ate the uncontrollability of many of the items
in the short run.
Now, the point that I tried to make in my statement, Senator Jordan,
is this-that we have to look down the road a way to see controllability
as a more manageable problem. I don't care whether we are talking
about 1972, 1973, 1974, or 1975, it doesn't really make much difference.
But the point is that as we look at our national priorities, and there-
fore at our budget outlook, 4 or 5 years down the road I think we have
duty to make a real serious appraisal of our national priorities. As
you look at the budget for 5 years hence, just to pick a figure again,
you do have more flexibility there. You also have more flexibility for
your programs if you can persuade the Congress that these are the
right programs. But we do get boxed in by our art of compromise-
or whatever you want to call the name of the game-as we make com-
mitments and incur obligations which either legally or morally we
must fulfill, but which produce a stream of "uncontrollable" outlays
later.
The way I look at the job of Budget Director, more philosophically,
is that if I can double from-just to pick figures-i to 2 per-
cent the amount of time I spend on the longer range issues, some suc-
cessor of mine may not have to spend 98 or 99 percent of his
time putting out fires, so to speak. My basic objective is to allocate
my resources and the resources of my staff so as to make me more
valuable to the President. If I can concentrate more on the point that
you have raised here-it is a very valid point-of the frustrations of
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356
attempting to make significant changes through near-term budget re-
visions and the opportunity to make substantial achievements through
real budget reappraisal and program reappraisal, the part of the time
spent on longer range issues can be extended.
Senator JORDAN. I realize that the fiscal year 1969 is two-thirds over.
But looking ahead, I think you make a. good statement here when you
say:
The review of the budget is urgent. This administration is now considering
ways of reshaping Government's programs in the light of its own policies.
And I hope that is true.
And, then, you add this sentence:
We do not intend merely to pile new programs on top of old ones.
Congressman Roth has performed a. great public service over in the
House by identifying over 1,200 programs of Federal grants-in-aid,
many of them overlapping and many of them competing, the agencies
competing one with another, to see who can give away the most money.
I would hope that you would, in your review of the reshaping of the
Government programs, as a Budget Director, take that into account.
Mr. MAYO. We will.
Senator JORDAN. It is not altogether your responsibility. We share
it with you.
But certainly I think that you could not turn your back on such a
situation without giving it substantial attention.
Mr. MAYO. Yes, sir.
Senator JORDAN. Mr. Mayo, how much of the budget increases are
built in? Have you identified those with respect to pa~y and interest and
so on? Did you have a figure or a. percentage in mind as to those built-in
increases that cannot be avoided?
Mr. MAYO. We have figures that are available in the budget of the
outgoing administration identifying specific built-in increases. The
increa.se in pay is one of those, and I believe the figure is $2.8 billion.
We have other built-in increases that are less easily defined than that,
relating to increase in workload in departments, increases in farm pro-
grams, increases that are related directly to a formula approach on
Public assistance, and grants-in-aid that we were lust talking about.,
and, of course, the increa~se in people who are eligible to get social
security benefits.
Those are what I would call built-in increases.
Sam, do we have a figure in the old budget?
It is the same table, really, that produced your $90 billion, Senator
Jordan, and it gives the estimated costs of what we call open-end pro-
grams. I say "we". I did not have anyt.hing to do with the preparation
of this, but I think it is a fairly clear present.ation of what is required
by existing law.
Senator JORDAN. Along with that, how about the built-in receipts?
We all know that-because we have a. graduated income tax struc-
ture-the rate of increase of Federal receipts is somewhat higher than
the rate of increase of the gross national product. How does the built-
in ra.te of increase in Federal receipts compare with the rate of built-in
expenditures?
Mr. MAYO. Well, it is hard to make that comparison for any given
year, because of the extraneous items that get into the picture. There
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357
is an increase of $8.6 billion from 1969 to 1970 in what is called rela-
tively uncontrollable outlays. There is an increase of revenue, exclusive
of the surtax, of a little over $10 billion. This is on page 61 of the
budget of the outgoing administration.
Senator JORDAN. Thank you.
I just have one quick question, and, then, my time is up. How much
of the 1969 budget goes for the ABM system, and how much of the
1970 budget goes for the ABM system?
Mr. MAYO. I do not think that there is any figure-at least, I have not
found it yet, sir. I am still looking for figures in the budget.
Senator JORDAN. If you can get it, will you supply it?
Mr. MAYO. I will see if I can do it, sir.
(The reply from the Bureau of the Budget follows:)
Total obligational authority for the Sentinel ABM was estimated in the 1970
budget of the outgoing administration to be $902 million in fiscal year 1909 and
$1,788 million in fiscal year 1970.
Senator JoRDAN. Thank you.
Senator PRoxMnm, (presiding). Senator Percy?
Senator PERCY. Mr. Chairman, with your permission I would like to
welcome our guest this morning. I know we look forward to having
Dr. Mayo before us many times in the future.
We are very proud of him in Illinois. And we are very proud of the
fact that both the Secretary of the Treasury and the Director of the
Budget come from Illinois. We have a team that has worked together
for many years, and I know they will work together ably and well
here.
Dr. Mayo's personal history is well known to all the members of this
committee. I was surprised to recall that he has served his Government
for about 28 years now in the Federal area, coming to Washington
the first time in 1941. He has also worked in the private sector and has
always worked steadily to support the activities of the Government,
especially in the rrI.easury Department.
He is known in Chicago as the man who budgets his own time. His
colleagues claim that he squeezes 60 seconds of work out of every min-
ute of activity. He organizes his activities well. 1-Ic keeps his finger
on top of everything. And, besides, lie is enjoyable to work with.
I do not know whether you are going to enjoy working with this
budget, Dr. Mayo. But I hope you will enjoy working with us, because
we have a common purpose to better understand the economic impact
of Federal spending on the economy and to try to better set priorities
for the resources of this great Nution and to try to best utilize these
resources.
I think this committee has contributed valuably to this understand-
ing and especially my colleague before me, Senator Douglas who, I
think, was probably one of the ablest and most active members.
I would like to ask, in the area of budget reduction-I know it hits
been only a short time that you have been looking at it but where do
you see the possibility for reductions?
If we are going to reassess priorities, we have to perhaps emphasize
some things more than others, and that means more money for certain
projects rather than others. And new money has to come out of some-
place. Do you see any possibility for it coming out of public works,
defense, space, so that other budgets, say for the cities, can go up?
24-S33-6~-pt. 2-6
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358
Mr. MAYO. Again, this is a. question of national priorities, Senator
Percy. And, again, I do not feel that I should prejudge the review that
we are now undertaking.
In response to the chairman's suggestion earlier, I indicated that, as
far as I was concerned, we were going to take just as careful look at
the military budget as we do at the civilian side of the economy. Noth-
ing is sacrosanct in our eyes as we undertake this review. Sure, we will
look at space programs. We will look at all programs, including public
works, with-I guess the Budget Director is supposed to have either
a jaundiced eye or gimlet eye or a fishy eye. It is called all sorts of
things, some of which are unprintable. In any event, we are going to
look questioningly at everything that comes before us.
Now, I will not pretend to become an overnight wizard at interpret-
ing all of these facts and opinions and judgments the first time around.
But you can be sure that I will do my best to advise the President
where I think cuts can be made as we try to redirect programs.
Senator PERCY. As Director of the Budget, have you made your
mind up whether you would like to see the President have discretionary
authority to raise or lower taxes subject to certa.in limits placed by
Congress?
Mr. MAYO. I have not made up my mind.
senator PERCY. Did you determine, or do you have any feeling as
to whether the program that we used in the Housing Act of 1968 where,
instead of large appropriations for public housing, we used interest
subsidy measures which reduced the budget impact and brought forth
huge amounts, hopefully, of private funds is a good approach? Have
you determined whether or not the use of tax incentives for, say,
areas such as job training1 which, if we are going to do an adequate
job, would require multibillion-dollar appropriations will do the job?
Tax incentives would mean no appropriation required, but it would
cut revenue. The impact to the Treasury would be felt only after the
man had been trained and the tax deduction could be taken off the
corporation income taxes. Have you determined yourself whether that
is a feasible and desirable method of reallocating appropriations and
revenues?
Mr. MAYO. All I can say at this time, Senator Percy, is that I think
it is of sufficient merit that it is worthy of consideration.
Senator PERCY. That leaves you lots of flexibility. You served on
the President's Commission on Budget Concepts. Was there any dis~
cussion then, or have you determined whether or not it would be a
good idea for the Government, like almost every corporation I know
and universities and any major institution, t.o take a 5-year look ahead
and try to see where you are going to go rather than always just
dealing with a 12-minute period? Would it help to try to give us a
broader picture? The administration will stay in certainly for 4. and
I hope for 8 years. To ta.ke a 5-year period would give us a. chance, then,
to see where this adininistra.tion intends to go? All of us, I think,
would benefit from such a forecast.
Do you feel that would be a valuable contribution to our budgetary
thoughts for the country?
Mr. MAYO. Well, we went through quite a bit of discussion on this,
Senator Percy, in our Budget-Commission days.
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I think all of us feel, as I indicated to Senator Jordan a few moments
ago, that the only way we can get real control over the budget is
through plans which, although they are subject to change will at least
give us some idea of what we will be doing 3, 4, or 5 years in the
future. This is the only way we will have a chance to make decisions-
to avoid having them made for us by past commitments and
obligations.
As to how formal such a presentation should be is a question that we
never fully resolved in the budget commission discussions. There was
unanimous agreement, if I remember correctly, that such estimates
should be prepared for the major program's. As you well know, this is
required on most public works projects now, before they are presented
to the Congress.
Such estimates must be handled pretty carefully, again to keep your
flexibility. For instance, the head of x program must not be given a
feeling of great security that his program is there through that whole
5-year period by the fact that you put down some printed digits. It
may be a program that, actually, you are hopeful of getting rid of be-
fore the 5-year period is up, and you `have not fully made up your mind
what would succeed, and so forth.
So, there is a question here of how formally you go about making
and announcing 5-year projections.
There is also a question of the extent to which you want to put the
President on the spot in terms of a~set of numbers.
It was suggested in the Budget Commission's report that the need
for long-term projections was very great, and if it could not really
be done within the Government officially, that perhaps some responsible
outside group could undertake such a project, possibly with help from
the Budget Bureau staff.
These are some of the thoughts that have gone through my mind
recently on this.
But I am terribly impressed with the need for keeping your flexi-
bility as you go on out several years. Regardless of what we may say in
criticism of the uncontrollable expenditures concept as being a defeat-
ist or reflecting a defeatist point of view, we have to agree that there
are some things that you just can't do anything about within a period of
a month, or 2 months, or 4 months; there are more things you can do
something about next year because Congress hasn't acted, and there
are even more that can be `changed in the year beyond that. But pro-
ponents of programs have a tendency to try to find ways to lock them in
through formal arrangements such as formula grants and contractual
commitments. Construction is probably a good example, because it is
hard to turn it off once you get it started without being terribly in-
efficient in many cases. An administrator of a program that is suscep-
tible of being locked in tries to get them locked in; and I suppose you
can't blame them for trying.
That is a kind of long-winded answer.
Senator PERCY. Thank you, very much.
Senator PROXMIRE (presiding). Mr. Conable?
Representative CONABLE. Mr. Mayo, I think that we `all sympathize
with you at this point.
You are in a very specialized field, and you are dealing with a world
you never made. You are reviewing someone else's budget.
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360
Your position is politically a very sensitive one, sir, because you are
the right arm of the President with respect to priorities, I do not
believe you even had to be confirmed by the Senate; did you?
Mr. MAYO. That is correct.
Representative CONABLE. I am interested, without trying to em-
barrass you in any way: Are you bringing your own people into the
Bureau of the Budget, or are you reviewing the budget largely with
those who have drawn it up as your assistants?
Mr. MAYO. I have brought quite a few people into the Budget
Bureau. I have also retained a number of people whom I have known
personally over the years to be people with complete intellectual hon-
esty and people who have been known as critics of the spending process
and the way it is conducted. I have one of them at my right arm, Sam
Cohn, who is Assistant Director for Budget Review. Another is my
Deputy, Sam Hughes, who has been in the Budget Bureau since 1949,
and is not just an elevated civil servant-he is much more than that;
he is a real student of the process and a real spark plug. But let me add
this: In adition to these two that I have mentioned, I have brought in
new Assistant Directors-Dick Nathan on the human resources side,
and Jim Schlesinger on the military and international side; Dwight
Ink, in our office of executive management, and Maury Mann, who is
behind me, from the Federal Reserve in Cleveland, who will be my
man to handle economic matters. So, I have surrounded myself with a
new team of four men as Assistant Directors, in addition to the two
Sams.
Representative CONABLE. Of course, the real reason for my question
is I want to be sure we are having a new look at this budget and not
simply a. review of it by those who originally formulated it.
Mr. MAYO. I understand that. And I siThmit that some of the Secre-
taries and the agency heads of the outgoing administration have sus-
1)ected that many of the Budget Bureau people must be Republicans
from way back.
Representative CONABLE. I am concerned about the oversight prob-
lem. I think, probably. your Bureau is performing more oversight
than the Congress itself. We have a great tendency to pass things and
never to hear from them again, and I think it is awfully important
that we have independent people of judgment and loyalty to the ad-
ministration who will be reviewing the various things that were done.
Mr. MAYO. I think you can count on us for that.
Representative CONABLE. I would like to ask you another question
that has been around for a. long time.
I am personally horrified to find us appropriating for the. executive
branch, the Departments, 3 and 4 months after the fiscal year has
begun. This is no problem for Congress, but it must be a. terrible
problem for you. And I am wondering if there has been serious con-
sideration of the possibility of going on a different basis, a calendar
year basis for instance, where the appropriation process precedes the
actual expenditure of the money by greater period of time in order
to permit more orderly planning than must be possible in your office
when we are on a fiscal year basis and have this very large degree of
overlap? It is not unusual for us to be better than a quarter of the
way through the fiscal year before you know what Congress is making
available.
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Mr. MAYO. I understand the problem very well. And as to the solu-
tion to the problem, I am much more uncertain, not just because I
have been on the job for only a month, but much more fundamentally
than that.
I have posed the problem-or philosophy, if I may-that maybe
things do not get done until they just have to get done. And if you
had a calendar year fiscal system, maybe the process would get post-
poned further, because of the attitude: "Oh, well, we do not have to
qu ite in ake this deadline."
Representative CONABLE. We would have some self-limiting factors,
however, in that respect, because of elections.
Mr. MAYO.. Yes.
That raises another possibility that has been suggested, sir1 that
maybe you would put the budget on a biennial basis. Many States
operate on that basis. And I have some personal reservations as to
whether that would be going in the proper direction-at least, as I
have observed it in certain State governments. But it is, at least, some-
thing that has been mentioned.
You could argue that that would substitute a more thorough review;
but its timeliness, of course, would be affected in the process.
Representative CONABLE. Without respect to anything you may do
between now and any given time in the future, what do you consider
to be the most unstable part of the budget as a result of your cursory
examination of it up to this point?
Do you feel, for instance, that defense is subject to the widest varia-
tion, or what areas are likely to cause you the most trouble, which
require the closest attention and the quickest action if trouble starts
developing?
Mr. MAYO. Well, this is a pretty hard judgment to form. Even after
a period of time, I am not sure I could give you.a satisfactoryanswer
to your question. The Defense budget, being the largest ~nd having
certain elements of both volatility and inertia built into it, is probably
the most difficult to get a handle on. And yet, the budget of any depart-
ment or agency has challenges in it from the standpoint of your ability
to achieve a technical competence to form your own judgment, not just
make a reservation on someone else's judgment. I think this is part of
the problem. And I do not think, certainly at this stage, that I have~any
fixed idea that one agency's budget is easy and another's is tough in
terms of achieving control.
Representative CONABLE. That is all.
Senator PROXMIRE (presiding). Senator Miller?
Senator MILLER Mr Mayo, in your prepared st'rtement, you said
For fiscal policy, this means that we should aim to provide restraint by achiev-
ing surpluses in the Federal budget in both the current and the coming fiscal
year.
Yesterday, Dr. McCracken, in his statement, testified as follows:
Our view of the outlook and goal for 1969 implies the need for continuation of
a budget whose expenditures are at least matched by the revenues from the tax
system-assuming at least full employment.
Reading these two pages together, it sounds to me as though you are
shooting for surpluses, whereas he is more or less looking for a balance.
Mr. MAYO. I would not want to put words in his mouth, but I would
interpret what you just said, Senator Miller, as indicative of a mini-
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mum requirement under these conditions. I certainly would consider
it a minimum requirement.
Senator MILLER. What if that minimum is achieved, he would be
happy, but, according to your statement, you would be much happier
with the surpluses?
Mr. MAYo. Yes.
Senator MILLER. Now, with respect to fiscal 1969 and referring to
the limitations of the Expenditure Control Act, a number of exceptions
were made to that in the past.
Mr. MAYO. Tha.t is right.
Senator MILLER. And by the time Congress adjourned last fall, there
were a good many of us that had the feeling that perhaps the exceptions
were going to pret.ty much eat up the $6 billion expenditure reduction-
such things as defense expenditures, increased spending on interest on
the national debt, and the like.
Mr~ MAYO. Yes.
Senator MILLER. Have you had a chance to analyze and see whether.
or not that $6 billion expenditure reduction has in fact been pretty well
eaten up, or will by the end of this fiscal year be pretty well eaten up?
Mr. MAYO. Yes. I think your statement is a fair one, "pretty well
eaten up." According to the figures in the budget of the outgoing
administration, the expenditures under the ceiling were reduced, not by
$6 billion, but by $8.3 billion. However, there is an estimated $6 billion
increase in t.he expenditures exempt from the ceiling, not only those
expenditures which were exempt in the first instance. As you will
recall. the President had to come back to the Congress a.nd was granted
specific exceptions of up to $907 million for the Commodity Credit
Corporation. and up to a specified amount of $560 million for public
assista.nce. So, your point is well taken, with reference to eating up
the $6 billion that t.he Congress had in mind in the first place. How-
ever, I would immediately say that that does not mean that the whole
effort was not worth while from the st.andpoint of restraint of total
expenditures, beca.use it is hard t.o say what those figures would have
looked like if there had not been the $6 billion ceiling. They could easily
have been much, much higher.
Senator MILLER. As a. supporter of that. measure, I was not suggest.-
ing that we should not have passed it.
But the point I was trying to elicit from you was, because of these
expenditures, beca.use it is hard to sa.y what those figures would have
looked like if there ha.d not been the $6 billion ceiling. They could
easily have been much, much higher.
Mr. MAYO. I get your point.
Senator MILLER. Would you agree?
Mr. MAYO. Yes, I would agree.
Senator MILLER. Ca.n you tell us whether or not you expect to Present
to the Congress any supplemental appropriation requests for the cur-
rent. fiscal year?
Mr. MAYO. There will be supplemental requests, yes; there is no
question about that. lYe are in the process of reviewing proposed
supplemental requests right now, those covering the items provided
for in the budget. As we review them. we a.re sending them up. We
do not. wa.nt to hold up the process that Mr. Conable expressed concern
about and cause even later appropriation action. We are reviewing the
supplementa.ls as quickly as we can.
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There is also another supplemental in process involving authority
for the Commodity Credit Corporation. It would shift an appropria-
tion request of a billion dollars from 1970 to 1969. This is, if you want
to call it that, bookkeeping between the 2 fiscal years. Budget author-
ity has to be brought up more currently, because of the factors that
we mentioned earlier-the effect of the dock strike and the advanced
feed grains payment to farmers. This is a case in which funds are more
available than is the authority to spend funds.
Senator MILLER. Does this imply that you are going to shift from
the policy that I think has been followed for about 3 or 4 years of not
covering the current years of losses in the CCC but to shift them into
the following year and have them covered by appropriations?
Mr. MAYO. But there is still capital impairment of CCC from past
years which has not been appropriated.
Senator MILLER. And you want to get the past years' impairments
up to current-
Mr. MAYO. I want to get a billion dollars of this enacted this spring,
yes. There is still further capital impairment to be restored in fiscal
1970. I believe it is $6.2 billion in total, including this bill. The pro-
posed supplemental would merely reduce the request for capital im-
pairment restoration next year from $6.2 billion to $5.2 billion, bring-
ing forward the billion dollars.
Senator MILLER. Can you give me a rough figure on how much pre-
vious capital impairments of the Commodity Credit Corporation's
capital account hftve not been covered up until now which you are
going to have to cover?
Mr. MAYO. I believe that most of the $6.2 billion we are speaking of
is in that category.
Senator MILLER. What this really amounts to is that if we are going
to put a stop to inflation by coming out with a reasonably balanced
budget, then there is over $6 billion of prior impairments that have to
be restored before we can start thinking about some of these new pro-
grams that we would like to have; is that so?
Mr. MAYO. Let me put it this way: The expenditures for crop sup-
port have already been reflected, of course, in the budget. There is no
question about that. This is the authority that now has to be restored.
But this is one of the things that we have to get in order, yes.
Senator MILLER. I take it, from what you said, that your policy in the
future will be to present a budget request or appropriation request
which will restore impairments, certainly current impairments, during
this administration; is that so?
Mr. MAYO. I am not yet to the point of making a judgment on that.
As I said, this impairment restoration is to make up for most of the
past impairment-restorations up to last June 30. I have not reflected
yet on the question of how current we should become. But certainly
that is an objective to keep in mind.
Senator MILLER. I have just two questions further, Mr. Chairman.
Senator PROXMIRE. Go right ahead.
Senator MILLER. On the anticipated supplemental appropriation re-
quest that will be coming in between now and the end of this fiscal
year, you have alluded to a $1 billion item for Commodity Credit. Can
you give us a rough idea of how much the supplementals would
amount to?
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364
Mr. MAYO. I really can't at this stage, because several of them are
still under review-all of them except the very few that we made deci-
sions on that are now in the process of going through.
Senator MILLER. I do not wish to tie you clown to specifics, Mr.
Mayo. But I was wondering if it might approach another billion
dollars.
Mr. MAYO. No.
Senator MILLER. It would not be that much?
Mr. MAYO. Well, there is the pay increase itself.
Sam, would you like to speak on this?
Mr. COHN. Senator, the outgoing administration budget listed about
$4.8 billion of supplementals that would be sent up this session for
fiscal year 1969, and they were included in the budget figures. The two
biggest were an amount for Vietnam-I do not remember the exact
amount, it was for the Defense Department for Vietnam costs-and the
pay raise that became effective last July 1. That pay raise was based
on law and approved by the Congress. The pay raise amounts were not
known at the time last year's budget was transmitted, and were not
included in any of the appropriations enacted by the Congress last
year. But the pay raise has been made effective and the salaries are
being paid at the new rates. The total 1969 supplemental appropria-
tions requested in the budget by the outgoing administration for that
was $1.6 billion. As Mr. Mayo said, this is now being reviewed in an
effort to see if we can cut down on that sum. But those supplementals
will have to come forward this session.
Senator MILLER. In other words, the supplementals that were fore-
cast by the recently presented budget for fiscal 1969 will remain
roughly the same as far as this administration is concerned; is that
right, talking in the neighborhood of $4 billion or might there be
another billion dollars on top of that for the Commodity Credit
Corporation?
Mr. MAYO. Well, the billion for the Commodity Credit is certainly
in our submission at this point. On the reappraisal of the other, I really
can't give you a judgment, because I have not tried to add up the few
things that we do have. It is too early. But I would say that there are
a number of instances where we are asking departments or agencies
to evaluate their ability to absorb some of the~ pay increase, for in-
stance. Whether these are minor or not, I can't give a judgment on at
this point. But there is a push in that direction.
Senator MILLER. If you are stuck pretty much with that $4 billion,
plus a billion dollars for CCC, that is going to come pretty close to
eliminating the projected budget surplus for 1969, isn't it?
Mr. MAYO. Let's put it in two parts. First of all, on the CCC supple-
mental, that will not affect the budget surplus itself.
Now, the spending of the $168 million for advance payments on the
feed grains program, yes, that does eat into the budget surplus. There
may be some other expenditures in CC~-because of the dock strike-
that eat into that budget surplus. but this will come nowhere near that
bill on. But on the pay, and so forth, the expenditure effect, Senator,
of the $4.8 billion that Mr. Cohn referred to here is already in the
calculation of the $2.4 billion surplus. I do not think you need to be
concerned about that.
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365
Senator MILLER. I was just wondering how much additional you
might be forced to ask for which would further reduce the already
small surplus that is forecast.
Mr. MAYO. I think I can say this-Mr. Cohn can correct me if he
thinks I am going too far on this: I think I can say that the supple-
mental we have in mind thus far-other than the CCC one, to the
extent that it affects outlays-would not materially eat into the
surplus.
Senator MILLER. Thank you.
One last question:
When you and Dr. McCracken-I presume, at least you can speak
for yourself, but I assume you are together on this-when you refer
to the Federal budget in those statements I quoted, are you talking
about the unified budget?
Mr. MAYO. Yes, sir.
Senator MILLER. Is it your intention to present only a unified budget
in your reports to the Congress, or do you expect also to give us an
operating budget picture?
Mr. MAYO. It is our intention to concentrate on the presentation
of the unified budget in the interest of having a focal point and a
budget which should, complicated though it must be, at least give the
reader of the budget a fighting chance to absorb one concept. rfhis
does not deny the need for separable figures on the trust funds and
the aggregate of the trust funds, and those will continue to be
presented to the budget.
Senator MILLER. I would hope that you might somewhere along the
line give a synopsis of the trust fund accounts to compare, so that a
person who is really interested in this could understand what the op-
erating picture was. For example, the operating budget deficit for
fiscal 1967 was in the neighborhood of $61/2 billion. And, there are
economists who feel that more accurateiy reflects the inflationary p~-
tential of the budget than merely a unified accounts approach.
Then, there is also this to be said, and that is: Taxpayers who pay
into the trust funds may be a little unhappy about the fact that they
are paying into the trust funds for the purpose of financing an other-
wise deficit of the Government, and feel a little put upon.
So, if these points can be brought out somewhere in the budget state-
ments. I thinJ~ it would be a good way tO keep the public informed.
And this is one thing that I have found in the past few years they feel
they are not informed about, and that is the impact on their own tax
situations, and also the possible impact of inflation upon the budget.
Mr. MAYO. You may be aware already, SenEttor Miller, of special
analysis B in the budget. I have it here in front of me, if you would
like to take a look at it. Page 20 of the special ahalysis volume in the
budget does have a table, table B-2, on Federal fund receipts and out-
lays, which I think answers precisely the point you have in mind. It
shows, at the bottom Of the page, an excess of outlays, excluding trust
funds, of $6,962 million for the fiscal year 1969, and $6,848 million
for 1970 as in effect deficits of the Federal funds.
We are not trying to satisfy all users of the budget-and I think I
can speak in this regard for both the prior administration as well as
this one, since the unified budget came out of a bipartisan commission
appointed by President Johnson, chaired by the present Secretary of
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366
the Treasury, and including Mr. McCracken as a member andfour of
your associates in the Congress as members. I think I can say that they
were looking for an appropriate measure that did not try to satisfy all
users of the budget-this is impossible. They wanted to satisfy the vast
majority of users by going to a concept which would include the net
effect of the trust fund operations, because, from an economic stand-
point, the taxes that are levied under social security do have an eco-
nomic effect, different, of course, but an economic effect that is im-
portant to take into consideration.
WTe observed further-and I will continue to stress this point-that
our decision to put a unified concept into effect in no way, in our mind,
affected the sanctity of those trust funds. This is terribly important.
And the Government securities held by these trust funds are just as
legitimate investments as the investments by a private pension fund is
in the stocks or bonds of an industrial corporation.
Senator MILLER. Be assured, I have no doubts about the integrity of
the trust funds in your hands. However, I remember when the Secre-
tary, the former Secretary, of the Treasury, testified before this com-
mittee around a year ago, in response to one of my questions, he recog-
nized that Treasury borrowing is measured against the operating
budget deficit.
Mr. MAyo. Borrowing from the public, yes.
Senator MILLER. That is right. Not the unified budge.t. And, there-
fore, to the extent the Treasury-
Mr. MAYo. I am sorry. I misspoke myself. The borrowing from the
public concept plus the trust funds in the traditional sense is tied to
the operating budget. You are quite correct.
Senator MILLER. Yes. And to the extent that such borrowing has an
effect on inflation, then the operating budget deficit is very, very im-
portant. And because of the great amount of attention that the new
administration has given to inflation, it would seem to me that some-
thing might be done about highlighting the operating budget deficit
and the borrowing entailed and the inflationary possibilities that this
would have.
Mr. MAYo. To pursue that one more step, however, Senator, I think,
if you will go beyond that and look at the borrowings from the public,
this is really the essential measurement of what the Treasury is able
to do in debt management with the public, which is a very significant
part of the whole inflationary environment. This is where the basic
contribution is made. The basic contribution on the inflationary side
that relates to trust funds is a contribution of an excess of those taxes
over expenditures in the first instance. The issuance of the special obli-
gations, therefore, is more neutral in the debt management concept, if
I may disassociate the. two.
I know this is getting a little esoteric, perhaps, but the point I am
going back to is that, as an economist, I would pay even more attention
to the analysis of the proper handling of the borrowing from the public
as a good or bad indicator when I am analysing the inflationary
problem.
Senator MILLER. Thank you very much.
Thank you, Mr. Chairman.
Senator PROXMIRE. Mr. Mayo, how many Budget Bureau personnel
are assigned to Defense?
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Mr. MAYO. Well, let me see. I do not have those figures in my head
at this point. As a rough guess I would say, including the international
programs that really go along with Defense, probably 50.
Senator PROXMIRE. Fifty. And how many people are there in the
Budget Bureau?
Mr. MAYO. Well, there is a total of 500.
Senator PROXMIRE. How many of those are assigned to other work
on other budgets?
Mr. MAYO. I did not bring my chart along with me that I rely on
in such instances, Mr. Chairman. I `should have. We have, of course,
legislative reference; we have executive management; we have budget
review, statistic standards, and a number of these operations that are
terribly important which do not involve programs, per Se.
Senator PR0xMIRE. At any rate, about 10 percent of your personnel
is assigned to Defense?
Mr. MAYO. Yes; 10 percent of total personnel.
Senator PRox1~iIiu. And Defense constitutes $81.5 billion in the new
budget?
Mr. MAYO. Yes.
Senator PROxMIlu~. And, as I understand it, relatively controllable
civilian outlay is less than $20 billion in the new budget.
Mr. MAYO. Yes.
Senator PROXMIRE. And although the ratio is 4 to 1 in the Defense,
they only get 10 percent of the Budget Bureau's attention.
Mr. MAYO. What I say is that although your ratios are overstated,
your point is still in the right direction. I would say that the other
expenditure programs are as much-
Senator PROXMIRE. Wouldn't it be fair to say that there is two to
three times as much attention concentrated on the nondefense dollars
as there is on the defense dollars, judging by the allocation of person-
nel today?
I am not holding you responsible; you are a new man.
Mr. M~ro. If you judge it strictly that way, I can't quarrel with
your approach.
Senator PRoxMniE. Now, are you reviewing the anti-ballistic-missile
system cost?
Mr. MAYO. That is being reviewed; yes.
Senator PROXMIRE. You are? How many people are on that?
Mr. MAYO. Well, I can't give you a guess on that. I just do not know.
It has been reviewed with reference to our regular staff, our regular
program people. And I have asked James Schlesinger to pay par-
ticular attention to this.
Senator PROXMIRE. Can you give us any idea when you would have
a conclusion on this, a recommendation?
Mr. MAYO. No, I can't yet. This is part of the review which I am-I
hope, understandably-reluctant to give terminal data on yet.
Senator PRox1~rJRE. I understand. But, at any rate, you will be in a
position to make recommendations when the President decides whether
or not to proceed with the ABM; is that correct?
Mr. MAYO. Yes.
Senator PROXMIRE. You say, in your statement:
We must, therefore, be in a position to achieve reductions or even elimination
of lower priority programs. This will entail careful program evaluation on our
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part. We must examine the cost and the benefits of Government programs for only
then will we have the data on which to make wise priority decisions.
I take it this refers to the PPB operations. Can you give us the
Nixon position, the Nixon administration position, the plans of the
new administration, for implementing and increasing the effectiveness
of this new system?
Mr. MAYO. ~ feel that the idea of program evaluation, Mr. Chair-
man, is a. sound one. I am not particularly wedded myself to the "PPB"
as a term. I am. I think, skeptical of the arguments that have been
made that PPB should be applied to areas that are still on the frontiers
of analysis. It isn't that I am against progress, but I think we can
devote our resources more appropriately to concentrating, at this stage
of our progress, on the techniques and the concentration of many of
those techniques, but not applying them to all of the Government's
endeavors.
Senator PROXMIRE. Without' getting into a. discussion of the philos-
oplay, or even some of the policy problems involved, as I understand
it, the Presidents have used in the past a program memorandum which
would summarize within a 20-page. span. usually or maybe less, the
policy alternatives that an agency is confronted with in making its
expenditures. and I understand that there are possibly as many as 200
of these. And these indicate the cost-benefit relationship to the extent
that they can on many of these programs.
Now, what I would like to ask in that. connection is: How will the
program memoranda and the analytical studies generated by the PPB
system become a more integra.l of the decision process in the Bureau
of the Budget?
And I take it from your first answer that you are not sure yet
whether PPB itself should be given further scope or whether the
limitations are such that perhaps it should not be.
Mr. MAYO. Well. I should clarify t.hat a. bit. I do believe `strongly
in the idea behind PPB, regardless of what we may end up calling it.
With this in mind, I have appointed a new assistant director for
program evaluation, Jack Carlson. He is engaged now in trying to
reorient our efforts to make the process not only more effective in our
longer run look, which is one of its purposes, but also to see if we can
integrate~this a little better into the budget process. We want it to
contribute mOre positively to the preparation of the budget, not just
next fall when~ it may be a little too late to affect 1971, but starting
even this spring to get a. little more input into the budget process.
Senator PROXMIRE. We are very anxious-we, on this committee,
and I have talked to a. number of members-we are very anxious to
have you, if you will, develop a. set of ProPosals on making available
to the Congress parts of the planning, programing, budgeting system,
such as the program and financial plan, the program memoranda.
This would be invaluable to us. I realize that some of this has to be
confidential for the present, of course. But this kind of data has not
been available, has not been used by the Congress to make our deci-
sions on these priorities, and sometimes we have made decisions
stupidly because we just did not know.
I do not see any reason why this could not be made available. It
would be very helpful to us. It is prepared, anyway. And this corn-
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369
mittee is going to have hearings in the spring on this, and will go
into detail on it, and I think that we would like to get additional
information on the benefits and costs of the various public programs,
including information on the characteristics of the beneficiaries of
the outputs of these programs. This would be most helpful to us.
Mr. MAYO. I will be glad to work with you on this. I feel this is
important.
Senator PROXMIRE. Now, in addition, I would like to ask you just
a few more brief questions. Do you have a policy-have you worked
out a policy on user charges? The advantages of user charges, it seems
to me, are very considerable. They insure in the first place that the
facilities will be used at an optimum level. They avoid congestion.
And, No. 2, they tend to place the cost or burden of a public program
on those who use them.
We have shifted to some extent in this area. Do you have any policy
worked out as yet?
Mr. MAYO. No. This is part of our review again. As I mentioned in
my statement, Mr. Chairman, on the user charges that were presented
in the budget, we are taking a careful look at these.
Senator PnoxmimE. I hope you will let us know on this, because we
are very interested in this.
And also Secretary Barr made a very, I thought, imaginative series
of proposals to us just as he left office, and one of them was on what
he called tax expenditure.s. You know the impact of tax credits, and
so forth, on the budget. He said they represented a serious drain on
revenues. And I wish you would do this: React to the proposal that a
more comprehensive budget document be prepared which would dis-
play tax expenditures as well as regular Federal outlays, and the com-
ment on the effect which the anticipated administration proposal on
tax credits would have on the size of expenditures as defined by the
U.S. Treasury report.
Mr. MAYO. We will take a look at that. I am aware of Mr. Barr's
suggestion. I can see some possibilities in it. I can see some problems
in it, too.
Senator PRox~iIRE. If you could do that to some extent, summarize
it perhaps when you are looking over your remarks, we would ap-
preciate it, because we would like to get a reply from you just as soon
as we possibly can.
Mr. MAYO. All right.
(The further reply from the Bureau of the Budget follows:)
Supplementary comments were requested on two subjects: (1) the proposal
that a more comprehensive budget document be prepared which would display
tax expenditures as well as regular Federal outlays, and (2) the effect which the
anticipated Administration proposal on tax credits would have on the size of
expenditures as defined by the U.S. Treasury report.
(1) The principal virtue of periodic estimates of tax expenditures is that, when
related to regular budget outlays, they would afford a comprehensive measure
of all calls upon budget resources-whether as direct outlays, loans, or revenue
forgone. A fuller measure of the role of the Federal Government in allocating
resources would thereby result. Moreover, since tax expenditures estimates
measure the current cost, in terms of revenue forgone, of special tax provisions
adopted in the past, they are essential to re-evaluations of these tax provisions.
The drawbacks associated with estimates of tax expenditures are both con-
ceptual and practical in nature. Several conceptual limitations of tax expendi-
tures estimates were noted in the Treasury Department study, "Tax Expendi-
tures: Government Expenditures Made Through the Income Tax System," sub-
PAGENO="0094"
370
mitted to the Joint Economic Committee on January 17, 1969 by former Secretary
Joseph W. Barr. Other limitations result from the fact that the revenue loss
attributable to some special tax provisions has to be excluded from the estimates
either because there is insufficient information regarding the magnitude of the
revenue loss or because there are honest differences of opinion as to what con-
stitutes a tax expenditure in specific cases.
Comparing tax expenditures with budget outlays often requires that tax ex-
penditures be forced into classifications not appropriate for them; consequently,
a substantial part of total tax expenditures falls into what is essentially a miscel-
laneous category. And adding tax expenditure estimates to the budget could pose
a workload problem of major proportions.
When plans are made for the 1971 budget, the question of whether to include
tax expenditure estimates in one of the budget documents will be considered. No
decision on whether to include them will be made until full consideration can be
given to the several relevant issues involved.
(2) The effect which the Administration's proposals on tax credits will have on
the size of tax expenditures will depend upon the nature of the tax credits pro-
posed. Estimates of their effect cannot be made until the tax credit proposals have
been formulated.
Senator PROXMIRE. And you talked about flexibility and not tying
yourself down in the future on the basis of policy judgments now. I
would like to call your attention to one specific recommendation made
by this administration in their closing days, the Trinity R.iver project..
The initial cost of this project would be $150,000. The ultimate cost
or once we get committed is $750 million. It would provide a canal,
in effect, from Fort Worth to the Gulf of Mexico. Some people say it
would be easier to move Fort 1~Torth to the Gulf of Mexico, and cheaper.
At any rate, tile benefit-cost ratio, with a 31/4-percent discount, is 1.5.
If they used tile new discount proposal which we will use after t.he
1970 budget., it goes down to 1.09. And the benefits there are very, very
questionable, because the transportation benefits are measured on the
reduced cost of those who will use the canal rather than tile effect of the
total reduced cost to the Nation as a whole. And it. is a very risky proj -
ect in the sense of tile public investment actually paying out. And on
tile basis of tile hearings we have had, I think that. most economists, no
matter 110w liberal they may be with tile public money, would agree
that this would be a serious misallocation of resources. So, I would
hope that you would give that ca.reful consideration.
Mr. MAYO. Well, I have seen the Trinity River-
Senator PROXMIRE. It is the kind of thing that. we do so easily with
pressure from powerful and influential and attractive Senators and
Congressmen. It is just $150,000. And once we are in it., we never get
out of it.
Mr. MAYO. This illustrates very well the problem of uncontrolla-
bility.
Senator PROXMIRE. If this were up for 1971, it would have a lot
harder time, because we have adopted a new discount factor; instead
of three a.nd a quarter percent, we go to 45/s, I think it is.
Now, finally, do you prepare budget estimates based on alternative
levels of unemployment?
Mr. MAYO. Will I?
Senator PROXMIRE. Do you expect to?
Mr. MAYO. I have not gotten that far into it.
I don't expect to, in the light of wha.t typically has been done here,
but I am sure we will have in mind as we present our budget what
might happen to these estimates under cliffereiit 1eve.1~ of gro~ national
product.
PAGENO="0095"
371
Senator PROXMIRE. There are two parts of it: one is technical, which it
seems to me could be precisely the effect on unemployment compensa-
tion payments and the effect on the revenue side. Obviously, if you
have a slowdown in personal income, you are going to have a serious
drop in revenues. That is part of it.
Mr. MAYo. Yes.
Senator PROXMIRE. The other part of it, of course, refers to the part
of the uncontrollable so-called expenses which are based on contracts,
many of them, for public works for which we have made commitments,
but which can be postponed with small penalty payments, and some-
times without penalty payments, deferred until a later date. And it
would seem to me that it might be wise to the projections here, so that
in the event of increased unemployment we would have some kind of a
group of projects on the shelf, and so that also we could defer these
inflationary expenditures.
Mr. MAYO. We are quite aware of the extent to which deferments
have already been made and the type of thing you are talking about.
I am not saying we have a list, but we are aware, project by project,
what the status is and the extent to which projects can be speeded up if
there were demand for that, if there were need for that.
Senator PRoxMnu~. Thank you very much. You have been a very
responsive witness.
Senator MILLER. `Will the chairman yield at this point?
Senator PROxMIRE. Yes.
Senator MILLER. I think he raises a very interesting question, and
that is the matter of the impact on employment or unemployment by
some of these projects.
I can see that this could entail a very close analysis of the relation-
ship between the end item and its stimulation of employment. For ex-
ample, a certain project might, if it were postponed, only have an im-
pact, say, on 500 jobs in construction of the project; but, on the other
hand, this postponement could have a negative reaction in the failure
to permit development of industrial plans that would provide 5,000
jobs. So, I just make that observation. While I agree with the desira-
bility of having it, I would hope that the analysis of it would go be-
yond the direct employment on the project, taking into account the end
results of the project itself.
Mr. MAYO. That is a very good point. There is a multiplier effect in
all of these.
Senator PROxMIRE. Thank you very much. Before we adjourn, I ac-
cept for inclusion in the record at the close of today's proceedings
answers from Budget Director Mayo to questions sent to him by any
of our members individually.
The committee will resume its hearings tomorrow morning at 10
o'clock, in the auditorium of the New Senate Office Building, room
G-308.
(`Whereupon, at 12:25 p.m., an adjournment was taken until 10 a.m.,
`Wednesday, February 19, 1969.)
PAGENO="0096"
APPENDIX
The following answers to Senator Javits' written questions were
subsequently submitted by the Budget Director:
Question 1. The previous Administration's budget for fiscal 1970 anticipates
that defense expenditures for Southeast Asia will drop almost $3.5 billion below
their estimate for fiscal 1969. Is this reasonable, in your opinion?
What assumptions about military activity in Vietnam form the basis for this
decline?
I note that the number of military personnel in that area will actually rise
a bit, according to the budget; what other factors would lead to a reduction
in defense spending there?
Answer. The entire defense budget, including expenditures for Southeast Asia,
is currently under review. Until this review has been completed, this Administra-
tion will reserve judgment about the estimates contained in the budget of the
outgoing Administration.
The previous Administration's estimate of outlays in support of Southeast
Asia was based on the assumption that current force levels and activity rates
would continue through fiscal year 1970.
The principal factors which the budget assumed would lead to the decline
in defense spending in Southeast Asia are: reduced aircraft attrition, a sig-
nificant reduction in the consumption of air ordnance and ground ammunition,
and the completion of a large part of the Southeast Asia construction program.
Question 2. The Report of the Cabinet Coordinating Committee on Economic
Planning for the End of Vietnam Hostilities estimates that of the $29 billion
currently being spent on Vietnam, $10 billion would be required in other military
uses in peacetime. Is it true that one-third of the "peace dividend" has already
been committed for military programs? What are these military programs?
Answer. A special post-Vietnam study group within the President's Cabinet
Committee on Economic Policy has been established to look into the whole range
of post-Vietnam adjustment problems. This group will study, among other things,
the magnitude and timing of the post-Vietnam peace dividend and the alternative
uses of the total peace and growth dividend.
Until the study has been completed, the magnitude of the dividend will not
be known, and its proposed allocation to specific uses will not be made.
Question 3. The excise tax cut of 1965 called for phasing out the Federal
excises on automobiles and telephone services, but this has been continually post-
poned to help meet the Federal need for revenue. Is this Administration corn-
mitted to eventually allowing these taxes to expire, as the previous Administra-
tion appeared to be?
Answer: It is this Administration's intention to allow these taxes to expire
as soon as conditions permit.
(372)
PAGENO="0097"
THE 1969 ECONOMIC REPORT OF THE PRESIDENT
WEDNESDAY, FEBRUARY 19, 1969
CONGRESS OF THE UNITED STATES,
JOINT EcoNoi\no COMMITTEE,
Washington, D.C.
The Joint Economic Committee met, pursuant to recess, at 10 a.m. in
room G-308, New Senate Office Building, Hon. Wright Patman (chair-
man of the joint committee) presiding.
Present: Representatives Patman, Reuss, Moorhead, Widnall, and
Conable; and Senators Proxmire, Sparkman, Javits, Miller, Jordan,
and Percy.
Also present: John R. Stark, executive director; James W. Knowles,
director of research; and Douglas C. Frechtling, minority economist.
Chairman PATMAN. The committee will please come to order.
Today we continue our hearings on the state of the economy and the
economic program of the Administration.
Secretary Kennedy, we are glad to have you with us. We are also glad
to have your associates, Mr. Walker and Mr. Volcker.
The Treasury occupies a central position in the fiscal and monetary
affairs of this Nation, and I know the members will have a number of
questions to ask you. So I will ask you each to proceed in your own way
with your statement, after which we will ask questions under the
10-minute rule.
I am told Mr. Kennedy has a very important engagement involving
a meeting of the National Security Council with the President at 11
o'clock this morning, and it will be necessary for us to release him at
least 10 minutes before that time.
That is what you suggested, wasn't it, Mr. Kennedy?
Secretary KENNEDY. Wnith your pleasure, please.
Chairman PAT1~1AN. We will be very glad to do that.
So if you will summarize your statement, we will then interrogate
you. Each member, of course, will be limited to 10 minutes, but we will
respect the time that you want. And if it is necessary to have you back
we will ask you to agree on some time that is mutually convenient for
the committee and for yourself.
Is that satisfactory?
Secretary KENNEDY. That will be satisfactory.
Chairman PATMAN. And if we want to ask any of you gentlemen
any questions in writing, I assume it will be satisfactory to do that.
And then when you look over your transcript of the testimony of
today's proceedings, you can answer those questions.
Will that be satisfactory?
Secretary KENNEDY. That will be satisfactory.
Chairman PATMAN. Then you may proceed, sir.
(373)
24-833--09--pt. 2--7
PAGENO="0098"
374
STATEMENT OF HON. DAVID M. KENNEDY, SECRETARY OF THE
TREASURY, ACCOMPANIED BY CHARLS E. WALKER, UNDER
SECRETARY, AND PAUL A. VOLCKER, UNDER SECRETARY FOR
MONETARY AFFAIRS
Secretary KENNEDY. It gives me great pleasure to appear before
your distinguished committee. I am accompanied on this occasion, as
you have already stated, by Under Secretary Oharls Walker, and
Under Secretary for Monetary Affairs Paul \Tolcker. I understand
that we are to concentrate mainly on domestic economic matters this
morning. Your committee has already received testimony earlier this
week from the Council of Economic Advisers and the Bureau of the
Budget. Therefore, we will not attempt to review the economic and
fiscal situations in great detail. Our prepared statements are fairly
short. I will begin by giving you my own general appraisal of the
current situation. The Under Secretaries will then coiument briefly on
specific issues in tax policy and debt management.
It is no secret that there are serious flaws in the economic picture.
Strong inflationary pressures and an unsolved balance of payments
problem require corrective action. But, there are also elements of great
strength. American productive achievements in recent years have kept
real income rising while also meeting the requirements of a rapidly
expanding defense effort. Unemployment has been reduced to the lowest
levels in nearly two decades. The dollar is strong and respected in the
world in spite of recent inflationary trends and a deteriorating trade
balance.
As a Nation, we are rich in material resources and responsive to the
needs we see around us. Our conscience has been awakened to the exist-
ence of poverty amidst plenty and the need to make equality of oppor-
tunity a reality for all of our citizens. These heavy responsibilities
must be met. To do so, the first priority must be to place the current
expansion on a sounder and more sustainable basis. Otherwise, we run
the risk of trying to do too much and end up by doing too little.
Any incoming administration encounters unsolved problems and
we have our share. We have inherited a serious inflation. It is distorting
the economy and weakening our international competitive position.
If unchecked, this inflation will undercut the dollar at home and
abroad. Already, rapidly rising prices have eroded the purchasing
power of millions of Americans who counted on their government to
provide sound money.
We recognize that there are risks in attempting to stop inflation too
abruptly. If the economy were to be halted in its tracks, unemployment
would rise prohibitively. Even though the inflationary psychology
might be broken, the cost would be too high.
There are also risks in doing too little. Insufficient restraint would
mean only a brief slowing down of the economy and no lasting reduc-
tion of inflationary pressures. Something very much like this occurred
in 1967, when expansionary policies were pressed so vigorously as the
economy slowed that the inflationary trend was never broken. As a
result, inflation has built up a considerable momentum in recent years.
The lesson is that the economy must be placed under firm restraint until
there are unmistakable signs that we are headed back on a noninfla-
PAGENO="0099"
375
tionary path. There will, of course, have to be a continuing review of
policies as the adjustment proceeds.
For the present, given the economic outlook as outlined to you by the
Council of Economic Advisers, a combination of fiscal and monetary re-
straint is clearly required. The budget should be kept in surplus while
the Federal Reserve pursues appropriate complementary policies.
While the administration has reached no final decision with regard to
extension of the 10 percent surcharge beyond this June 30, a budget
surplus will continue to be needed if inflation is to be combated without
extreme credit stringency. Unless fiscal 170 Federal expenditures can
be cut back appreciably from the levels now apparently in prospect,
there will be no choice, in my opinion, but to continue the surcharge
for another year.
Other matters for legislative consideration will be described by the
Under Secretaries. As you know, President Nixon has emphasized that
tax reform and equitable tax administration are to have a high pri-
ority. Hearings begin this month in the House Ways and Means Com-
mittee and in clue course we will be submitting the administration's
proposals.
The balance of payments continues to be a cause for concern. A small
surplus was recorded last year on the liquidity basis of calculation.
But this statistical improvement reflected a massive inflow of foreign
capital-both private and official. Inflows are unlikely to continue on
that scale. Meanwhile, our merchandise trade surplus dwindled to the
vanishing point last year. A major reason for the steadily worsening
trade position since 1965 is the sharp increases in imports caused by
overexpansion of the domestic economy. A return to noninflationary
growth is essential to the restoration of our trade surplus and the
maintenance of confidence in the dollar.
In conclusion, I will only note that much the same economic policies
are needed to promote internal and external equilibrium of the econ-
omy. Both the domestic economy and the balance of payments are
badly in need of relief from inflationary strains and distortions.
Mr. Chairman, that completes my presentation.
Chairman PATMAN. Thank you, sir. You have made a splendid state-
ment. In fact, I don't know of anything I disagree with. It sounds real
good.
But, of course, Mr. Secretary, time is of the essence in your commit-
ments. And I will get down to a point or two that I want to cover
personally.
The conflict of interest is on the mind of practically everyone these
days, as it should be. Many people believe that if our country ever falls
as a Government run by the people, the conflict of interest will be the
principal contributing cause. And that is not accusing you or any other
person of a conflict of interest, I want that made plain. But I just bring
it out to show the importance of it.
Of course, you are well known as a banker-a big banker and a fine
banker. Nobody disputes that. And you have been appointed as Secre-
tary of the Treasury. There are certain laws involving the Secretary
of the Treasury that do not involve other people in the Government,
because it is one of the most important positions. The Secretary of the
Treasury has so much importance and authority. Therefore, Members
of the Congress are certainly concerned about that.
PAGENO="0100"
376
And of course, it is reported that you held about 8,000 shares of bank
stock in a big bank and other banking interests. Naturally, we would
like to know how you disposed of that stock in order to become Secre-
tary of the Treasury.
Secretary KENNEDY. Mr. Chairman, my estate was placed in trust
with an independent trustee.
Chairman PATMAN. Who is the trustee?
Secretary KENNEDY. That is the Old Colony Trust Co. of Boston.
Chairman PATMAN. Is that a revokable trust?
Secretary KENNEDY. Nonrevokable during the period that I am in
the service of my country.
Chairman PATMAN. Nonrevokable as long as you are Secretary of
the Treasury?
Secretary KENNEDY. Precisely.
Chairman PATMAN. But you still own the bank stock?
Secretary KENNEDY. There. will be divestiture of the bank stock in a
matter of time, not complete, but to get a balance, a program of balance
within the portfolio. I will not know what is in the trust at any time.
Chairman PATMAN. Of course a private trust, Mr. Kennedy, is not
like a supervised trust. And this trust, being a private trust, would not
have any Government supervision.
Secretary KENNEDY. We either believe in trusts, Mr. Chairman, or
we don't believe in them. This has been gone over by the committee of
the Senate that approved my confirmation. I agree with you, there is a.
problem. A way must be. found where a man can serve, if he owns any-
thing-unless you want a Secretary of the Treasury that owns nothing.
And I have t.he feeling that this does take me out of any discretion with
respect to my estate.
Chairman PATMAN. In other words, you are trying to arrange it so
that you can still exercise independent judgment.
Secretary KENNEDY. Precisely. And I have indicated within the
Treasury in a directive to all departments that on any matter where
there would be any possibility of conflict, that I would not be in-
volved, other than as Secretary.
Chairman PATMAN. I can give you a good illustration of what
I mean. In this morning's paper, the Evans-Novak colunm has a
heading, "Banks' Move To Open Old Loophole Will Provide Test of
Tax Reform." That would be a good challenge to your independent
judgment, being interested in banking. And you would have to a.ct
in favor of the bank if some wrong has been done to the banks. And of
course, it is your duty to prevent wrong as well a.s anything else.
This discloses a. question that is brought up before our committee
oftentimes a.bout the 2.4 provision for losses of banks. You know,
that was agreed to. And the result was that the banks cut down on their
loans; they didn't make venture loans so much, or risk loans, because
they had that 2.4 that was guaranteed to them as a deduction. That
was an incentive for them to be hard on their loans and not have any
losses. Therefore, the banks have been making several hundred mil-
lion dollars on this reserve.
I will a.sk, if there is no. objection, that this article be placed in the
record at this point.
(The article referred to follows:)
PAGENO="0101"
377
[Column from the Washington Post, Wednesday, Feb. 19, 1969]
BANKS' MOVE To OPEN OLD LOOPHOLE WILL PROVIDE TEST OF TAX REFORM
(By Rowland Evans and Robert Novak)
The suddenly sprouting Congressional urge for tax reform will get an
early test when the banking industry, which usually wins what it wants in
Washington, attempts to pry open a recently closed tax loophole.
The closing came last fall in a quiet, clever maneuver by Stanley Surrey,
winding up eight frustrating years as Assistant Secretary of the Treasury
for tax policy. With a stroke of the pen, Surrey boosted by an estimated $100
million a year taxes paid by commercial banks.
As Surrey was well aware, both the outgoing Johnson team and the incoming
Nixon team at the Treasury had ties to the banking industry which made it
all but impossible to overrule his regulation. Thus, only Congress can restore
the bankers' tax advantage-a preview of similar confrontations between tax
reform sentiment and lobbying pressure in the coming tax reform struggle.
Like most big industries, the bankers enjoy a special tax privilege: A tax
formula permitting them to take an automatic deduction equal to 2.4 percent
of their outstanding loans as a so-called bad debt reserve.
Since actual bad debts are well under 1 per cent of loans, this formula
amounts to a bountiful gift from Uncle Sam. This was precisely the view of Stan
Surrey.
Surrey, an ardent tax reformer, had tasted more failure than success at the
Treasury and last fall was chagrined when President Johnson suppressed his tax
reform proposals. As a valedictory, therefore, Surrey began rewriting tax regula-
tions in his closing days-including the one on bank taxation.
Instead of reducing the 2.4 per cent, Surrey ruled that the bad debt percentage
could not be applied to absolutely safe loans-most notably loans to the U.S.
Government. Nobody knows exactly how much that will cost the bankers in 1969,
but $100 million is the educated guess. Accordingly, Surrey's stroke of the pen
was an instant tax reform of major proportions.
Neither of Surrey's two superiors in the Johnson Treasury-Secretary Henry
H. (Joe) Fowler or Under Secretary Joseph Barr-cared for the change. One
report circulating among lobbyists is that Fowler was restrained from killing
Surrey's rule change only when Surrey threatened to resign with a blast against
the Johnson tax policy-a report confirmed by some and denied by others.
Adept at bureaucratic maneuvering, Surrey issued the change in regulations
last October while Fowler was in Geneva for a monetary conference. Surrey's
action could have been overruled in the Johnson Administration's closing clays.
But when Fowler resigned as Secretary in December, all hope expired for the
bankers.
The reason: Barr, Fowler's successor as Secretary in these closing weeks, had
accepted a post-Government job with a leading Washington bank-the American
Security & Trust Co. Barr rightly felt constrained from interfering with Surrey's
handiwork and so informed the banking industry.
That was particularly glum news for the bankers, because Barr's successor
as Secretary in the Nixon Administration, David Kennedy, was coming to
Washington from the Continental Illinois Bank in Chicago and was just as unwill-
ing as Barr to bail out the banking industry at the risk of creating a conflict of
interest.
The bankers' position became even bleaker when President-elect Nixon named
as Under Secretary, No. 2 man in the department, the chief lobbyist of the
banking industry: Charls Walker of the American Bankers Association. Walker,
taking a surprisingly strong position for tax reform in nonbanking areas, must
also avoid any seeming conflict-of-interest as an advocate of bankers' tax
privileges.
Thus, bankers know their only hope is Congress. Legislation to overrule
Surrey would take too long, but the Joint Committee on Internal Revenue could
pass a resolution instructing that Surrey's regulation be revised.
However, leading House tax-writers are unsympathetic to the bankers' position.
Indeed, there is some feeling in Congress that Surrey did not go far enough
and should have limited the bad debt deduction to the actual amount of losses-
running at less than 1 per cent-for an industry enjoying unprecedented profits.
Whether that Congressional feeling persists should provide an accurate barometer
for general tax reform.
PAGENO="0102"
378
Chairman PATMAN. The article states that an assistant to Mr.
Fowler changed this to where it is going to cost the bank a hundred
million dollars. Now Mr. Fowler was reluctant to change it because
he was going out. And Mr. Barr, when he came in, he had already
taken a position with the banks, and it would be embarrassing to him.
And now it will be up to you. And if your judgment is that that should
be changed, why that puts you in an embarrassing position if you are
in the banking business.
Now, may I suggest t.hat this is not new to me. Back in 1932-and I
am not saying any of this as a threat, Mr. Kennedy, I have no personal
feeling against you or any of your associates, and I am trying to act
fairly on these matters-but I had a run-in with another Secretary of
the Treasury one time in 1932, and I impeached him on the floor of the
House, Mr. Andrew IV. Mellon, and I gave my reasons for the im-
peachment charges. One of the major reasons was that he was extensive-
ly in the banking business, and in conflict with the law of our country,
and therefore was ineligible.
Now, it is true, after 2 weeks hearings before the .Judiciary Com-
mittee of the House-a number of them were executive sessions, but
we had public sessions too-evidently somebody didn't want to let
that committee pass on the impeachment charges. And for some
unknown reason, like a flash out of the Heaven the word came out in
big boxcar headlines, "Mellon Resigns, Appointed to the Court of St.
James." And of course, that rendered moot those hearings. It was
tantamount to a pardon in the middle of a trial.
So Mr. Mellon, I don't think, wanted to resign. But Mr. Hoover-
now, I am telling you my personal knowledge of things that went on
that were not always printed-Mr. Hoover was getting into a big
campaign in 1932 with Franklin P. Roosevelt. And naturally, it
wouldn't help his party for something like this to be hanging over
him. He didn't necessarily want to get Mr. Mellon out, and Mr. Mellon
didn't want to get out, I am sure he didn't. And he did one of the most
courageous acts a President ever did. He accepted Mr. Mellon's resigna-
tion without it ever having been tendered. And so when Mr. Mellon
was taking the oath, one of my friends in the newspaper fraternity was
standing right next to him. He said, "Now, this is not a marriage cere-
mony, this is a divorce"-because he didn't want to leave the Secretary
of the Treasury's office. But the sentiment was all the other way.
And of course he left, and the question became moot, and the com-
mittee decided not to pass on it further, although they could have. But
many Members of Congress, like La Guardia of New York, Browning
of Tennessee, and many others insisted on the hearings going on. But
of course, the so-called wiser heads prevailed, and they decided that
the question was moot, and he was not only out of office but he was out
of the country, and they just let it go. And that is the way it happened.
But all these questions came up. And that is a terrific question in our
country today, conflict of interest. And personally, I don't see how you
can claim that you are not in the banking business if you just have
your stock in trust. That is my personal opinion. Of course, the courts
might not agree with me on this.
How much commercial bank stock have you placed in trust, Mr.
Kennedy?
Secretary KENNEDY. It will be probably 38,000 shares.
PAGENO="0103"
379
Chairman PATMAN. How much would that aggregate in present-
day value?
Secretary KENNEDY. A million two-hundred thousand, something
like that.
Chairman PATMAN. A million two-hundred thousand. That would
aggregate all of your commercial bank stock?
Secretary KENNEDY. But that stock will be diversified out of the
trust within a reasonable time. So I don't think there will be any
problem.
Mr. Chairman, if you are going to impeach me-
Chairman PATMAN. I didn't say I was going to impeach you.
Secretary KENNEDY. I know, but if that was what you are indicating,
I would suggest you do it right away.
Chairman PATMAN. I didn't have that in mind, and I didn't want
you to consider it a threat. It is not a threat. Of course, there are 435
Members of the House.
Secretary KENNEDY. As I have already indicated, I had a discussion
before the Senate Finance Committee before I was confirmed. They
went into this with great care. I recognized the problem. And it
is up to the Congress to decide on conflict of interest. In my own con-
science and heart there will be no conflict. I will use all my best
efforts to see that the law of the land is maintained and there is com-
plete equality of purpose, and everything else. But if it is the judg-
ment at any time of the Congress that a conflict exists, they should
so state and make it clear. I think that this trust arrangement does
qualify. It is the only way I know to handle it. It seems to me the
best solution.
Chairman PATMAN. I think you are on pretty solid ground to
accept what the Senate did in confirming you. At the same time, that
doesn't relieve the House of Representatives from taking action.
Now, when Mr. Mellon was appointed, many Members of the Sen-
ate felt that they made a mistake when they confirmed him. You
know, we all want to confirm the Cabinet of the incoming President,
we don't care who they `are, just so they are eligible, and the Senate
took it that way, I am sure. But now when Mr. Mellon was confirmed
they tried several times to undo that. But they never could do it.
He stayed in office 12 years.
Secretary KENNEDY. He was `a great Secretary, Mr. Chairman.
Chairman PATMAN. To some people. A lot claim he was a gTeat
Secretary, some claim he was the greatest Secretary of the Treasury
the country ever had. But there are some people who don't agree.
Secretary KENNEDY. That is right, there is always an honest differ-
ence of opinion.
Chairman PATMAN. When Mr. Harding sent his Cabinet to the
Senate he didn't send Mr. Mellon's name up. And when Mr. Coolidge
became President and he sent his Cabinet to the Senate, he didn't
send Mr. Mellon's name up. Mr. Mellon was the only man in history
who held the office without being confirmed except one time. And the
Senate never could get a hold of it anymore. They would have liked
to have done something about it, but they couldn't reach it. But that
didn't keep the House from doing something about it, because under
the Constitution, if an impeachment charge is made, it must be made
not in the Senate but in the House. And if impeachment charges pre-
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380
vail in the House, then it comes to the Senate, of course, as you know,
for a trial by the Senate. But the Senate never could get to it.
So it doesn't foreclose the question at all, Mr. Kennedy, because
the Senate confirms you, not at all.
Now, I asked consent to file some pertinent information. Without
objection I will do so, and then I will yield to the other members.
I have introduced a bill to prohibit certain conflicts of interests on the
part of officers of the Government having responsibilities with
respect to the banking and monetary system. And the provision here
is:
The Secretary of the Treasury and the Under Secretary of the Treasury
shall be ineligible during the time they are in office for 2 years thereafter to
hold office, position, or employment in any bank whose deposits are insured
by the Federal Deposit Insurance Corporation. Neither the Secretary nor the
Under Secretary of the Treasury shall be an officer or director of any such
bank or Federal Reserve bank or hold stock in any such bank; and before
entering upon their duties they shall certify under oath that they have com-
plied with this requirement.
Now, the main point is that they cannot hold any office, position, or be
employed in any such bank during the thne they are in office or for
2 years thereafter.
A lot of people believe that a person shouldn't go out of office and go
right into business that he has been exercising judgment over. How
would you feel about a law like that, Mr. Kennedy?
Secretary KENNEDY. I haven't looked into the law that you propose.
If that is the law, I will abide by it, of course. I have no idea of what
will happen after I leave the Treasury. i have been chairman of a
bank. I will surely not go back as chairman of a bank. I don't go back
into past places as far as chairmanships are concerned. I don't know
what I will do. I would like freedom of action.
Chairman PAa'~rAx. Mr. Widnall?
Representative WIDNALL. I will pass.
Chairman PATMAX. Senator Proximire?
Senator PROXMIRE. Mr. Kennedy, following on the line which the
chairman has opened up here, you and your two colleagues I think
were excellent appointments. And I am specially aware of the remark-
able job you did as Chairman of the Board of the Continental-Illinois
Bank, one of the great banks in the country. And you were also head of
the Commission on the new budget which we have adopted now and
which you did such good work on.
Mr. Walker, too, has a ffne record. I recall his appearing many
times before our Senate Banking Committee, always knowing pre-
cisely what he is talking about and being a very, very helpful and intel-
ligent witness.
Mr. Volcker has appeared before this committee. He has been a
real expert not only in private life but also in the Treasury, I under-
stand, in foreign international-I should say internation financial
matters.
And yet you do raise an embarrassing problem, not in your confirma-
tion-I was enthusiastically for all of you, as I said-but on getting
disinterested objective advice from the Treasury on several matters:
One, to which the chairman has alluded on this artificial write-off of
~ percent on bad debt reserves; another on interest rate policy as it
affects institutions; and the third, which concerns me very much, is in
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381
the one bank holding company legislation that is before us this year,
probably the most important financial institution legislation we will
have this year, and in which I feel the Treasury takes a position which
will enable banks to get into other businesses, but will keep other
businesses from getting into banking. It may be a sound position, but
it is the kind of position you would expect from the banking fraternity.
I have introduced another bill, a~s you may know, and of course the
chairman has introduced a bill in this area.
So I do hope you are aware of the problem this raises. It has nothing
to do with your character or your ability. You are all men of the
highest character and ability. And yet there is this problem of your
past associations which, it seems to me, are very, very hard to purge
yourselves of.
Secretary KENNEDY. I wouldn't try, Senator. I think that we can
be objective. We recognize the problem in each of the areas you men-
tioned. And we should be objective. We have come up with recom-
mendations in each case. Your have our background.
You must bear in mind that each of us, I think, has spent as much
time in the public sector as we have in the private sector. And so we
do have balanced backgrounds. And I think that each of us, whether it
is you or anyone of us here, is made up of our experiences and our
training and character and everything else. I believe that the experi-
ence we have had in banking and related matters will be helpful rather
than harmful in this effort.
Senator PROXMIRE. Now, let me ask a substantive question. You talk
about serious inflation as one of the most troublesome legacies that you
have. And I agree with you, it is troublesome. And yet you, and also the
previous two witnesses we had, the Chairman of the Council of Eco-
nomic Advisers and the Budget Director, all indicate that they antici-
pate a bare surplus. They don't anticipate reducing the Johnson
budget significantly. In view of the obvious inflationary strain and
also in view of the conclusions from this that Mr. McCracken properly
drew, we will probably have tight credit and high interest rates all
year. Do you also share this notion that it is unlikely that you can
have a significant reduction in the 1970 budget?
Secretary KENNEDY. The 1970 budget reflects, as you well know,
legislation that is already on the books, programs that the Congress
has approved and that are going forward. It requires a careful ex-
amination item by item. I don't think that we are in the position yet
to determine just what change or reduction can be made in that 1970
budget. In the present one I think it is clear that we can change very
little, because the calendar is against us.
Senator PRoxl\IIRE. Frequently in the past the Secretary of the
Treasury has been the strong man of the Cabinet. You are a very able
and strong personality. I do hope that you will be one of the ones that
come down here to decide to keep spending down. I think in our area
this committee in the past has recommended vigorously to the adminis-
tration in a bipartisan way that they cut spending below what they
have. And I earnestly hope that you will do that. Because, as you
know, the alternative is a tight monetary policy which can devastate
housmg.
I am very dlisturbed in this area because Mr. Romney, who shouldi
be the champion of housing, and whom we confirinedl with enthusiasm
in the Senate Banking Committee, has indlicated that he thinks the
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382
housing goals of the administration for low income and moderate
housing are unrealistic, can't be achieved. They only provide for
233,000 units this year. And it seems to me to be a modest goal, modest
in terms of the resources allocated, tough in view of the financial
situation. But this is a problem that I hope you will help us solve.
Secretary KENNEDY. It is a very serious problem. And I am very
much interested in the development of housing and in urban problems.
I agree 100 percent that item by item and program by program we
should have a careful look and see how much saving we can get out of
the expenditure side of the budget. I believe that there would be areas
for reduction-how much I am not prepared to say, because that is a
review by each of the Departments, and by the Budget Director-but
I am pushing to the extent of the power of my office to reduce as much
as possible.
Senator PROXMIRE. One of the additional reasons why I am so con-
cerned with this is the failure of the surtax to do what it was con-
structed to do. The economists. those who were frank about it. admit
that they were wrong. They uniformly told this committee that it
would have a rather direct and fairly prompt effect, not immediate,
but fairly prompt effect on the economy. Since July 1, interest rates
are up 10 to 15 percent, as you know, right along the line, all the Fed-
eral interest rates, municipals, corporates, and so forth. Consumer
prices have gone up more rapidly since the surtax was passed. The bal-
ance of trade has deteriorated badly since the surtax was passed. We
had a balance of trade in the first half of 1968 which was favorable. The
balance of trade since then on the merchandise account has been
unfavorable, distinctly unfavorable.
So that I think we can't rely just on higher taxes, or continuing
high taxes to help us in this area. I don't see any alternative except
to take a much harder, tougher look at keeping spending down more
than we have.
Secretary KENNEDY. I agree that we have really got to push on the
expenditure side, Senator.
Senator PRox~II~. Now, on November 22, 1968, in an address you
delivered at the Annual Civil Rights Conference at the University of
Utah you said:
"There is no doubt that American industry, including the banks, has
spent far too little of its energies and financial resources to relieve the
strains of the inner city. That tide is now turning. We have a great deal
to learn, including how best to communicate with the people who need
our encouragement, but it will be done."
Specifically, how can we turn the tide, how can we get the banks
more directly involved in this?
Secretary KENNEDY. I think in the last year or so the banks have
been spending a lot of effort, time, and resources in this field. I spent at
least a third of my time in the last year in this field.
Senator PROxMIRE. I know it has done a great job.
Secretary KENNEDY. Now, in the banking system they organized a
national committee. Mr. Graham, of the Continental Illinois Bank, was
chairman of that group. The committee discussed programs and policies
that would be helpful in joining the banking system and the resources
they have and the abilities they have to work within the community to
develop programs that would help solve the inner city problems.
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I am sure that in this field there has been not only an awakening, but
also a recognition that this is all to the good. And it applies not only
to banks, but it is moving over into the corporations generally. When
you see the amount of time that the heads of corporations and the
heads of banks and others are taking in this field-and that is what
I was trying to indicate in that talk in Utah-you see that there is a
change. And that is part of this administration's policy.
Senator PROXMIRE. That is very useful. But it seems to me that we
have to see some concrete specific action. I am talking about what the
insurance industry has done, which I think is most encouraging. They
reported to the Banking Committee of the Senate that they were close
to their commitment of $1 billion to be invested in the inner city
areas. They invested over $700 million as of late last year. Now, what
can the banks do? I-low can they get into the act? There is so much
more money involved in the private financial institutions than the
Federal Government has. Will guarantees do the best on the part
of the Federal Government?
Secretary KENNEDY. Banks are doing it in several ways right now in
this program. They are working on corporate joint enterprises to pro-
vide funds for not only loans, but also capital where it is needed. And
they are making loan policies very liberal with respect to areas of need.
If you add up the loans that are made, it is pretty hard to say whether
they would have been made otherwise or not. We cannot pick a single
number such as a billion dollars, but it will add up to a billion as you
go along. And I think they can demonstrate statistically and in figures
later to your satisfaction that effort is being directed in this vein.
Senator PROXMIRE. My time is up. What I want to know is what we
can do as a Congress-there are guarantees, for example, which would
not involve such a big budget commitment, in fact a rather modest one,
but which would enable banks and other institutions to do a better job.
Secretary KENNEDY. That has to be on the Government side; this
has to be a cooperative effort.
Chairman PATMAN. Ordinarily under the strict interpretation of
the rules Senator Jordan would be the next member to interrogate the
witness. But Mr. Widnall passed because he was not ready, and Senator
Javits came in immediately thereafter. So unless there is an objection,
the Chair will recognize Senator Javits under those circumstances.
Senator JAvITs. I thank the Chair very much. I hope there is no
objection, I will try to be brief.
Chairman PATMAN. There is no objection.
Senator JAvITs. Mr. Secretary, just one question on your qualifica-
tion to be Secretary of the Treasury, notwithstanding the fact that you
are a banker, and will have some kind of interest, beneficial or not,
directed to the extensive amount of bank stocks. What benefits does
the United States get from the fact that you are one of the leading
bankers in this country, perhaps in the world, from having you as
Secretary of the Treasury?
Secretary KENNEDY. That is a very difficult question for me to
answer. I do have from my experience in economics and financial
matters a background that should be helpful. I would hope that it
would be helpful. I do have a very large acquaintanceship abroad, not
only among private bankers but among finance ministers and central
bankers. I spent many years, as you know, in our Central Banking
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384
System, the Federal Reserve. Those qualifications should be of value
and help to our country. If I didn't think I had the qualifications-I
am not boasting, I know the problems are very serious-I would not
~have accepted this assignment.
Senator JAVITS. Mr. Secretary, in a business where confidence counts
~or everything, isn't it fair to say that you ought to command the con-
fidence of people who evaluate dollars and money and the probity of
governments in the world?
Secretary KENNEDY. Banking is built on confidence. And I hope I
have the confidence not only of the bankers but of the civic people with
whom I work.
Senator JAvITs. So we ought to take you for your strengths, and if
you have any weaknesses, we can always find other fellows that will
give us different advice.
Secretary KENNEDY. I am sure I have wealmesses, sir.
Senator JAvITS. Just a. few questions for you on a somewhat differ-
ent line from that which is being pursued. It is a fact, is it. not, that you
have confidence that the dollar is strong and can be maintained? I
notice with interest that you say, "The dollar is strong and respected in
the world in spite of recent inflationary trends and a deteriorating
trade balance."
Secretary KENNEDY. Precisely so, Senator. In the period that we
have gone through just recently the dollar has stood up very well.
And we hope that it will continue to do so.
Now, it will not, unless we can keep the balance necessary to con-
trol inflation in our economy.
Senator JAVITS. You talked about cutting expenditures, you talked
about the necessity for perhaps continuing the tax surcharge, you can't
get a budget surplus otherwise. Now, there are other things that can be
clone. One is to close tax loopholes, isn't that true?
Secretary KENNEDY. Precisely.
Senator JAVITS. Do you feel favorably disposed to the suggestion
that the Treasury publish annually the cost in terms of tax revenues
of those things which are complained about so much as tax loopholes,
tax avoidances?
Secretary KENNEDY. In the Budget Commission studies that Senator
Proxmire ref erred to we had considerable discussion on how von called
these matters to public attention. And I think there should be and
can be a way to do it. We are studying all of these areas and how
we can best look at them.
Senator JAVITS. Just one other question along' the same lines. You
are going to refinance, we understand. some $12 billion in Government
debt between March 12 and June 30. And a good deal of that is going
to be returned to nrivat.e capital, is that correct? The result of the re-
financing, we understand, in that period will return a. good deal of
money to the money market.
Secretary KENNEDY. Yes, there is a paydown in that period, that is
right, sir.
Senator JAVITS. What effect do you expect that should have on
interest rates?
Secretary KENNEDY. It would tend to ease them slightly, offsetting
other pressures.
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385
Senator JAVITS. Can you think of anything else, aside from what
we have been discussing, that would ease interest rates, bearing in
mind all the results of the existing financial situation in which this
country finds itself because incomes to a certain extent have kept
pace with inflation, and those people hit hardest are those who have
had to pay higher interest, and the effect on housing of higher interest
rates? Is there any suggestion as to what should be done about it?
Secretary KENNEDY. In that connection, I don't think there is an
indication that the Treasury's position will add very much oue way
or the other. We have a very heavy refunding program along with
this paydown. And while our cash need will be down somewhat in
this period, that is a market matter, and it will probably get in the
short term area very quickly. It does have some ripple effect, but I don't
think it would go to the heart of the problem you are trying to
solve.
Senator JAvIT5. Is there anything else that you have to suggest
that, we could do on the interest rates?
Secretary KENNEDY. We are pushing, as you know, to control infla-
tion. And eventually-how long that would take I don't know-but
hopefully that will reduce interest costs.
Senator JAvIT5. That is your best prescription?
Secretary KENNEDY. That is the best prescription at this time.
Senator JAvIT5. There is one other question I would like to ask,
and then I will ask the committee's permission to yield to Senator
Jordan. There is a lot of complaint and a lot of concern in my mind
about Federal financing techniques as well as Federal bookkeeping.
Now, let me lay that before you in a few words, and then I will ask you
a question. The Federal bookkeeping is much objected to on the ground
that they treat capital items as current expense, or we have no capital
budget, that we are financing the Vietnam war on the pay-as-you-go
basis, which is absolutely fantastic for wars, we have always financed
them by debt. Those are two points. And thirdly, that we are failing
to rationalize and develop interesting financial techniques. For ex-
ample, in this very Banking and Currency Committee that Senator
Proxmire talks about, we developed the techniques for financing col-
lege housing which took a budget drain of only the interest rate under-
writing, that is all, the U.S. guarantee did the rest. We are beginning
that same thing in hospitals, hospital modernization. I tried it last
year and was unsuccessful. But I am confident we will get it this
year. These make enormous differences.
For example, for hospital modernization you buy a billion dollars
worth of modernization for budget exposure not in excess of $50 mil-
lion. There is a big difference in appropriating a billion and 50 million.
Now, is the Treasury going to study both these questions with a new
and free outlook, not tied to the past, that is, whether the Federal
accounts `are really kept in such a way as to justify our position in the
world? We say we are suffering from inflation and budget deficits. I
don't think it is true in terms of the real strength of the currency and
what it really means in production `and integrity.
Secondly, the many ways in which an administration in which
there is great financial confidence could adopt totally new financing
techniques which will make very measurable budgetary differences.
Secretary KENNEDY. Senator, we are taking a look at some of those
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386
areas that you are talking about, and we will take a look at each of
them. Because I agree that we ought to take a look at each of the areas
rather than just be prejudiced1 by the past polic~r that doesn't mean
that I agree in the various areas.
Senator JAvITS. Mr. Secretary, would it be taxing you too much to
ask you to write to the committee-and I will ask unanimous consent
to include it at this point in the record-as to the ideas and pomt of
view of the Treasury and what it is going to look into, so that we have
the whole thing before us as a kind of new approach to many of our
problems? And it would be in a sense a self-dictated directive as to
what you are really going to do. WTould you mind doing that?
Secretary KENNEDY. I would be glad to do it.
Chairman PATMAN. Without objection it is so ordered.
(The information requested by Senator Javits and subsequently
supplied follows:)
FEBRUARY 19, 1969.
Hon. DAVID KENNEDY,
Secretary of the Treasury,
Treasury Department,
Washington, D.C.
DEAR MR. SECRETARY: This is to confirm our discussion this morning at the Joint
Economic Committee hearings concerning my suggestion that the Treasury con-
sider the following: the question of setting up a capital budget within the Federal
budget; the reasons why the Vietnam war is being financed out of current rev-
enues rather than debt financing as in past wars; and new financial techniques
such as interest subsidies to encourage the flow of private capital to modernize
or construct hospitals, educational, and other facilities designed to alleviate
certain basic social problems facing the country today.
In order that the record on our hearings may be clear on this, I would appre-
ciate it if you would submit to the Joint Economic Committee a letter indicating
that the Treasury Department plans to look into these questions.
May I congratulate you on your first appearance and excellent testimony
before the Joint Economic Committee.
With best personal regards,
Sincerely,
JACOB K. JAVITS.
THE SECRETARY OF THE TREASURY,
Washington, D.C., March I~, 1969.
Hon. JACOB K. JAVITS,
U.S. Senate,
Washington, D.C.
DEAR SENATOR JAvITS: This is in reply to your letter of February 19, 1969 in
which you confirm our discussion on that date at the Joint Economic Committee
Hearings and request that I submit to the Joint Economic Committee a letter
indicating that the Treasury Department plans to look into the following ques-
tions: "the question of setting up a capital budget within the federal budget; the
reasons why the Vietnam war is being financed out of current revenues rather
than debt financing as in past wars; and new financial techniques-such as
interest subsidies to encourage the flow of private capital to modernize or con-
struct hospitals, educational and other facilities-designed to alleviate certain
basic social problems facing the country today."
These questions raise a number of broad budget and fiscal policy issues. While
we have not yet developed our thinking fully on these matters, I would like at
this point to make the following comments.
The capital budget question was explored in some detail in the October 1967
report of the President's Commission on Budget Concepts, which I chaired. The
Commission strongly recommended against a capital budget which would pro-
vide separate financing of capital or investment expenditures on the one band
and current or operating expenditures on the other. The Commission felt that
such a budget would seriously distort the budget as a decision making tool.
Nevertheless, the Commission saw considerable merit in the continued publication
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387
and improvement of useful tabulations of capital items such as Special Analysis
D in the budget document.
As to the question of financing the Vietnam war with debt rather than current
revenues, I would like to note that in the fiscal year 1968 budget outlays for
special Southeast Asia support were $26.5 billion, or only slightly more than the
budget deficit of $25.2 billion. I believe it is now clear that such debt financing
of the Vietnam war contributed greatly to the current inflation problem and that
we must now make every effort to avoid budget deficits which would add further
to this problem.
Your question on new financial techniques, such as interest subsidies on private
borrowings, must be considered in the context of broader questions regarding
the method of providing Federal credit assistance, the budgetary treatment of
Federal credit programs, and the impact of these programs on money and credit
markets and on the economy. These questions have been the subject of several
private and public studies in recent years and were also studied by a special
task force on Federal credit programs appointed by President-elect Nixon. In
addition, the budgetary treatment of Federal credit programs was a very impor-
tant part of the study by the President's Commission on Budget Concepts in
1967.
It is clear that maximum reliance must be placed on existing private financial
institutions in meeting the credit needs of the economy. It is also clear that
necessary Federal credit assistance to help meet these peeds should be pro-
vided, where feasible, through existing institutions rather than through direct
Federal loans. Such assistance can be provided through Federal loan guarantees
and insurance as well as through interest and debt service subsidies on both
guaranteed and nonguaranteed loans. These measures are feasible so long as
private lenders are willing to participate in these programs on reasonable terms.
However, it should be emphasized that no matter what the financing techniques
employed or budget accounting methods adopted, it is essential to provide for
effective Executive and Congressional control over the volume of credit stimu-
lated by Federal assistance programs. Also, in a full employment economy with
excessive price increases, a Federal stimulus to high priority programs-for
example in urban areas-should be offset by cutting back in areas of lower
priority in order to avoid adding to inflationary pressures.
Thank you for your kind remarks regarding my testimony before the Joint
Economic Committee. I assure you that we will be looking very carefully into
the questions you raised and that we will be soon developing an overall approach
to these problems based on our own careful review of them.
In keeping with your request, I am sending a copy of this letter to the Joint
Economic Committee.
Sincerely yours,
DAVID M. KENNEDY.
Senator JAVITS. And I would like to yield to Senator Jordan.
Senator JORDAN. Mr. Chairman, I am quite willing that we return
to the regular order and go to the other side.
Chairman PATMAN. Thank you, sir.
Mr. Reuss.
Representative REuss. Thank you, Mr. Chairman.
And welcome, Mr. Secretary, and your associates.
I note, Mr. Secretary, your strong emphasis-and here I quote-
"that the economy must be placed under firm fiscal and monetary
restraint." In the light of that, have you considered the effect of the 7-
percent investment tax credit which in addition to costing the Treasury
some $3 billion a year in revenues, produces an inflationary overheating
of the capital equipment market in an area where the economy is under
the most pressure? In the light of that, are you prepared to recommend
the immediate repeal of the 7-percent investment tax credit?
Secretary KENNEDY. I am not prepared to recommend immediate
repeal, because we haven't looked into it carefully. Dr. Walker has
been asked to take a look at all areas of taxation. That will be part of
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388
the analysis that we are going through. In fact, they are starting now
to work on it.
Representative REUSS. You will, I hope, be willing, in view of the
fact that the investment tax credit not only loses the revenue, of course,
but in view of the fact that it has a very sharp inflationary potential-
you will, I hope, put that near the top of your list.
Secretary KENNEDY. That will be very much on our list. We have
already discussed it in general terms, but there is no indication that
the actual effectiveness or ineffectiveness has been established.
Representative REU5S. Now, turning to the international field: this
committee, as you know, has long opposed an American official increase
in the price of gold. Among the reasons for our view is that to do so
would hurt friends of the United States who have relied on the promises
of three Presidents not to fool around with the price. It would help
the speculators, it would help countries which by grabbing gold have
succeeded in embarrassing us at various times. It would help the
principal gold supplying countries, the Soviet Union, and the Union of
South Africa. It could well lead to a worldwide inflationary situation
by producing superabundant reserves. It could produce a destabilizing
effect, because having once done it people might expect that it would
be done again. And finally, of course, the power to change the price of
gold lies, we believe, entirely in the Congress.
~\Toulcl you agree with the position I have just outlined and with the
reasons given, and comment on any of those reasons?
Secretary KENNEDY. I have had a few things to say on this myself,
as you well know. And I would like to put it in the record, Mr. Chair-
man, the remarks which I made on this subject at the White House on
January 22, 1969.
Chairman PATMAN. Without objection it is so ordered.
Secretary KENNEDY. Thank you.
(The statement referred to follows:)
We have inherited inflationary pressures that are seriously distorting the
economy and financial markets. That inflation must. and will, be contained.
We are all conscious of the risks of abrupt and blunt action that could bring
unnecessary unemployment. We mean to avoid that. But we are equally conscious
of the risks of not moving decisively, because inflation is undermining both the
foundation of our prosperity at home and our balance of payments position.
The indications of an over-all statistical balance in our international payments
last year are welcome.
But no one should be deluded. Underneath the over-all result, our trade balance
has sagged to the vanishing point under the pressure of inflation, and additional
controls on American investment were imposed to achieve the balance. We do not
plan to rely indefinitely on tight controls or statistical window dressing to
disguise, but not cure, a basic deficit. Maintained too long, these devices can only
be self-defeating.
It will be our purpose to maintain a strong dollar both at home and abroad.
We will not seek an answer to our problems by a change in the monetary price
of gold. We see no need or reason for such action.
Calm study in cooperation with our friends-not unilateral actions or dis-
ruptive changes in the vital role of the dollar and gold-must remain the founda-
tion of real reform and progress in the international financial system.
Responsible budgeting and support for firm monetary policies are the core of
the actions that must lie behind any successful attack on inflation and our balance
of payments problems.
Representative REUSS. Did any of the points I have made disturb
youin anyway?
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C)
Secretary KENNEDY. I have considered all of those points, and they
all have more or less validity. There are arguments on all sides of
questions like this, as you well know. Our program, of course, is to
keep the dollar strong by domestic policy, control of inflation, and
build up our balance-of-payments strength, and then we are in a posi-
tion really to maintain our dollar everywhere. That is the basis of our
trust. Mr. Volcker will have more to say, of course, when he appears
before you on this whole question.
Representative REUSS. This committee I know, based on past exper-
ience, will want to work very closely and cooperatively with you and
your associates toward that end.
Secretary KENNEDY. And we shall be in touch.
Representative REnSS. Certainly if we can master our domestic
economy, no reason appears to us, and I gather to you, Mr. Secretary,
to change the price of gold.
Secretary KENNEDY. I have said that a change in the price of gold is
not in the offing.
Representative RImSS. Thank you very much.
Secretary KENNEDY. Mr. Chairman, may I be excused
Chairman PATMAN. You may be excused under our agreement.. And
we will ask you to come back at some time that is mutually satisfactory.
Thank you for your appearance.
Now, then, if it is satisfactory with the committee, if I hear noobjec-
tion, we will just go ahead and recognize the members for 10 minutes.
And that contemplates, of course, that you gentlemen file your state-
ments, and we will just continue the questioning.
Mr. WALKER. Mr. Chairman, I respectfully suggest that we do have
some substantive matters on debt policy and debt management in our
statements.
Chairman PATMAN. You will be asked those questions. And at the
close you may make a statement on your own. Will that be satisfactory?
Mr. WALKER. However the committee wants to proceed.
Senator SPARKMAN. Mr. Chairman, before we proceed, I want to
make a suggestion with reference to committee procedure. If the com-
mittee knew that the Secretary was going to have to leave at a certain
time, I think the time allowed for questioning of each member should
have been cut down to such a point that all of us would have had an op-
portunity to ask him questions. I did have questions I wanted to
propound to him. I would not, though, ask that he come back. I just
mention that as a matter of procedure in the future.
Chairman PATMAN. I think you are exactly right. But of course, we
did not know about this until 10 o'clock this morning, and we had to do
the best we could.
Senator SPARKMAN. At the same time we could have cut the ques-
tionin~ time in two.
Chairman PATMAN. We overlooked your very wise suggestion and
counsel, and I am sure if it had been brought up in time we would have.
Senator SPARKMAN. I hope you will not overlook it next time.
Chairman PATMAN. We will ask the Secretary to come back. I want
him to come back anyhow.
Senator SPARKMAN. I don't.
Chairman PATMAN. Senator Miller?
24-S33-69---~pt. 2-S
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390
Senator MILLER. I would not want to ask the Secretary to come back,
although I have some questions. Could we have the same procedure that
we have followed to date, that each member could have questions
answered by him?
Chairman PATMAN. That has already been agreed on. And any
member of this committee who desires to ask the Secretary or anyone
of these gentlemen questions may do so. Ordinarily, we only have one
statement anyway, Mr. Walker, from the Secretary, and the others;
and if you want to ask any questions, you may proceed.
Mr. WALKER. I understand. And in this instance we very much
shortened each statement so the total would be comparable to a regular
statement.
Chairman PATMAN. With the understanding that if questions do not
bring out the information you want to bring out you will be allowed
to do so.
Mr. WALKER. Thank you.
(The prepared statement of Under Secretary Charls E. `Walker,
follows:)
STATEMENT OP THE HONORABLE ~JHARLS E. WALKER, UNDER
SECRETARY OP THE TREASURY
Mr. WALKER. I am grateful for the opportunity of expressing to the
committee the great interest of the Treasury Department in pressing
forward with a program of tax reform and equitable tax administra-
tion. The President and the Secretary have emphasized both publicly
and to me that these matters are to have a high priority in this adminis-
tration, and the Treasury will bend every effort to attain these goals.
`We have assured Representatives `Wilbur D. Mills and John IV.
Byrnes, Chairman and ranking minority member of the Committee on
Ways and Means, of our desire and intention to work closely with their
committee in connection with the hearings on tax revision proposals
that commenced yesterday. `We are reviewing carefully the proposals
developed at the Treasury Department under the previous administra-
tion which have recently been published. We are working on the devel-
opment of proposals and plan to present them at the proper time to the
`\iTays and Means Committee.
`W'e hope to accomplish this as soon as possible consistent with the
need for filling key vacancies in the Treasury Department staff and the
desirability of developing and recommending a coordinated and or-
derly program of legislation.
Our first concern is with the equitable distribution of the income
tax burden. The outgoing Secretary of the Treasury recently called
attention to some of the problems involved on this score, and the
agenda for the current Ways and Means Committee lists these and
others. `We regard the matter of tax revision to achieve equity as of
fundamental importance, deserving of the most urgent attention in
the administration and in the Congress. We shall strive to achieve also
a good measure of simplification in this complex field. It may well be
necessary to approach this task in stages, accomplishing first those
changes that permit of ready solution and examining at greater length
more fundamental revisions of the tax structure.
PAGENO="0115"
391
We are also devoting every attention to the use of tax incentive to
help solve the problems of the cities and of our disadvantaged citizens.
We are examining closely some of the more promising approaches
recommended by the President's Task Force on Taxation. We hope
that means will be developed to use the potency of tax incentives,
along with other programs, to enlist private capital and business
ingenuity in this urgent effort.
We intend also to bring the whole tax system-State and local as
well as Federal-under careful and searching examination. The issues
involved are long run in nature and involve the strength of our
domestic economy, our international financial position, the capacity
to generate revenues to meet national needs, the appropriate distri-
bution of revenues among different levels of government in relation to
their fiscal responsibilities, and many other factors.
Among these issues are those of the coordination of Federal, State,
and local taxes, an exploration of the role of value-added taxes used
by a number of Western European countries, and similar issues of
fundamental significance. We believe these matters should be carefully
examined `and we plan to discuss approaches to these studies within
the administration and with congressional leaders in the period ahead.
Mr. Chairman, this concludes my statement.
Chairman PATMAN. Thank you, Mr. Walker. We will proceed
with the questioning.
Senator Miller?
Senator MILLER. Thank you, Mr. Chairman.
Mr. WALKER. May I make the point that we have a division of labor
in the Treasury Department. The international, financial, and debt
management question are Mr. Voicker's area. My area is tax policy
and certain aspects of domestic economic policy.
Chairman PATMAN. That will be helpful to us. We will include
Mr. Volcker's statement in the record at this point.
PREPARED STATEMENT OF THE HONORABLE PAUL A. VOLCKER
Mr. Chairman, I appreciate this opportunity to accompany Secretary Kennedy
and Under Secretary Walker on our first appearance before your committee.
As Under Secretary for Monetary Affairs, a good part of my own time will
be devoted to the balance of payments and international finance. I understand
that you plan to devote a later meeting exclusively to those matters. Consequently,
my brief remarks this morning will be directed toward some problems of domestic
financial policy related to my responsibilities for Treasury financing.
Virtually my first official act upon my return to the Treasury three weeks
ago was to announce the terms by which the Treasury would refund some $141/2
billion of maturing debt. By necessity, those terms included the highest rates of
interest available on a Treasury note or bond since the Civil War. As it turned
out, even those record rates-G.42 percent for an 15-month issue and 6.29 per-
cent for a seven-year-failed to attract much enthusiasm among potential in-
vestors. More than a third of the maturing securities held by the general
public had to be paid off in cash.
That experience reflects in a concrete way the strains pervading the domestic
credit markets as we took office. You are, I am sure, familiar with other signs
of pressure and imbalances: for example, the relative shortage and high cost
of residential mortgage money, the sharp increases in interest expense for our
state and local governments, and the growing tendency of some lender~s to require
an element of equity participation before committing loan funds.
My purpose today is not to elaborate these facts. Rather, I would like to
suggest how, in managing the Treasury's finance and debt, we might contribute
toward restoring better balance in financial markets.
PAGENO="0116"
392
The main responsibility, I should make plain, must lie elsewhere-in respoiisi
ble budget and fiscal policy and in appropriate monetary policy. These are the
principal policy tools for restoring sustainable, non-inflationary balance to the
economy as a whole. This kind of balance in the economy generally is a prerequi-
site for any lasting reduction of tensions and interest rates in financial markets.
There are two ways in which debt management can and should play a
supporting role in this effort to achieve better balance. In the first place, Treasury
financing can at all times provide some positive support to restrictive fiscal and
credit policies by absorbing funds that might otherise simply fuel excessive
private demand. The precise means of achieving this result will always be de-
pendent upon the particular set of economic and market circumstances prevailing
at the time of financing. It would be an oversimplification to measure the economic
impact of Treasury financing entirely by the maturity of the securities sold. Never-
theless, there can be no doubt that inability to offer longer-term securities elim-
inates one highly important option in debt management, and thereby sharply limits
its potential effectiveness as a tool of general economic policy.
The second way in which debt management can support the aims of stabiliza-
tion policy is at least as significant. In the best of circumstances, the necessitous
nature of Treasury financing and the potential impact of these large borrowings
on credit markets create difficult problems for the conduct of monetary policy.
These problems can-and should-be minimized by orderly spacing of financing.
by reducing the size of maturing issues, and by use of financing techniques that
avoid undue reliance on sales to the commercial banking system or exposure
to market fluctuations. Again, the maturity of the securities offered is not
the only consideration. But it is a relevant and important variable.
These circumstances explain why we shall ask the Congress at an early date to
review the 41% percent interest rate ceiling on Government bonds. This has been
a contentious issue in the past, and I have no desire to open that debate pre-
maturely this morning.
I will only observe that the average maturity of the privately-held debt has
shortened steadily since mid-1965, when it stood at 5 years, 9 months. By the
end of last month, it had declined to a post-war low of 4 years. This continuous
shortening of the debt increased liquidity in the economy, and thus tended to add
to the inflationary potential. And the net result has been to force the Treasury
into the market for refunding in such large amounts as to immobilize monetary
policy for extended periods. In 1965, for example, the average amount of
privately-held, marketable Treasury debt maturing each quarter was $3 billion;
the average amount maturing in each quarter of this year, $51/2 billion, is very
substantially larger.
I would also note, in this connection, that our savings bonds-solds to millions
of individuals in relatively small amounts-are subject to a 41% percent ceiling.
The savings bonds program has been a part of the Treasury's debt management
effort since before World War II. In some ways, the value of this program is
greatest precisely in an inflationary period like the present. Yet, we are all con-
scious that these same inflationary pressures that have so profoundly permeated
other sectors of the credit market have, for the time being, reduced the relative
attractiveness of savings bonds. This is also a matter that we will be reviewing
urgently in coming weeks.
In conclusion, I can make no promise of immediate relief from the heavy pres-
sures on domestic financial markets, or from high Treasury interest costs. That is
certainly a part of our ultimate objective. Moreover, with fiscal and monetary
policy both geared to a non-inflationary path, it seems to me a reasonable hope
for the not-too-distant future. But to put low interest rates and better availability
of money first on our list of priorities would be self-defeating. For the attempt
could only add more fuel to the fire of inflation and, thus, to the distortions and
strains in financial markets.
Senator MILLER. Whomever my question might fit, first of all, ac-
cording to the proposed fiscal 1970 budget, which is now being
reviewed and is possibly going to be revised, there is a S6i/4 billion
operating budget deficit, which is apparently the reason why there
is an estimated increase in the national debt of ~61/2 billion. My
question would be, how does Treasury propose, if we do indeed end up
with an operating budget deficit of, say $61/2 to S5 billion, how does it
propose to finance that without aggravating the inflationary situation?
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393
Mr. WALKER. Let me say one introductory thing, and then Mr.
\Tolcker will comment on the financing techniques.
I understand that you are referring to the old administrative budget
approach. I do want to point out that under the new concept adopted
as a result of Mr. Kennedy's commission there is a projected surplus
in the receipts versus expenditures, and also in net lending, giving an
overall surplus. But Mr. Voicker can clarify why there is a financing
operation.
Senator MILLER. May I say, I am very much aware of that. But the
point is that in the budget document there is an estimate that the na-
tional debt subject to the debt ceiling limitation will be increased $6'/2
billion. And that is premised upon a $6˝ billion operating budget
deficit. My question is, after the revisions are made by the new ad-
ministration, how will that budget deficit, if there is one, be financed
without aggravating the inflationary situation?
Mr. VOLOKER. If I may try an answer to this one, Senator Miller, I
think Under Secretary `Walker's answer is the basic point so far as the
inflationary aspect of this is concerned. What is happening here is that
we have a deficit in what used to be called the administrative budget,
and that deficit is more than offset by surpluses in the trust funds. To
that extent the deficit in the administrative budget is self-financing. It
is financed through issuing debt to the trust funds. And with the small
overall surplus, the overall impact of the budget is neutral, at least. Our
financing problems are not small. But in terms of increasing the debt,
the significant part is the part held by the general public with respect
to its impact on inflation. For the fiscal year as a whole, that is pro-
jected to decline slightly. We have the peculiar situation here where
the debt subject to limit, as you pointed out, will rise, while the debt
held by the public over the course of the fiscal year as a whole pre-
sumably will decline slightly. This will give us some debt ceiling
problems that we are struggling with now. We have some work to do
in that area. But the overall budget, so far as its financial implications
are concerned with respect to the inflation problem, is in a position of
essential neutrality.
Senator MILLER. If you finance this $6˝ billion out of public
securities issued to the general public, that would have a tendency to
slow down inflation, would it not?
Mr. VOLcKER. To the extent that the trust funds have a surplus-and
they have a very large surplus-it will not be financed through borrow-
ing from the general public.
Senator MILLER. That is up to you, isn't it?
Mr. VOLCKER. I suppose it is up to us in the broadest sense. But we
have a legal responsibility to keep the trust fund fully invested. They
are limited to investment in Federal securities. So to fulfill that re-
sponsibility we must provide securities to meet the needs of the trust
funds. In providing those securities our needs for financing with the
public de.cl inc.
Senator MILLER. To that extent, then, is this not going to have an
inflationary impact? As I understand it, if the deficit is financed by
the general public, this has a definite tendency to curb inflation; it
takes the purchasing power of the general public out of the economy,
and therefore it tends to slow down expansion, whereas if you don't
PAGENO="0118"
394
do it that way you tend to go into the other direction into the infla-
tionary picture.
Mr. VOLCKER. This is a complicated process, as you are well aware,
Senator. It depends on where you cut into the total picture. What is
happening in the total budget, as reflected in the small surplus, is that
money is being taken out, at least in a small amount, on balance from
the private economy. This should have some deflationary effect in and
of itself, apart from the way we do the financing. We also have a
large number of maturing securities to roll over. We will have to do
some seasonal financing. The way we conduct our financing operations
will have a further effect on financial markets and on anti-inflationary
policy. And I can assure you that we will try to arrange this financing,
and we will have to do it in any even in very substantial volume, in a
manner and to the degree that such financing is an appropriate tool
to dampen inflationary pressures. That is the burden of my statement
that I am submitting here today.
Senator MILLER. I am sure that you will do your best. And I under-
stand that it is a very complicated problem, and ties in with the Fed-
eral Reserve and the monetization of the national debt and the
monetary policy.
The thing I wanted to bring out, however, was that it appears that
there may be less holdings in the general public sector rather than
more holdings in the short range, and that this could cause an infla-
tionary impact. Therefore, so you are going to have to do something
else to try to offset that for your refinancing operation.
Mr. VOLCKER. As long as inflation is the major problem for the
domestic economy, we will certainly try to conduct debt management
operations so that there is no inflationary impact.
Senator MILLER. I have just one other question at this time. I take
it that the position of the Treasury Department would be that it would
prefer to take-that they would prefer to have our Federal Government
take purchasing power away from the American people by taxation
rather than by inflation.
Mr. VOLCKER. I certainly think that is true, where that choice pre-
sents itself.
Senator MILLER. Now, if that is so-and the suggestion is made that
we change our structure, our bookkeeping so that we don't worry too
much about capital investments even though they might amount to a
debt, and even though we might have to finance that-would not that
type of a bookkeeping change, with, you might say, a toleration of an
addition of $10 or $20 or $30 billion a year in capital expenditures-
which would have to be financed-would that not lay a foundation for
inflation?
Mr. VOLCKER. I certainly think that whether the expenditure is on
current account, so called, or on capital account so far as the budget
is concerned, that we would have to be concerned about the potential
inflationary impact in either event.
Senator MILLER. And the increase in the debt would lay the founda-
tion for that problem, would it not?
Mr. VOLCKER. If we simply segregated capital expenditures and
automatically financed them by an increase in debt, there may well be
an inflationary impact, depending on the existing economic conditions.
This would have to be taken into account. I don't think by any segrega-
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395
tion of the Government accounts, whether or not that is desirable, con-
ceptually, we get away from the necessity of maintaining an overall
balance in the economy in balancing national output with productive
capacity.
Senator MILLER. Will you be good enough to furnish the committee-
and I would ask the chairman to have this placed in the record at this
point-with an analysis of the budget deficit, let's say, the operating
budget deficit situation, $6˝ billion, and how the increase in the debt
ceiling limitation that it would entail could be handled by some of
these other mechanisms to which you referred to offset the inflationary
impact that in itself might cause.
Mr. VOLCKER. We would be glad to do that.
Senator MILLER. Thank you.
Chairman PATMAN. Without objection, it will be so ordered.
(The subsequent submission in reference to the above follows:)
The budget for fiscal year 1970 estimates over-all surpluses in the unified
budget of $2.391 billion in fiscal year 1969 and of $3.414 billion in fiscal year 1970.
Special Analysis B indicates that these over-all surpluses reflect excesses of
outlays of Federal funds over receipts of approximately $6.962 billion in fiscal
year 1969 and $6848 billion in fiscal year 1970. The trust funds in the same two
fiscal years are estimated to have excesses of receipts over expenditures of
$9.353 and $10262 billion.
As a result of the over-all budget surpluses, earnings from seigniorage, and other
adjustments in Federal accounts, $3.091 billion of Federal debt held by the
public at the end of fiscal year 1968 will be repaid in fiscal year 1969 and $4.000
billion additionally will be repaid in fiscal year 1970, assuming unchanged cash
balances.
Excesses of receipts over expenditures of trust funds are required by law
to be invested promptly in Federal securities. Therefore, Government securities
will be required to be issued to the trust funds in sufficient amounts to meet
this legal requirement with respect to the trust fund surpluses projected in
fiscal years 1969 and 1970. Thus, even with the reduction in debt held by the
public, the estimated over-all increase in gross Federal debt (including special
notes issued to the IMF) amounts to $5135 billion in 1969 and $6.323 billion in
1970. After adjustments for changes in agency debt and in public debt not sub-
ject to the debt limit, the debt subject to the debt limit, according to the Budget,
will increase by $3.747 billion in fiscal 1969 and by an additional $6608 billion
in fiscal 1970. The actual debt ceiling limitation will, in addition, also need to
take account of the seasonal pattern in receipts and expenditures.
Senator Miller inquired about the inflationary effect of an increase in debt.
At the present time, given an over-all surplus in the unified budget, there would
normally be an equivalent-approximately equal-reduction in the debt held by
the general public, which is defined to include the Federal Reserve System as
well as private investors. This reduction in the publicly-held debt could be avoided
by building up Treasury cash balances at commercial banks or Federal Reserves
Banks. But any net deflationary effect of such a build-up in cash balances would
need to be judged in the context of other monetary policy operations, which
are the responsibility of the Federal Reserve System.
In general, while there are disagreements over the extent of the impact,
a budgetary surplus is considered to have a deflationary impact on the economy
by removing funds from the private spending stream. A reduction in privately-
held Federal debt may release funds into the capital markets and thus facilitate
borrowing by others. However, this influence may well be swamped by the general
effects of monetary policy or other factors on conditions in the money and
capital markets.
Chairman PATMAN. Senator Sparkman?
Senator SPARKMAN. Dr. Walker, Iwant to ask you about that in-
vestment credit that the Secretary had something to say about. As
I understood him, he said that you were not ready to recommend yet
that it be changed, or that it be repealed. Did I understand him
correctly?
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396
Mr. WALKER. I think I would recast that just a little. In referring
to the words "recommend yet," I don't think that should prejudice any
sort of action one way or another, or lead to an expectation that
action ma.y be coming. I think what he is saying is that we are reviewing
all aspects of the tax laws just as efficiently a.nd rapidly as we can. And
that is one that we will look `at. There are a number of arguments
on both sides with respect to the investment credit, as you well know.
Senator SPARKMAN. I `am glad to hear you say that, because I don't
believe I agree with my friend, Henry Reuss, with reference to it,
at least not all the way.
I would like to mention this-
Mr. WALKER. May I say just one more word on that?
Senator SPARKMAN. Yes.
Mr. WALKER. With respect to the investment credit it is quite clear
that some economists believe appropriately timed removal or restor-
ation of this to be an effective device to manipulate interest spending
throughout the business cycle. Removal was attempted, somewhat abor-
tively, in 1966, and credit had to be quickly restored. On the other
side of the coin, the basic argument made by President Kennedy and
Secretary of the Treasury Dillon in proposing the investment credit
was that it was a. fundamental type of tax reform that wouldn't be
turned on and turned off too much-otherwise it tends to be diluted
as a device to promote capital formation.
Senator SPARKMAN. I would certainly agree with you on that. I
think it is well to keep in mind how the investment credit came into
the law. I believe the first recommendation that was made by a
congressional committee was made by the Senate Small Business Com-
mittee in the early part of 1953. It was the result of a study that had
been made during 1951 and 195~. And it. was proposed that an in-
vestment credit be allowed small businesses that were not able to re-
place their equipment as readily and easily as companies that had a
good, strong capital background. And it was wrestled with for several
years. Finally it was written into the law in the form that it is now~
7 percent across the bOard. without any distinction as to small
businesses or big businesses. I certainly agree with you about turning
it off and turning it on. I think it ought to be a steady policy what-
ever it is. And I hope that in consideration of it it may be kept in
mind that it is something that means a great deal to small businesses.
I don't know whether it would be feasible to make it applicable to small
businesses alone or not. Certainly when it was finally agreed to it was
not restricted to small businesses, but was made applicable across
the board.
Now, another thing. I understand-
Mr. WALKER. May I make one more comment, Senator?
Senator SPARKMAN. Yes.
Mr. WALKER. I say we will review this, and I don't want to prejudge
any conclusions. But I will say that I personally, ever since its intro-
duction in 1961, supported the investment credit-to the objection of
some of my employers at that time. It wasn't received well initially in
the industrial, business, financial, or labor communities, as a matter of
fact. But my own personal opinion is at this stage, subject to refuta-
tion on the evidence, that it has been a highly effective device to pro-
mote the longrun investment that really supports economic growth.
PAGENO="0121"
397
Senator SPARKMAN. I am glad to hear you say that, because I
fully agree with you on it.
Furthermore, it seems to me-I may be wrong in this, but it seems
to me that the repeal of the investment credit would run somewhat
contrary to the proposal, which I understand will be a part of the
administration's proposal, to use tax incentives for certain programs
that we want.
Mr. WALKER. That is correct, sir. We are, at the direction of the
President, hard at work studying two types of tax credits for incen-
tive purposes. One would be in effect the application of a credit to
promote what you might call human investment, on-the-job training,
in other words. In the other area, we are taking a very hard and inten-
sive look at those having to do specifically with investment in poverty
areas. And I think that the apparent success of the initial investment
credit leads some of us to be quite heartened about the possibilities of
the success of other credits to solve some very pressing social problems.
Again, I am not prejudging. We will have our work on this area
completed at the earliest possible date.
Senator SPARKMAN. Let me ask you about the debt limit. Are we
going to be called upon to increase the debt limit?
Mr. VOLOKER. We have a very tight squeeze in that area in March and
again even tighter in April, Senator Sparkman, and it does appear
that action will be necessary to provide us with any kind of operating
margin over that period. We will, in any event, have to take some kind
of debt-ceiling action for the next fiscal year at some point along the
line.
Senator SPARKMAN. Senator Proxmire addressed a question or
made a statement to the Secretary regarding our housing goals. It
seems to me every time we get into financial difficulty it is housing and
small business that take the brunt of it first, and heaviest, and I cer-
tainly agree with his statement in which he expressed disappointment
that Secretary Roinney on several different occasions indicated that
we would not be able to meet the goals.
Now, the goals have been set by law, and it seems to me that what we
ought to be doing is steaming just as hard as we can at meeting those
goals even if we are not able to do it in the long run and not start off
by saying, we are simply not going to be able to meet the goals that
have been set.
And I hope that you people in the financial world will help out with
this housing pro~ram which I think wifi mean n'iore to this country
than almost anything that we have devised so far.
Mr. WALKER. Senator, let me say on housing-a subject you and I
over the years have discussed rather intensively-that we particularly
want to improve the functioning of the mortgage market and the long
sought but still elusive goal of creating a secondary mortgage market
that is active and viable. I would also point out that one of the major
factors that economic policy should strive toward in containing infla-
tion is avoiding erratic swings in fiscal and other policies. These swings
have given us difficulty in recent years. We should avoid the type of
credit crunch which by its nature hits hardest at institutions which
traditionally make the largest volume of housing loans, partly by
custom and partly by tax preferences, through such things as bad debt
reserves and other measures which Congress has adopted in the public
interest to promote loans for housing.
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398
And I would like to make one more point: I have made this point
privately before the savings and loan interests of the country, and I
would like to make it before this committee. There is no question in
my mind that in the long run there is going to be great difficulty in
relying upon Government control of interest rates through Regulation
Q. to try to keep the housing credit flow up. This can be done in the short
run, but in the long run it gets iiito all sorts of difficulty-it is a jerry-
built proposition.
That is not saying that any recommendation with respect to the
interest rate control bill is necessarily forthcoming or that it will
take a particular form. But from the long-run standpoint of housing
for the American people, there are many of us who are convinced-
and I so told the U.S. Savings and Loan League-that the thrift
industry has to be made more competitive vis-a-vis the commercial
banking industry. The thrift industry has to be put in a viable position
in terms of a more balanced portfolio so that when interest rates go
up their iiiterest income would also go up. and they could pay the rates
to savers which are necessary to hold the savings funds and avoid
this "clisintermecliation" which hit so hard in 1966. I called upon the
savings and loan leadership to appoint a blue ribbon task force to
work with us in the administration-and I have discussed this with
Dr. McCracken-and to work with all other groups in an effort to make
the thrift industry truly viable and more competitive vis-a-vis commer-
cial banks. This is bound in the long run to help realize those housing
goals which you referred to earlier.
Senator SPARKMAN. Thank you very much. My time is up.
Thank you. Mr. Chairman.
Chairman PATMAN. Senator Jordan?
Senator JORDAN. Thank you very much, Mr. Chairman.
One question I wanted to ask the Secretary, but lie is not here, so I
am going to ask it of either of you gentlemen.
I am curious to know why two sentences were stricken from page 4
of Mr. Kennedy's prepared statement, one of which says:
"In the financial area it will not be necessary to ask Congress for
immediate action on the debt limit."
And you answered that. I think, in response to a question of Senator
Sparkman.
Mr. WALKER. The answer is that Mr. Voicker in his statement was
going to refer to some of those points that the Secretary initially had
in his statement. But Mr. Volcker did iiot get to Present his statement.
Mr. \TOLCKER. I do not want to imply that the debt-ceiling decision
has been made at this point. This is something we are looking at very
intently at the moment, as we must, in view of the problems that lie
ahead in terms of Senator Miller's concerns as well as the immediate
PrObTefli.
Senator JORDAN. And the other sentence stricken from the Secretary's
statement. was "\Ye also will be asking for congressional reconsidera-
tion of the 41-/2-percent interest rate ceiling on long-term Treasury
is~nes
Do you want to address yourself to that?
Mr. VOLOKER. That sentence virtually duplicates a sentence which is
in my prepared statement and is not stricken. I am sure you are well
aware that with the current 4~j-percent ceiiin~ for Treasury bonds,
as a practical matter, it is impossible for the Treasury to issue any
PAGENO="0123"
399
securities with a maturity of more than 7 years. This does pose some
severe limitations on the flexibility with which we can conduct debt
management operations during this very difficult period, and, certamly,
on balance, it hampers the kmcl of job that we would like to do in
terms of supporting the general effort to control inflation. We feel
that this has become a problem of more critical importance through
the passage of time and the very steady and severe decline in the aver-
age maturity of the debt.
At the time I left the Treasury in 1965, for instance, the average
maturity of the privately held debt was about five and a half years. It
has now slipped, as of the end of January, to something like 4 years,
which is some indication of the increasing size and frequency of the
refunding that has to be done to keep this very large amount of debt
outstanding. The net result when the Treasury is in the market so
frequently for such large amounts is to create some very real difficul-
ties for the Federal Reserve in the conduct of their policies. It does
also, as I indicated, hamper our own flexibility in conducting ap-
propriate anti-inflationary policies in this situation. It is an area in
which we have a great deal of concern. And we do have under con-
sideration just what approach might be made to the Congress in this
area.
Senator JORDAN. Not only that, but it puts the Federal Government
competing with the State and local governments and the private sector
for what money is available for loan purposes, does it not?
Mr. VOLCKER. There are very difficult problems in this area. The
fact of the matter is that the securities markets in all areas are under
very heavy pressure. I think this is basically a reflection of inflationary
pressures in the economy generally. This has led to a very large demand
for credit, and has led, too, on the other side, to a relative unwilling-
ness on the part of the investor to put his money in fixed-income
securities. I think the only real answer to that problem in the end is to
restore balance to the economy and regain control over this inflation
so that we have a more balanced picture in the financial markets and
set the stage for the kind of decline in interest rates and easy avail-
ability of credit that we would all like to see.
Senator SPARKMAN. Will the Senator yield for just a suggestion?
Senator JORDAN. I yield.
Senator SPARKMAN. I wonder if it might be well to ask Mr. Volcker
something about the interest rates on savings bonds. That is the only
kind that the little fellow can participate in.
Senator JORDAN. I am coming to that.
Senator SPARKMAN. I thank you, Senator Jordan.
Senator JORDAN. You pretty well stated my point.
What incentive is there for this patriotic little fellow to buy savings
bonds from the Federal Government at the rate that is available to him
when the rate of interest he earns is less than the rate of inflation?
Mr. VOLOKER. We are anticipating each other.
Let me just read a paragraph that I did have in my prepared state-
ment on this very point:
I would also note, in this connection-in connection with the interest rate
ceiilng-that our savings bonds-sold to millions of individuals in relative small
amounts-are subject to a 41/4 percent ceiling. The savings bonds program has
been a part of the Treasury's debt management effort since before World War II.
In some ways, the value of this program is greatest precisely in an inflationary
PAGENO="0124"
400
period like the present. Yet, we are all conscious that these same inflationary
pressures that have so profoundly permeated other sectors of the credit market
have, for the time being, reduced the relative attractiveness of savings bonds.
This is also a matter that we will be reviewing urgently in coming weeks.
We are very conscious of this problem, Senator.
Senator JORDAN. I have some questions for you, Mr. 1\Talker.
I notice that you say that you intend to bring the whole tax system,
State and local as well as Federal, under a careful and searching
examination. Under what authority do you propose to study State and
local taxation?
Mr. WALKER. That should be clarified, sir. As you well know, there
are various proposals with respect to State and local revenue sharing
with the Federal Government, as well as proposals for tax credits at
the Federal level for income taxes paid to the States. We are not
saying here that we are about to tell State and local governments what
to do. But in order to reach decisions and make recommendations to
the Congress as to the Federal tax structure, we must approach it as
an integral whole.
Senator JORDAN. The State and local govermnents say that their
sources of taxes have just about reached the point beyond which
there is any more yield to be derived, and they intend to look to the
Federal Government for tax sharing or perhaps vacating some areas
of taxation to the States.
I hope you know that you will get into that.
Is that what you have in mind?
Mr. WALKER. Without endorsing any specific plan at this time that
might have been advanced in this area, I think I can tell you that this
administration is quite sympathetic to the problems which you so
rightfully describe with respect to State and local taxation sources.
Senator JORDAN. On another point, among your studies will be the
expiration of the role of value-added taxes used by a number of
Western European countries. I have always felt that some countries
used this device to operate against us in our balance of payments. Do
you concur in that? And, if so, would you have any idea that you might
recommend a value-added tax for this country?
Mr. WALKER. I will ask Mr. Volcker to comment on the balance-of-
payments implications.
I am not at all sure that we can say that this is the whole purpose
of the value-added tax in Western Europe. I will say that the value-
added tax has important implications and perhaps great value for
domestic purposes. And it has been recommended by certain responsible
groups in this country as an appropriate approach to taxation in a
major restructuring of the U.S. tax system.
This is a very, very complicated and difficult matter and, again, I
do not want to prejudge. From a long-range standpoint, we think that
this issue must be studied. And one aspect of it, of course, is the inter-
national implications which I will ask Mr. Volcker to comment on.
Mr. VOLCKER. This is a complex and contentious matter. But I
personally share the feeling of a great many people that the way the
value-added tax system operates in relation to the system of border
tax adjustments used in IVestern Europe is such that the net result is
to the disadvantage of our own trade position. This is an area in which
we have a very considerable interest, whether or not the solution lies
in a value-added tax in the United States, which is obviously dependent
PAGENO="0125"
401
upon a great host of considerations apart from the balance-of-payments
consideration.
We have the whole border tax question under intensive study. And
there are various directions this could take.
This is something that we want to be discussing, I am sure, rather
intensely, with some of our friends in Europe over the months ahead.
Senator JORDAN. I hope you do it, because I think at least an in-
vestigation of value-added taxation has real merit.
My time is up.
Chairman PATMAN. Dr. Walker, in the absence of the Secretary-
you are Tinder Secretary; that is, you are next to the Secretary of the
Treasury.
The Treasury Department, of course, markets the Government
securities and it must be vitally concerned with the day-to-day opera-
tion of the monetary policy. Your Office has specific authority and
responsibility in the area of monetary policy. It is your responsibility
to develop a program to bring down the current high level of interest
rates.
I call your attention to section 10, paragraph 6, of the Federal
Reserve Act, 12 U.S.C. 246, which provides that-now, remember,
Dr. Walker, that this is the law right now:
Wherever any power vested by this Act in the Board of Governors of the
Federal Reserve System or the Federal Reserve Agent appears to be in conflict
with the powers of the Secretary of the Treasury, such powers shall be exer-
cised subject to the supervision and control of the Secretary.
Is that your understanding of the law?
Mr. WALKER. It may be my understanding of that particular section,
but I certainly would not interpret that, in view of my knowledge of
the history and the record, as authorizing the Secretary of the Treas-
ury to order the Federal Reserve Board to take certain steps in credit
policy. Quite clearly, the Federal Reserve is a creature of Congress,
and if those steps were to be desirable under the approach to central
banking that has been followed in this country, then there should
be congressional action, not executive action-in other words, through
due action of the Banking and Currency Committees and the Congress
of the United States.
Chairman PATMAN. It is my opinion-and I am sure you will agree
with this point-that the Federal Reserve is exercising a lot of powers
that are not specifically given to the Federal Reserve under the act.
Don't you agree with that?
Mr. WALKER. No, sir, I do not think I agree with that. But if you
want to bring up specifics, in terms of where you think the Secretary
of the Treasury should attempt to prevent the Federal Reserve from
exercising power and undertaking actions which they are performing
illegally, I will discuss them one by one.
Chairman PATMAN. Very plainly and to the point, when the Federal
Reserve fixes interest rates, that is, the rates that they are allowed to
fix, at a rate that is against the public interest and the general welfare
and detrimental to the public, the Secretary of the Treasury, under this
provision I believe, has a right to take issue and decide that it will
not be done.
Mr. WALKER. Mr. Chairman, although there will be differences of
views with respect to what factors determine interest rates, the great
PAGENO="0126"
402
preponderance of opinion among professional economists at the pres-
ent time is that market factors are the prime determinants of interest
rates, not whether the Federal Reserve tends to set a given discount
rate level. The Federal Reserve obviously has an important direct
effect with respect to the handling of open market operations, discount
policy, and reserve requirements, but recent experience has contributed
to the building up of opinions, to the effect that if the Fed attempts
to use these instruments to get interest rates down below what the
market forces would dictate in an overheated economy-and this has
happened once or twice in the last few years-that the resulting
upsurge in business activity and inflationary expectations actually
results in higher rates than you would have had if they had not tried
to bring the interest rates down by inflating the economy.
Chairman PATMAN. Now, may I answer that, Dr. Walker?
Mr. WALKER. Certainly.
Chairman PATMAN. I take issue with you that the market. practice
determines interest rates. I take issue with you that interest rates are
determined by competitive market. When the national debt is huge
and high, like it has been for a number of years, it gives a wonderful
opportunity for the Federal Reserve, with the support and with the
direction of the Secretary of the Treasury, to keep interest rates low
on Government securities with the knowledge that the Government
rate that is fixed on long-term Government securities will go clear
across the board, because they dominate the market.
I have interrogated a lot of great men, in addition to yourself,
on this subject
Mr. WALKER. Thank you.
Chairman PATMAN. Like Mr. Eccles, who was Chairman of the
Board for a long time, and also like many presidents of the bank, and
also Mr. Martin, and I have never known any of them say that there
is actually a. competitive market in interest rates that fixes the interest
rates when the national debt is large.
Now, they will almost say it, when you call their hand and ask: "Do
you think that the competitive market fixes the rate on Government
bonds?" They cairnot honestly and truthfully say it, because the Fed-
eral Reserve has got a lot, of special dealers around that have to do
with this, and, of course, they control the dealers. And the open-market
committee only deals with these dealers. That is correct, is it not?
Mr. WALKER. That is true, but the dealers are intermediaries for
many thousands of holders of Government securities.
Chairman PATMAX. So, they fix the interest rates. They could have
the interest rate on housing today at 4 percent or 41/4 if they wanted
t,o.
Mr. WALKER. The dealers or the Federal Reserve sets them?
Chairman PATMAN. No, the Federal Reserve would fix those rates
if they wanted to work in the public interest, like the Federal Reserve
Board did for 14 years, from 1939 to 1953, when the Federal interest
rate on Government bonds was fixed at not more than 21/2 percent when
the national debt was high. All during those 14 years, when we were
in danger of depression, deflation, and inflation all the time, their
rates were kept, always, under 21/2 percent. Even after the Eisenhower
administration came in, tile first issue of bonds was 2% percent long
term; the next issue was at 2˝, and then the Secretary of the Treas-
PAGENO="0127"
403
ury, Mr. Humphrey, just arbitrarily asked for bids on bonds-I mean,
asked for tenders on bonds-of 3 percent for the purpose of arbitrar-
ily-without being required to-start the increased interest rates in this
country. And in May it got so bad that year that they had to back up
and start over again, because of a depression.
Between the two, I would rather flirt with an inflationary period
than a deflationary period-that is, a depression-for the reason that
there are known, provable ways of stopping inflation. You know what
they are. It can be done. But there is no known, provable way of stop-
ping a depression when it starts. Therefore, you are in great danger
v-hen you are flirting with a depression, and you are flirtmg with a
depression today, because you will not exercise your power over in-
terest rates.
Mr. WALKER. Mr. Chairman, we are both from the State of Texas.
We have, over the years, discussed this issue many times, when I was
Assistant to Secretary of the `Treasury Anderson-another Texan. I
enjoyed the exchanges, because I always learned something from them.
I am especially pleased that you categorized me as among the "great
men" that you have discussed this issue with, but I think you are
overly flattering.
Chairman PATMAN. I am talking about. reputation.
Mr. WALKER. Very good.
My substantive response to your points about the interest rate sta-
bility between 1939 and 1953 is this: I think you have got to realize
that during that same period there was a very significant inflation and
at the same time a decline in the value of a dollar. Now, obviously, a
great deal of this was necessary and a. result of World War II. But
that should not obscure the fundamental economic force at work-
which was the creation of money through monetary policy supporting
the prices of these bonds. That is the only way to do it in the shortrun.
But people learn.
In the situation today, this economic analysis I mentioned a few
moments ago clearly leads toward the conclusion that any attempt to
`stabilize interest rates at levels lower than real economic factors justify
is likely to be self-defeating and at the same time result in a significant
amonut of price inflation exactly like we have had. Ultimately, if his-
tory teaches us anything, this leads to the very depression which you
and I and this administration are determined to avoid.
Chairman PATMAN. My time has expired.
Mr. Widnall?
Representative WIDNALL. Thank you, Mr. Chairman.
Mr. Walker, the Secretary's statement spoke about "the balance of
payments continues to be a cause for concern. A small surplus was
recorded last year on the equity basis of calculation. But this statistical
improvement reflects `a massive inflow of foreign capital-both private
and official."
How large an increase was there in total? Can you tell me that,
Mr. Volcker?
Mr. VOLCKER. The figure that I recall offhand for the private inflow
of capital was in the neighborhood of five and a half billion, which
is an exceptional figure for the United States. There were two big
components in this inflow. One was a very large inflow of funds, run-
ning up `toward $2 billion, into American stocks. The other big com-
PAGENO="0128"
404
ponent, also roughly $2 billion, was made up of bond offerings, either
straight bond offerings or convertible bond offerings, by American
companies who were financing their overseas investments through
borrowings. These borrowings were primarily in dollar market, but
either in the Eurodollar market or other markets abroad.
Representative WTIDNALL. To what extent was that true?
You said it was largely made up of what type of funds? How large
an amount?
Mr. VOLOKER. There are about $2 billion of issues that are identifi-
able for the latter purpose, American companies financing their oper-
ations abroad. This is, in good part, a response to the foreign direct
investment program of the Department of Commerce, although, as
it turned out, the relative market conditions in the TJnitecl States and
in the European market last year meant that this large volume of
financing could be done in Europe at rates and on terms not all that
much more costly than might have been done b the same company in
the United States. There has been a maj or shift in relative conditions
of the American market and the European market in this respect.
Apart from the direct impetus of the Commerce program which cer-
tainly was the stimulus for this large amount of bond offerings in
Europe, the basic market conditions themselves were more favorable
toward this increased amount of foreign borrowing by large American
compames.
Representative WIDNALL. How large was the official flow?
Mr. VOLCKER. The official flow referred to was made up by a variety
of instruments held by foreign central banks or Governments-so-
called, "Roosa" bonds, agency issues of various types, longer-term time
deposits-which, in total, approximated something like $21/2 billion
last year. A portion of those transactions were directly related to
the continuing military offset programs that we negotiate with our
allies. They undertake on their part to offset at least a portion of
the balance of payments' cost of our military expenditures through
various kinds of neutralization procedures, some if which involve
an inflow of foreign official capital to this country.
Representative WmNALL. A lot of that inflow is attracted by the
interest rates.
Mr. VOLOKER. There is no question that tight money in the United
States has attracted a great deal of money to this country in recent
months and the last year.
Representative WIDNALL. If that condition should change abruptly,
how much of a problem would be posed almost overnight by a rapid
outflow?
Mr. VOLCKER. Well, there is no question that the balance of pay-
ments position in general has been supported by the tightness of
money in this country, and a change in that situation could well
lead to a change in the volume of these capital flows. It is awfully
hard to make any estimate, and I will not try, as to what the
response might be under different conditions, because so much then
depends, too, on what happens in European markets or other foreign
markets at the same time. A lot of the money attracted here by the
tightness of credit is short term funds initially lodged in the Euro-
dollar market. American banks are large buyers of that money now.
But even if conditions eased in the United States, they would prob-
PAGENO="0129"
405
ably ease in the Eurodollar market as well. These funds would still be
available for use somewhere, and I do not think it follows that the
American banks lose all interest in this market with some easing
of money in the United States, when that easing is paralleled by an eas-
ing of money in Europe.
But I think you have certainly put your finger on a potential prob-
lem, and it is related in a more general way to the fact that while we
did have a surplus last year-and that is welcome-the structure of our
balance of payments is not in a condition in which we would like to
see it. The trade balance has declined. We have had to rely much more
heavily on capital inflow, and I think we will be in a much more
satisfactory long-term position when we begin building the trade bal-
ance back to at least its normal historical level than when we rely
heavily in this kind of capital inflow. But I do not want to imply that
all this capital inflow is temporary and transitory. We think there
are some realfactors behind it as well.
Representative WIDNALL. Are these investments pretty well divided,
~r do they reflect that one or two major central banks make the in-
vestments, or one or two private groups?
Mr. VOLOKER. I think they are very widely diversified in both
the private and official areas, except to the extent of the military
offset operations that were referred to earlier. The offsets naturally,
are conceiitrated in those countries where we have some heavy mili-
tary expenditures abroad.
But, in general, certainly the inflow of funds into stock market,
as nearly as one can tell, comes from a wide variety of sources, mainly
in Europe, but from a number of European countries.
Representative WIDNALL. To get back to the 4'/4-percent interest
rate being received on Government bonds, does the Treasury advocate
changing the definition of Government bonds to include instruments
up to 10 years?
Mr. VOLOKER. We have not reached a conclusion on that point, Mr.
Widnall. I think the logic of the situation suggests that the ceiling
under present condit'ions be removed but whether that is the best ap-
proach or not we just have not decided upon.
Representative WIDNALL. There is a choice of doing away with the
ceiling altogether?
Mr. VOLOKER. I think that is the general logic of the situation~ but
I am not able to say whether we would propose that as the approach
in this specific situation at this point or not.
Representative WIDNALL. There has been some discusthon about
doing away with the tax-free aspects of municipal bonds. Some have
argued very seriously that this would impair local financing. Those
favoring the elimination of the tax-free advantage have said that
a program of federally supported loans as in the proposed Urban
Development Bank would permit cities to obtain funds at a lower cost,
since the municipals are now being floated at increasingly higher
interest rates to attract buyers. Has the Treasury taken any position
on abolishing tax-free bonds?
Mr. WALKER. No, sir, we have not. This is an issue that is under
intensive study.
I will mention one or two of the situations that come into the
iioture.
24-833----G9-pt. 2--9
PAGENO="0130"
406
It is quite clear that this is a highly prized and highly valued in-
direct subsidy that the State and local governments enjoy. And there
are also, as you know, constitutional questions, and things of that type~
Representative WIDNALL. May I interrupt you?
Mr. WALKER. Yes.
Representative WmNALL. And a considerable tax saving for a lot
of people.
Mr. WALKER. That is correct, too. There are buyers and sellers, and
all sorts of interests and all sorts of people involved here.
Now, I t.hink the great preponderance of professional opinion is
that the Federal Government loses more in taxes than the State and
local governments get back through the tax-free subsidy. This is a
very difficult thing to lay out in lay terms. But basically, it results
from the fact that more and more State and local bonds are being
issued. The tax brackets were reduced in 1964 although somewhat
raised with the surcharge, and with the combination of an increase in
volume, and fewer individuals who are interested in getting the tax
exemption, you are tending more and more toward a saturation of
the market.
Under the economic analysis, when you sell a block of bonds as an
underwriter, you have to price those at a sufficiently high level in terms
of interest rate, or low level in terms of price, to sell all of those bonds.
This means you have got to make them attractive enough to pull in
that last marginal buyer that the economists talk about.
Now, in this process it would be quite clear that if you had an alterna-
tive such as the Urban Development Bank that was proposed by the
last administration and which we are studying at the present time-
it is quite clear that there would be a theoretical possibility of the
Federal Government or the Urban Development Bank borrowing
through taxable issues and loaning funds to the State government
at lower rates than they could have obtained through nontaxable
issues.
But there is a great question as to whether you would want to sub-
stitute that approach for the tax exempt approach.
What has been discussed are alternatives to permit municipalities
to take either approach, tax exemption if they like that, or the Urban
Development Bank approach.
The question, as you well know, is not entirely an economic ques-
tion. You get into major considerations with respect to the points that
Senator Jordan raised as to relationships between State and local gov-
ernments. Perhaps, Mr. Volcker in his-incidentally, you spoke of him
as No. 2. We look upon ourselves as equal; at least we get paid the
same amŽunt of money and we work, more or less, the same amount
of hours in the Treasury Department.
Mr. Volcker, both as an economist and in his responsibility as to
debt management, might want to enlarge upon this point.
Mr. VOI~CKER. I think you have covered it all.
Representative WIDNALL. Thank you.
My time is up.
Ohairman PATMAN. Senator Proxmire?
Senator PROXMIRE. I want to congratulate you on that last answer,
which is very helpful.
PAGENO="0131"
407
By giving the municipality an option, you would save money for
the Treasury and for the municipality?
Our calculation is that it would mean a billion dollars in reduced
cost to the municipality. But we could be wrong.
Nevertheless, I am very happy to hear your response, because it
shows you thoroughly understand this.
Mr. WALKER. We are studying your bill very carefully, but I do not
want to give the impression to all of our taxpayers and the Governors
all over the country that we are going to come in with a recommenda-
tion. We are completely openminded.
Senator PROXMIRE. This bill would have to depend upon the support
of the mayors, and so forth, around the country?
Chairman PATMAN. I hope you do not ignore my bill on that sub-
ject, too.
Mr. WALKER. You can bet your boots on thai, Mr. Chairman-we
will study all the bills.
Senator PROXMIRE. Gentlemen, I want to congratulate you, too. I
must say that, generally, in these 3 days that we have had so far, I am
disappointed that the officials of the Nixon administration have taken
the President's inaugural warning to the country to heart the way
they have. He cautioned them to speak in a low voice, and they have
spoken in such low voices that sometimes we can't hear them. They are
not all specific; they generalize. They say, "We do not know yet." "We
may." "There is a possibility." There is a tendency not to answer in
specific terms.
I understand your dilemma, but I do hope you can give me some
answers on this. What I am concerned about is what we are going to
do about, what Mr. Kennedy's predecessor, Joe Barr, said is a "tax-
payers' revolt" in this country. He had reference in part to not only
the heavy burden of taxes, but also to the loopholes in the tax laws,
and the fact that a score of taxpayers with incomes over a million
dollars last year paid no taxes; and the fact that well over a hundred
with incomes over $200,000 paid no taxes. I wish you would write me,
Mr. Walker, without giving the names, how the 155 taxpayers with
very high income escaped taxes. I understand the Treasury did this
in 1963 for a number of taxpayers without giving the names. The key
items then were capital gains, oil, unlimited charitable deductions.
But if you can make that available in the next few weeks, I would very
much appreciate it.
Mr. WALKER. I think you should add to that list real estate
depreciation.
Senator PROXMIRE. Yes. This is just suggestive; it is not all.
Mr. WALKER. Could I make a couple of comments?
Senator PROXMIRE. Yes; I wish you would.
Mr. WALKER. We regret that we cannot come forward with a broad
array of policy reconimendations at the present time. Just give us time
to get organized, and I assure you that there will be many
recommendations.
I think the press pointed out yesterday that one of the Republican
leaders at the White House pointed out that there probably would be
three Presidential messages this week. And there will be more in the
future; there is no question about it. We are working in the area you
referred to earlier with respect to the one-bank holding company
PAGENO="0132"
408
problem, and we are close to having an administration bill on that
particular issue.
Secondly, I donot think that there is a taxpayers' revolt, certainly
not.
Senator PROXMIRE. You should have been with me in Wisconsin for
the last 10 weeks; you might have had a different view.
Mr. WALKER. I know the problem; I know the mail that is being
received on the Hill, and I know the mail that has been received in the
Treasury Department. Mr. Barr said, I think, "We face now the possi-
bility of a. taxpayer revolt." And I share with all those millions of
Americans who do pay a relatively large share of their income in taxes,
as I have over the years, a repugnance toward that part of a system
which does not provide for complete equity, and that repugnance is
shared b~ the Secretary of the Treasury and the President of the
TJnitecl States.
Now, I hope that the people of the United States, instead of revolt-
ing in a. manner. that impairs this unique income tax system, with
voluntary `reporting, that we have in this country, will revolt in a
much more effective way, and that is by making clear to the Members
of Congress and the tax-writing committees that they insist upon
measures to bring about an equitable tax system at the earliest possible
date. And I assure you that the Treasury Department will come forth
with positive recommendations in that area.
Senator PROXMmE. Let me just suggest a few. First, as I understand
it, the unlimited charitable deductions require the taxpayer to give
away up to 90 percent of his taxable income in 8 out of 10 years. The
gimmick here is that their taxable income is small, because people with
investments, with capital gains and so forth, are in a position where
much of their income is not taxable. Therefore, they are in a position
where they can escape from taxation, or at least limit that taxation
very, very greatly.
I understand that there is a recommendation that this be eliminated
over a period of 10 years. There is a staff recommendation. The Treas-
ury has taken no position on it. Do you feel that this is something that
you can give your support to?
Mr. WALKER. Not at the present time. We have to look at all areas,
and we have got to ask ourselves the question first, in approaching
these various areas: Is the preference which was originally given-
and I use the word "preference" instead of loophole-is the preference
that was originally given, presumably for a given purpose, operative
or significant in 1969 and the 1970's? I think it would be a mistake-
and I am not talking too much about the charitable deductions; I am
talking more about certain other areas here-it would be a mistake
not to approach these areas directly and look at the preference itself
rather than to say, initially, you are going around through the back
dooi~ with some other approach.
Senator PROXMmE. Let me ask you about two loopholes that the
banks have: One is that a bank sells some of its securities, and there is
a capital gain, and the maximum ta.x is 25 percent. But if it has a
loss, it is treated as an ordinary loss. This is information I get from the
staff of the Joint Internal Revenue Taxation Committee.
The other is the fact that banks are permitted to deduct two and a
half per cent of their debt as a bad debt reserve
Mr. WALKER. 2.4.
PAGENO="0133"
409
Senator PRox~1ni~. Although the loss average is less than 2.4.
Why should the banks be given these two special tax advantages?
Mr. WALKER. You are referring to the banks with the 2.4 and not
the savings and loans with 6 percent.
Mr. PROXHIRE. That is right.
Mr. WALKER. Take the second one first. The history of the commer-
cial bank bad debt reserve grew out of the depression, when losses
sustained by commercial banks were many times the 2.4-even based
on just the banks that survived, the only reliable figures-and that
does not take into consideration the thousands of banks that suc~
cumbed in which you had very large losses.
However, before any of us came to the Treasury the approach
taken for taxation of commercial banks in this area recognized-and
there was quite a bit of opinion to this effect at the end of World War
IT-that we might continue to have recessions and depressions and big
losses such as we had in the 1930's. So, the procedure that was followed
was to permit commercial banks, since they are in the business of
dealing and operating in debts, to set aside a tax-free accretion to bad
debt reserves each year in order to gird themselves for the sort of loan
losses they could expect if their economy should-
Senator PRoxMniE. That is the historical. Why is it justified now?
I understand the history of it, but why is it justified in 1969?
Mr. WALKER. I am not saying it is justified now. I am saying that
this is on the agenda of the I-louse Ways and Means Committee to
be studied, and it is also on our agenda.
I thought you asked me to explain why it is in existence.
Senator PROxMIRE. You were the chief executive officer of the
American Bankers Association, and I know you are very expert in
this area, and I just wanted to know whether or not you now felt,
as of now, 1969, there was any real justification for that 2.4 percent.
Mr. WALKER. I think the development of the percentage bears very
significantly on whether that is or is not a justifiable percentage, and
I am trying to explain how it came into existence.
Senator PRox~rIRE. Now, how about the proposal that Senator
Kennedy made shortly before he was assassinated, and since then a
number of people have supported it, that at least 20 percent of a per-
son's income over a certain level, fairly high level should be paid in
taxes, that we should have a system of providing-I think he suggested
20 percent, and some have even suggested as high as 50 percent for
those with very high incomes. In other words, just a blanket provision
for taxation, so that nobody is in a position of having a big income
and paying no taxes.
Mr. WALKER. That would get at certain people that have the tax-
exempt s~curities and the charitable deduction approach, perhaps,
and it certainly should he considered. At the ~ame time it does not get
into the area of such things as percentage depletion and rapid depre-
ciation of apartment houses where they do not have the net income.
This is a tricky area, when you start thinking about it.
Senator PROXMIRE. I am glad to get that modification of it, but I
think we should plug them where we can and find ways of perhaps
bringing others in.
Let me ask you this: You say in your statement that you would
like to provide tax incentives as a way of getting a private industry
PAGENO="0134"
410
more active in our cities and for the disadvantaged. I think it is a
ver fine statement, but how would von feel about providing in the
budget what Secretary Barr suggested, that is, having the cost of all
of the tax concessions we have, including investment credit., and so
forth, listed along with our expenditures so that we have some notion
of how we are proceeding?
After all, from the viewpoint of the Congress, a tax concession is
just as costly, from the viewpoint of balancing the budget, as expencli-
tures are. And, by and large, they go to those with big incomes, and
then trickle clown.
Mr. WALKER. I think figures to indicate this sort of thing would be
~very, very useful, indeed And you can bet your boots that when and
if we go up to the taxwriting committees with these proposals, we are
going to have to show what the initial revenue costs will be.
Senator PRox~rIRE. It. is a matter of submitting regular budgetary
reports to the Congress~ not just. answering questions when you are
asked, but so the country and the Congress would know what a burden
those are.
Mr. WTALKER. I want to Point out. that there is a substantial body
of opinion that believes that some tax credits stimulate economic
growth and, therefore, national income and corporate profits and
bring back new revenue to the Treasury. Thus a. tax credit may not
in the long run cost any revenue but. quite the. contrary.
Senator PRox\nnE. You can sa.y that about a lot of appropriations.
I can say that about manpower training appropriations, that. in the
long run, in the short run in fact. it is a marvelous investment. They
bring back returns many times.
But. I think, to go from that to the notion that therefore it. shouldi
not be reported-
Mr. WALKER. I did not mean to imply that at all. But I think Con-
gress has got to look at the other side of the coin, if it. is a productive
credit. or a. productive subsidy, that you can't just look at the cost.s
in 1969. You must also consider future benefits.
Senator PRox~lIHE. I do not think you should necessarily eliminate
these things. I think most of them are highly justified.
Mr. WALKER. I think Congress should have figures to the extent
that t.hey can be developed along these lines.
Senator PRox~II~. My time is up, Mr. Chairman.
Chairman PATMAN. Senator Miller?
Senator MILLER. I would like to refe.r to this point of tax exemption
on municipal bonds, Mr. Walker.
I agree that there are many taxpayers who are very concerned about
reading in the newspapers that people with a lot of money invested and
a substantial net income did not have to pay any taxes. I am also
concerned about the ability of the local governments to finance their
operations. Now, there are extremes. I think we are in one right now,
where there is complete tax exemption. The other extreme is to do
away with the tax exemption. I would hope that the Treasury would
come out with a recommendation somewhere in the middle ground.
One suggestion is that if a person shows $150,000 of taxable income on
his income ta.x return a.nd $100,000 of nontaxable income, he would
have to pay tax on $50,000 because it exceeds by $50,000 the amount of
the taxable income. Another possibility would be to use the percentage
PAGENO="0135"
411
approach, say, 25 percent or 20 percent of the taxable income would
be the amount that would be tax free, and the amount above that would
be subject to tax. And, then, of course, there is the variation of a reduced
tax rate on the amount of-I am sure you are aware of the various types
of approaches to this problem, but I just wanted to let you know that
I do hope that you use the middle ground approach rather than an
extreme approach, and I hope you will come up with a recommendation,
because this is an area of great frustration on the part of the taxpayers
I have talked to.
Mr. WALKER. We will examine all avenues.
I want to reemphasize also that it is an area of great complexity.
And if you had several "tax shelters," without identifying any that
exist, to remove tax shelter A without doing something about tax
shelter B will simply send that money and income into tax shelter B.
That must be considered in all these cases.
Senator MILLER. The beauty of the approach that I have suggested
to you is that it does not make any difference which tax shelter the
income comes from, if it exceeds 20 percent of the taxable income, it is
going to be caught; if it exceeds the amount of the taxable income, it
is going to be caught regardless of what kind of a tax shelter it comes
from.
Mr. WALKER. But some tax shelters show no taxable income. For
example, apartment building depreciation, if that is a tax shelter-
and I am not saying so-may not show any.
Senator MILLER. But' it may ultimately be that depreciation turns
out to be capital gains subject only to the 25 percent rates. So, you have
got an area of nontaxable income here.
Mr. WALKER. You raise a good point, but the fact remains that
many of these people pay no income taxes today.
Senator MILLER. I would hope to find~ an approach that would be as
simple and understandable to the general public as possible.
I would like to ask Mr. Volcker this question:
And if this has been covered, please tell me.
Last year, on the in-flow of funds, we had, of course, as you pointed
out, a substantial investment by overseas investors in the American
securities market. Can you tell me how much of the in-flow of funds
was attributable to acceleration of payments by other countries on
contracts here in the United States?
Mr. VOLOXER. I can't give you that figure offhand.
Senator MILLER. Was it significant?
Mr. VOLOKER. I do not believe so, last year. There has been some of
this in the past in connection with military payments in particular.
I would have to look at the particular record for last year, before I
could answer that question. I would be glad to do that for the record.
Senator MILLER. I wish you would. I remember that it was not very
long ago when West Germany, for example, accelerated its payments
*on contracts for military equipment, and this had a palliative effect;
it was certainly just a borrowing type of proposition.
Mr. VOLOKER. That is right. I would have to look it up.
Senator MILLER. What other tyi~es of borrowing mechanisms were
rased that showed up this last year in the form of an in-flow of funds?
Mr. VOLCKER. You are thinking of the official transactions?
Senator MILLER. Yes.
PAGENO="0136"
412
Mr. VOLCKER. I do not have the figures in front of me. There were
sales of medium term securities denominated either in dollars or foreign
currencies to foreign central banks upon a number of occasions either
in-
Senator MILLER. Do you know how much that amounted to?
Mr. VOLCKER. I do not have any of these-
Senator MILLER. Could you furnish that?
Mr. VOLCKER. I certainly could, for the record. I could give you all
of this for the record. There was some substantial volume of medium
term deposits in American banks. There were special debt transactions
that directly related to military offset.
Senator MILLER. Perhaps, I can shorten this by asking you if you
would be good enough-if it is all right with the Chairman-to
furnish for the record an isolated list of the amounts of these special
transactions?
Chairman PATMAN. Without objection, it is so ordered.
You can prepare them for insertion at the time that you examine
your transcript, if you will.
Mr. VOLOKER. I do find, Mr. Chairman, that these were published
in the balance-of-payments release that was issued the other day. And
I guess I do have some of these figures in front of me.
Chairman PAmIAN. I assume Senator Miller wants them in this
transcript here.
Senator MILLER. Yes.
Mr. VOLOKER. I can either read them off or supply them for the
record.
Chairman PATMAN. Just insert them when you read the transcript.
Mr. VOLOKER. I will do that.
(The information subsequently ified follows:)
Net "special" financial transacticrns in the U.S. balance of payments, 1968
.3fillions
Net sales of time deposits or certificates of deposits with an original ma-
turity of 1 year or more $594
Net sales of nonmarketable Government securities payable prior to ma-
turity only under special conditions-
To Canada 1, 050
To others 960
Net sales of U.S. Government agency bonds to international and regional
organizations 116
Nonscheduled repayments of U. S. Government credits 270
Special deposits in U.S. Treasury accounts 92
Other special financial transactions of Canada -121
Transactions of the United Kingdom -13T
Total 2, 824
Senator MILLER. One last. question, Mr. Walker:
Yesterday, Mr. Mayo testified:
If * the tax surcharge is not extended by early April, receipts from
corporation income taxes will be less than estimated because quarterly payments
that would be clue on April 15 would not reflect the extended surcharge.
The question is whether or not the administration has any plans
to make its position on this 10 percei~t known early enough so that
the Congress could legislate to avoid that problem?
PAGENO="0137"
413
Mr. WALKER. It is highly doubtful that that timetable could be
reached, given the budget review situation that is underway right
now. For t.he revenue estimates we will want to look at the tax receipts
in March or April, and we want to take a very close look at the economy
and the extent of the inflationary pressures, and, of course, al~o the
situation in Vietnam. All of these factors have to enter into the decision.
It would be very difficult to move the timetable up as much as you indi-
cate, even though highly desirable.
Senator MILLER. You do not think that you will be able to reach a
decision on that 10 percent in time?
Mr. WALKER. It would be very difficult.
Senator MILLER. To avoid the problem of corporate quarterly re-
ceipt~s having to be postponed?
Mr. WALKER. It would be very difficult, sir.
Senator MILLER. Thank you.
No further questions.
Chairman PATMAN. Mr. Reuss?
Representative REuss. Thank you, Mr. Chairman.
Mr. Volcker, in your paper you set forth two areas of the economy
which are under acute pressure for long-term capital, and I read:
"The relative shortage and high cost of residential mortgage money,
the sharp increases in interest expense for our State and local govern-
meiits."
If Congress grants the Treasury's proposed request to issue long-
term securities, longer than the 7-year practical limit now in the law,
obviously, every billion dollars worth you issue is going to acid a bil-
lion dollars worth of troubles to the credit market for homeowners,
and State and local governments.
~\Tould you spell precisely what this convenience of the Federal
Reserve and convenience of the Treasury argument is which you
apparently think supervenes the very obvious interest in not making
the life of the homebuilder and the life of the local government trying
to build a school any more difficult?
You just referred to difficulties, problems, and so on.
Well, before Congress votes to strike at the solar plexus of the
housing industry and the local governments, we want to know a little
more about it.
Mr. V0LCIcER. Let me just make a couple of points about your
premise, Mr. Reuss, if I may, before trying to answer the other part of
the question.
I do not think this is a one-way street at all in terms of the maturity
of the debt that is offered. Some of the most pronounced problems for
homebuilding-and I am thinking particularly of the 1966 experience
-were related to the problem of disintermediation. Certainly in some
market circumstances this can be aggravated, I think, more by the
Treasury piling excessive debt into the very short-term area than by
a more orderly and longer term financing program, simply on the basis
that people drawing money out of the savings institutions that may
tend to buy n'iortgages may be more enticed by a very high rate on
the short-term security than they may be enticed by taking the market
risks that are involved in tying up their* money for a long period of
time. And you can, in fact, get market conditions to extend now when
the short-term rates are higher than the long-term rates. The Treasury,
PAGENO="0138"
414
by feeding that kind of rate situation, may turn out to aggravate the
problems of the mortgage market in particular more than if they
spaced out their financing over a period of time. This is particularly
true with Treasury bonds in good part appealing to a somewhat differ-
ent set of lenders than the lenders that are particularly heavy in the
mortgage market.
I would also make one other point in this connection. I do not think
the Treasury has any intention of going out and issuing a tremendous
amount of long-term bonds without regard to its effect on the sectors
of the economy that may already in some sense be under more relative
pressure than other areas.
Representative REUSS. The less tremendous the amounts, the less the
impact on these problems. What are they?
Mr. VOLGKER. I think there are, essentially, two problems here, Mr..
R.euss. I will take them up in the reverse order that I mentioned in my
statement.
The one is that the heavy schedule of Treasury borrowing opera-
tions, and perhaps most particularly the very large Treasury refund-
ing operations that have been necessary in recent years to keep this
short-term debt rolled over, means that the Treasury is in the market
quite frequently, at least each quarter and sometimes oftener. If, during
this period, the Federal Reserve finds that they need to take some
action, it is circumscribed to some extent in terms of not being able
to take action that might upset the whole structure of credit markets
during the period of a Treasury offering of billions of dollars worth
of securities, when those securities are hanging out, so to speak, in the
market waiting for buyers.
Representative R.EUSS. I had thought that the Fed had emancipated
itself from the Treasury in the historic and highly publicized accord:
of 1951. It turns out they are still chained to the old workbench?
Mr. VOLOKER. I think they have emancipated themselves, if that is
the right word, from any direct support of Treasury financing, and I
think that is entirely appropriate. They cannot emancipate themselves:
from the responsibility for maintaining viable money and credit
markets in genera.l. There is always a problem during these offerings
The very mass of Treasury operations in the market is such that you
could get adverse repercussions not only with respect to the success
of that particular Treasury financing but spreading out and rippling
through the credit market as a whole. You would create in the end the
kind of disorderly conditions in the markets-the kind of discontinuity
in markets-that would affect the prospects for all kinds of borrowers,.
including specifically State and local government borrowers and mort-
gage borrowers, if Treasury financing is not handled in a reasonably
orderly manner.
Also they do, as part of their own responsibility, quite properly I
think, feel some responsibility for maintaining not easy conditions but
more or less steady conditions-on an "even keel"-cluring the period
that the Treasury is in the market. I think what you find, in an attempt
to do this, is that during a time of very heavy credit demand in all sec-
tors of the economy, an even keel may provide something of an open-
door for that period to any borrower who comes into the market because~
his need, in effect, must be accommodated along with the Treasury's,.
or the purpose of the even-keel operation is defeated. I think you saw
some elements of this kind, of a situation perhaps more particularly
PAGENO="0139"
415
last summer when the Treasury had to do a great deal of financing,
despite the fact the surcharge had just been passed. The Federal Re-
serve was inhibited to a degree in maintaining its control of the money
supply and bank credit during that period by the fact that the
Treasury was in the market so frequently. I think, without probably
any real intention on anyone's part, at least as I read the record from
the outside at that point, you ended up at the end of the summer with
a much larger expansion of credit and money than anyone had looked
for. This has had continuing repercussions on the economy and on
inflatioary developments since that time.
Representative REuss. I intend to ask the Fed when they~ are up
here, "Look, gentlemen, why don't you just relax the next time the
Treasury tries a borrowing or refund and see what happens. I say that,
because, really, what you are asking us to do is to assuredly hurt
housing and State and local government. To the extent that the Treas-
ury comes in with large bond issues, it is bound to tighten credit and
raise interest rates on the long end. And whenever we do that, we want
to be sure that we have a real evil that we are trying to work against.
I welcome your answer, and it is a straightforward one, and that
has got to be considered, but first I want to hear what the Fed has
to say.
Mr. WALKER. I am not sure what you want the Fed to do.
Do you want them to tighten or ease during the Treasury financing?
Representative RETJSS. I want them to do that which they would
otherwise do. I do not know why, particularly-up to 15 years, in my
case, of hearing the Fed's reasons for the glories of the 1951 accord-
I do not see why the Fed has to pervert itself. C-ranted, they are last,
but there are other last ones.
Mr. VOLOKER. I think we should hear from them.
Representative REUSS. Avoid catastrophe, yes; and create a lot of
excess money which you are then going to have to stop in a couple of
weeks or risk Senator Proxmire's ire.
Mr. VOLOKER. The basic dilemma that we are in-and you will be
interested in getting this directly from them-the basic dilemma that
I am sure they sometimes feel themselves in is that if we have a large
failure of a very important Treasury financing, they may end up with
credit market conditions that will require an even larger injection of
money in the end, to restore a tone of stability and balance to the
markets, than if they conducted their own operations in such a way
as to not aggravate that risk of failure which always exists anyway.
It is a difficult problem. I do not want `to prejudge this. But we are
certainly going to be prepared-not only in this connection but in
terms of our ability upon occasion and in judicious amounts make use
of an authority to issue longer term securities in a way that will con-
tribute to the overall `aims of economic policy-to avoid undue effect
upon any particular sector. I think in moderate amounts appropriately
arranged, this is entirely possible through advance refunding tech-
niques as well as through straight cash offerings or normal refunding.
Representative REUSS. I have a request for some information, which
I make now to the Treasury.
On the? percent credit, investment credit, would you get me a break-
down of the types of business that received this credit, with particular
reference to the Small Business Administration categories?
PAGENO="0140"
416
I say that, because it is my impression that Small Business really
does not get very much out of the $2 billion annual Treasury loss as
the result of the investment tax credit, and it would be very construc-
tive to have that. And I would appreciate it, if that material would be
available.
Mr. WALKER Yes; we will do that.
(The information requested and later supplied follows:)
TABLE 1.-INVESTMENT CREDIT CLAiMED, 1964 AND 1965
l~eturns filed
Number
Amount
1964
(thousands)
1965
(thousands)
Percent
increase
1964
(million
dollars)
1965
(million Percent
dollars) increase
(1)
(2)
(3)
(4)
(5) (6)
Grand total
(1)
2, 358. 9
(1)
2, 094. 0
Fiduciaries
Total (less fiduciaries)
All individuals, total
Proprietors
Partners, small business
corporation shareholders,
others
Corporations
(1)
2, 126. 4
1, 797. 5
10. 5
2, 348. 4
1, 980. 7
10. 4
10. 2
(1)
1, 631. 2
312. 7
1. 9
2, 092. 1 28. 3
375. 8 20. 2
1, 304.7
492. 8
1, 447. 3
~
533. 4
10. 9
8. 2
227. 5
85. 2
284. 7 25. 1
91. 1 6. 9
328. 9
367. 7
11. 8
1, 318. 5
1, 716. 3 30. 2
1 Not available.
Note: Amounts are rounded and may not add to totals.
TABLE 2-ESTIMATED TAXES ATTRIBUTABLE TO INCOMES OF BUSINESSES, BY SIZE OF BUSINESS RECEIPTS
AND FORM OF ORGANIZATION, 1965
lIn millions of dollarsi
Size of business receipts
Bus
mess income t
ax, by business
es organized as-
All returns
Sole pro-
prietorship
Partnership
Electing small
corporation
Corporation
Total, all sizes
"Small" business, total
Under $5,000 1
$5,000 to $10,000
$10,000 to $25,000 i
$25,000 to $50,000
$50,000 to $100,000__
$100,000 to $200,000
$200,000 to $500,000
$500,000 to $1,000,000
"Large" businesses (with receipts
$1,000,000 or more)
$35, 815
6, 028
1
1, 046
1
844
998
914
1, 200
1, 026
29, 786
$2, 951
2, 907
114
194
589
661
676
368
241
63
44
$1, 037
718
7
7
34
66
125
197
188
96
289
$195
106
(~) 1
1
3 J
4
6
16
45
29
90
$31, 662
2, 298
97
112
192
333
726
838
29, 364
1 Less than $500,000.
Source: Office of the Secretary of the Treasury, Office of Tax Analysis, Feb. 20, 1969.
Note: Details may not add to totals because of rounding.
INVESTMENT CREDIT AND THE SMALL BusINEss RETURNS
Table 1 indicates the amount of investment credit taken by corporations,
partnerships, and sole proprietorships in 1964 and 196~, the latest years for which
this isoformation is available. Table 2 incidates the estimated taxes attributable
to incomes of business by size of total business receipts. If one takes as a rough
definition the characteristic of total receipts of less than $1 million as a "small
business, Table 2 indicates the division of taxes between small and large
businesses.
PAGENO="0141"
417
It will be seen that for sole proprietorships a very large proportion of the tax,
about 99 percent, was paid by businesses that could be called small businesses.
If one compares this with the statistic from Table I that the investment credit
for proprietorships for 1965 was approximately $285 million, it follows that for
sole proprietorships the investment credit was approximately 10 percent of the
tax.
Corporations on the other hand were predominantly in the large business
category, and it will be seen, by comparing Tables 1 and 2, that for corporations
as a whole the investment credit in 1965 was approximately 5 percent of the
tax, smaller than the credit-to-tax relationship for sole proprietorships. Part of
this result follows from the fact that the effective tax rate on proprietorship
income is in the neighborhood of 10 percent, while it is in the neighborhood of
40 percent for corporations. The credit is relatively larger for corporations in
relation to their income but relatively smaller in relation to their tax.
For corporations we can also get a picture by comparing tax and credit by size
of assets. Corporations with assets below $1 million (i.e., "small" businesses)
received $189 million of investment credit in 1965 and paid corporate taxes of
$3,077 million. The credit averaged about 6 percent of the tax. For all larger
corporations the credit was $1,527 million and the tax was $28,585 million. Thus,
the credit was slightly over 5 percent of the tax.
No data are available to make a direct comparison of tax credits and business
size for partnerships and subchapter S corporations. This is because the data,
as to the use of the tax credits against tax, would be reflected in the returns of
the partners and the shareholders of subchapter S corporations, and those re-
turns could not readily be associated with the size of the partnerships and the
subchapter S corporations.
Chairman PATMAN. Mr. Moorhead?
Representative MOORHEAD. Thank you, Mr. Chairman. Mr. Voicker,
while in Europe at the OECD meetings various statements were at-
tributed to you, by the press, concerning your position on more flex-
ible exchange rates as one alternative for meaningful international
monetary reform.
Mr. VOLCKER. There is a multiplicity of particular kinds of pro-
posals, as you know.
Representative MOORHEAD. At one point you were quoted as saying
that the study of flexible exchange rates would be limited to "aca-
demic circles." However, other officials in the adminstration, notably
in the CEA of the Treasury, said that they are indeed pursuing stud-
ies of flexible exchange rates. So I would like to give you this oppor-
tunity to set the record straight.
Mr. VOLOKER. That was not the connotation at all that I wanted
to leave. And I want to correct any interpretation of the record
that indicates that I consider academic life some sort of purgatory.
I think the fact is that with respect to these kinds of proposals- the
wider band kind of thing to which you are referring-our position
is-and I do not think there is any disagreement among any of us
on this point-the same as it is toward a number of other proposals of
like character. We want to look at these with an open mind. There are a
lot of technical problems with that particular proposal, as there are
with most, and I do not think any of us think there are any magic
solutions in these areas-that we can seize upon any of these devices
and our problems will somehow go away. I do not think that is possible
atall.
But on the other hand, I think some of these proposals or some coin-
bination of them, may make a contribution toward a more effective
functioning of the international financial system. I think they all
need more study before we are going to be able to arrive at any posi-
tion on any of them.
PAGENO="0142"
418
On the flexibility question we particularly found a notable lack of
interest, I think, in European official circles at this point. So, I do
not think tha.t these ideas are right on the docket in terms of immedi-
ate moves in this kind of direction, and I do not want to give that kind
of impression at all.
On the other hand, this is something that we will be looking at
internally, obviously. And' I would encourage others to look at it.
And I, in fact, would be doing this in some of these academic circles
myself had I not been sitting here. After a little longer period of
gestation `and the conclusions become clear as to where the interest
of this country and other countries may lie, I think we will be in a
position to reach some official conclusions on these matters. But we
are definitely not there at the time.
Representative MOORHEAD. I can merely say that I encourage in-
ternal Treasury studies in `addition to the academic studies on this
important issue.
Chairman PATMAN. I would like to ask a question like I asked
Secretary Kennedy. Do you, Mr. Walker or Mr. Voleker, own stock in
commercial banks?
Mr. WALKER. I own no common stock in any business corporation.
Mr. VOLOKER. I own no stocks.
ClTairlnan PATMAN. Now, if I understand correctly, there are four
bankers in the Treasury Department now under the new administra-
tion: Mr. Kennedy; yourself, Dr. Walker; Mr. Voicker; and recently
added was a man by the name of Jim Smith for Congressional Rela-
tions. Wasn't he your assistant in the American Bankers Association's
public relations office?
Mr. WALKER. Mr. Smith was a long-time employee of the Senate
and was assistant to Senator Mimdt until he came to the American
Bankers Association's Washington staff about 1961, 1962 or 1963. As
for myself, I am not a banker. I never was a banker. I was a trade
association executive.
Chairman PATMAN. If you represented the banks, I do not see how
you could come here.
Mr. WALKER. I admit that you have got a point.
Chairman PATMAN. I mean as a career.
Now, I would like to `ask `another question. The President approves
interest rates that are fixed on long-term Government bonds; isn't
that correct?
Mr. WALKER. Anything over 1 year, any note or bond.
Chairman PATMAN. That has always been my understanding. I
looked it up one ti1ne, and I was very clea.r that it was that way; but if
it has been changed inadvertently or otherwise, I do not know it.
That means you keep talking about a 1951 accord. That was a
meaningless so-called accord. That was under Mr. Truman. And Mr.
Truman not only could not approve it; he denounced it. And how
can you say there is an accord where he is the principal actor, since
he has got to fix the interest rates on long-term Government bonds
and he did not approve it?
He is one of the principal actors and, therefore, it could not be an
accord.
I just submit that for your consideration.
PAGENO="0143"
419
Mr. WALKER. I am surprised. I would like to see the record. I
did not know he denounced it. I wrote my doctoral dissertation on that
episode, and I did not know it.
Chairman PATMAN. I happened to be around at the time, and I
happened to be with Mr. Truman then, and I knew something about
what was going on. He did denoance it. He thought it was terrible.
But they ffnally agreed that they would not violate the understanding
that the Board had with Mr. Truman, and that was that they keep the
rates to 21/2 percent except one issue, and 234 percent that were non-
negotiable and really not worth as much as 21/2. And they kept those
rates until the end of Mr. Truman's time. They did not violate that
part.
Now, the other question I would like to ask you is:
You were with the Chase Manhattan Bank, were you not, Mr.
Voleker:
Mr. VOLOKEII. Yes.
Chairman PATMAN. And how long were you with them?
Mr. VOLCKER. I was with them for 3 years. I was with them earlier
for a period of 4 years, too.
Chairman PATMAN. They are contributors to the American Bank-
~rs Association fund, aren't they?
Mr. VOLOKER. I assume so.
Chairman PATMAN. How much did they contribute in 1967 to the
banking association fund, or anything that could be considered public
relations in the 2 years of 1967 and 1968? Could you get those figures?
Mr. VOLCKER. I assume I can.
Chairman PATMAN. And will you put them in the record at this
Point?
Mr. VOLCKER. Yes.
(The information requested follows:)
THE UNDER SECRETARY OF THE TREASURY
FOR MONETARY AFFAIRS,
Washington, D.C., February 25,1969.
Mr. MICHAEL CARLSON,
Secretary, Chase Mahhattan Bank,
New York, N.Y.
DEAR MR. CARLSON: At the Joint Economic Committee hearings on February
`19, 1969, Chairman Patman, after establishing my former connection with Chase
Manhattan, asked two questions about the bank.
1. ~`They are contributors to the American Bankers Association fund,
aren't they ?"
My reply: "I assume so."
2. "How much did they contribute to the banking `association fund, or
anything that could be considered public relations in the two years of 1967
and 1968? Could you get these figures ?"
My reply: "I assume I can."
Mr. Patman asked that the data be added to the record of the hearings.
If the information can be supplied, I would appreciate the bank sending it to
the Committee directly. I plan to inform the Committee of this request to you.
Sincerely,
PAUL A. VOLCKER.
PAGENO="0144"
420
THE CHASE MANHATTAN BANK,
New York, N.Y., If arch 5, 1969.
Hon. WRIGHT PATMAN.
Chairman, House Banking and Currency Committee, Rayburn House Office
Building, Washington, D.C.
DEAR Mn. PATMAN: Paul A. Voicker, Under Secretary of the Treasury for
Monetary Affairs. has informed us that at the Joint Economic Committee Hear-
ings on February 19, 1969 you asked whether this Bank is a contributor to
the American Bankers Association fund and how much this Bank contributed
to the Bankers Association fund in the two years of 1967 and 1968. Since Mr.
Volcker did not have the information requested, he has asked that we reply to
you directly.
In each of the years this Bank paid membership dues to the American Bankers
Association of $18,500, an amount calculated on the basis of assets. In each of
the same years, this Bank contributed to the Foundation for Education in Eco-
nomics $1,850, an amount computed in relation to the membership dues.
Yours very truly,
MICHAEL E. CARL50N,
Vice President and secretary.
Chairman PATMAN. Now, then, Dr. Walker, do you have the infor-
mation as to how much the bank distributed to the American Bankers
Association fund during these 2 years?
Mr. WALKER. What years?
Chairman PAT~rAx. The calendar years of 1967 and 1968.
Mr. WALKER. Roughly, $8 million. The annual dues income at the
time averaged around $4 million. So, it was roughly $8 million. Con-
tributions by banks were matched by an equal amount that the Amer-
ican Bankers Association obtained primarily through its widespread
educational programs, such as the American Institute of Banking.
Chairman PATMAN. How do you justify asking the Federal Reserve
to contribute public money?
Mr. WALKER. Are you talking to me now as Tinder Secretary of the
Treasury?
Chairman PATMAN. I am talking to you as a former representative
of the American Bankers Association's lobby here on Capitol Hill-
that you expended 600 percent during the time you were in there. In
oth.er words, you started out with one lobbyist and wound up with six.
Mr. WALKER. That is quite an expansion. I never thought of it in
those terms.
First of all, I ought to say that I am not sure it is quite proper for
an Under Secretary of the Treasury to comment upon the activities
of a private trade association. I do know the answer that has been
given to that question in the past is that the Federal Reserve banks
had a reduced scale of dues vis-a-vis the commercial banks, and they
had the privilege of participating in the educational programs of the
American Bankers Association. They viewed this as particularly valu-
able in the training of their examiners and sending them to the bankers'
graduate school at Rutgers. This participation helped toward giving
their young people a college education. This was the major justifica-
tion, as I recall, that the Federal Reserve banks made for participation
in the ABA.
Chairman PATMAN. But they made direct donations over $1,000 a
year, money that would have gone right straight into the Treasury and
saved the taxpayers that much, but they elected to make a contribution
to the people that they are supervising. So they were actually carrying
members of the Federal Reserve System.
PAGENO="0145"
421
Mr. WALKER. I think the point is that they hoped to get a public
interest return in terms of the educational system that the banking
industry has organized.
Chairman PATMAN. Don't you think that the Federal Reserve, can
help the housing industry by fixing a low rate of interest, say at 4%
per, and maintaining that rate for the construction loans of family-
sized homes, and that is for families?
Mr. WALKER. For the reasons I went through earlier, I think it.'
would be disastrous for the housing industry if the monetary au-
thority created very large amounts of money, which in turn would
force interest rates up, resulting in more disintermediation. This would~
be, I think, a highly self-defeating policy.
Chairman PATMAN. Can you see that we can continue to keep on
paying the rate now and increasing it and survive?
Mr. WALKER. I think that interest rates are much too high. And
that is why this administration is dedicated to ending the inflation
which is the root cause of the high interest rates at the present time.
Chairman PATMAN. Don't you think higher interest rates cause-
inflation?
Mr. WALKER. No, sir. I think that inflation causes higher interest
rates.
Chairman PATMAN. If you increase interest rates, say, to 10 percent,.
that is added on to the cost of all the goods on the shelves, added into
every business in America, and that makes prices higher. High price
is what causes inflation; isn't it?
Mr. WALKER. All economic analysts that I know of think that. the.
impact of the growing money supply on the price level greatly-
swamps the cost effect of interest rate increases. I know of no reputable-
economic study that comes to any other conclusion.
Chairman PATMAN. You don't discriminate between necessary ex--
pansion or growth expansion?
Mr. WALKER. I would discriminate. I think I am on record with.
you, Mr. Patman-do you recall the letter I wrote you last summer-
with respect to the rate of monetary growth, commenting on the guide-
lines that came out of this committee, that I thought that a ra.te of~
monetary growth in a general range of 9 to 6 percent was not a bad
idea, and that the Fed could properly be asked to explain aberrations.
from that rate, and they could under certain conditions-do you re-
member that I wrote you a letter on that subject?
Chairman PATMAN. I will look it up and read it carefully.
Now, before yielding to Senator Proxmire to ask some questions,.
before we close, I think we had better notify the Secretary of the
Treasury that from the reports I have gotten from the other members,..
they would like to have him return at some suitable time in the future.
So if you will keep that in mind I appreciate it.
Senator Proxmire?
Senator PROXMIRE. I would like to ask you whether the Treasury
has had any chance to review Governor Rockefeller's suggestion that.
the surtax be kept over a period of time, and gradually be given to the
States for educationa.l purposes. Has the Treasury considered it al-
ready, or do you expect to give it consideration?
Mr. WALKER. I think we will probably take a look at it. We haven't
considered it at this time. The sort of thing we would look at is whether-
24-833-----69--pt. 2-iO
PAGENO="0146"
422
it is desirable to tie down a substantial source of revenue. There are
complications there. That is without prejudging the proposal. It
should be looked at; yes.
Senator PRox~1n~n. How about the possibility-someone suggested,
that instead of permitting the surtax to expire, which many of us
support, that we consider an alternative which would be more pro-
gressive, and which would result in about the same revenue loss,
roughly, and that is to permit exemptions to rise from $600 to $1,000
per dependent?
Mr. WAr~u~n. We have no objection to studying that one. I think
the significant factor there would be the revenue implications of that
particular action. I don't have the figures offhand.
Senator PRoxMIm~. I understand it is just about the same as the
surtax, around a $12 billion loss. The surtax is roughly in that area.
Mr. WALKER. That is certainly something that should be considered.
Senator PROXMIRE. There is a tremendous amount of interest in this
in my State, and I think around the country. As I recall, the dependency
deductions were at one time around a thousand dollars, and they
lowered it during World War II. And of course with inflation the
way it is, it is very hard to rationalize the notion that anybody can
support a child on $600 a year. At any rate, such an increase would
have a progressive impact. And I do hope that your mind would be
open on that, and you would give it careful consideration.
Mr. WALKi~. We certainly will.
Senator PRoxMn~. Thank you.
Chairman PATMAN. Thank you very much, Dr. WTalker and
Mr. Volcker. I think we have had some pretty spirited answers and
replies. And there is nothing personal, I assure you.
Mr. WALu~n. I think both of us look forward to 8 years of exchange
with you, Mr. Patman.
Chairman PA~r~rAN. Thank you very much, gentlemen. As usual, any
questions submitted in writing to our witnesses and their subsequent
answers will be included in the record at the end of today's proceedings.
Without objection, the committee stands in recess until 10 o'clock
tomorrow morning.
(Whereupon, at 12:25 p.m., the committee adjourned, to reconvene
at 10 a.m., Thursday, February 20, 1969.)
PAGENO="0147"
APPENDIX
The following material consists of questions raised by Senator Miller
rand submitted to Secretary Kennedy, and his subsequent answers:
Question 1. Reference first sentence, page 2, of your prepared statement. Is it
not a fact that the low level of unem~ployment has been affected by the addition
of 600,000 mare Federal civilian employees over the last eight years, one million
more men in the Armed Services, and employment of upwards of two million
in industry because of the war?
Answer. The factors mentioned have certainly affected the distribution of
employment between civilian and non-civilian pursuits and between defense and
non-defense industries. There probably has also been some effect on unemploy-
ment rates as well, although this would be difficult, perhaps impossible, to
estimate statistically with any precision. In recent years excessive demand
came at a time when unemployment was already at relatively low levels and the
main effect was to drive up costs and prices very sharply.
The question points to the necessity of insuring that a smooth economic
transition is made when Vietnam expenditures can be reduced. President Nixon
has requested a full review of this matter and studies are underway.
Question 2. Reference the newt sentence. How do yon~ reconcile your state-
.nten.t that "the dollar is strong" with the world market for gold? Also, since the
dollar has fallen in value to 39 cents (compared to a 1939 dollar worth 100 cents),
does this not show that the dollar has been growing weaker-rather than
stronger?
Answer. In my statement I said: "The dollar is strong and respected in the
world in spite of recent inflationary trends and a deteriorating trade balance."
The dollar remains the most widely held currency and large balances are main-
tained in dollars both on private foreign account and by foreign monetary author-
ities in order to maintain the international value of their currencies in terms of
dollars.
In short, the dollar remains the most convenient liquid asset on the inter-
national scene. Gold in the private market is not a real alternative to dollars for
most persons. The gold market is thin and is affected by numerous special factors
at this time.
This is not to say that the recent inflation in the United States may not have
played some part in speculative pressure on the private gold market. We would,
of course like to see the dollar even stronger than it is now, as my whole statement
implies.
With respect to the second part of this question, the purchasing power of the
* dollar has fallen heavily as compared with the 1939 dollar. A substantial part of
this decline in purchasing power took place during World War II and the imme-
* diate postwar period. Since 1963, however the cost of living had risen 16 percent
as of November 1968. This is a result of the strong inflationary pressures to which
I referred in my statement and which require corrective action.
As I said in my statement, "The economy must be placed under firm re-
straint until there are unmistakable signs that we are headed back on a non-
inflationary path." This will strengthen the position of the dollar abroad as
well as at home.
Question 3. You state that the budget should be kept in surplus (p. 3, last
* full sentence of statement), but the Council of Econoin'ic Advisers points to an
objective of at least a "balance". How do you reconcile these two positions?
Answer. The two statements seem to amount to very much the same thing.
* Judging from its context, the statement by the Council of Economic Advisers
was intended to emphasize that a budget deficit at this time might have direct
inflationary effects and would create financial strains and expectations of con-
tinued inflation-hence the need for "at least" a balance. The Treasury state-
:inent simply stressed the desirability of keeping the budget in surplus rather
(423)
PAGENO="0148"
424
than avoiding a deficit. As a practical matter, the budget surplus of $2.4 billion
established in January for fiscal 1969 was relatively small (about 0.3 percent of
GNP) and the estimate is subject to error. The current fiscal influence might well
be described as relatively neutral although, taken together, fiscal and monetary
policy are exerting restraint. In principle, a fairly sizable budget surplus may
well be appropriate at a time when inflationary pressures are strong and the
economy is somewhat beyond the point of reasonably full employment, as the
term is usually defined.
Question 4. Page 5, second sentence of statement. Is not the sharp increase
in imports due also to the inflation which has caused our wage rates to increcise
more (on an absolute basis) than those of countries ewport lug to us, thus causiflg~
imports to be more competitive with our domestic products?
Answer. There are two important ways that over-expansion of our domestic*
economy causes our imports to increase-and the reference made to such over-
expansion as a major reason for our deteriorating trade position since 1965
was intended to encompass both of these effects.
The most visible, and initially most damaging, effect is that the i:nflated volume
of our total demand for goods due to domestic over-expansion leads directly
and immediately to more than proportionate increases in our demand for im-
ported goods.
A second and different effect, which comes about more gradually but can al~o~
do more lasting damage to our trade position, is that excessive increases in
our wages and other costs resulting from over-expansion of our economy will:
cause the prices of domestic goods to rise relative to foreign goods and thereby
make it more difficult for our manufacturers to compete successfully against for~-
eign-made products not only here at home but also in export markets~.
PAGENO="0149"
THE 1969 ECONOMIC REPORT OF THE PRESIDENT
THURSDAY, FEBRUARY 20, 1969
CONGRESS OF THE UNITED STATES,
JOINT EcoNo3nc CoMMn~r~E,
Wa$hington, D.C.
The Joint Economic Committee met, pursuant to recess, at 10 a.m. in
room G-308, New Senate Office Building, Hon. William Proxmire
(vice chairman of the joint committee) presiding.
Present: Senators Proxmire, Javits, Miller, and Jordan; and Repre-
sentatives Reuss, Widn all, and Brock.
Also present: John B. Stark, executive director; James W. Knowles,
director of research; and Douglas C. Frechtling, minority economist.
Senator PROXMIRE (presiding). The Joint Economic Committee will
come `to order.
Welcome to these hearings, Mr. Secretary. Never before has an ad-
ministration appointed to this Cabinet position a person with such
`depth in training, experience, and understanding relevant to the Na-
tion's manpower problems. I understand you are the first Ph. D. in
economics ever appointed Secretary of Labor. And that is also most
`desirable.
I understand furthermore that your predecessor, Mr. Wirtz, is not
only a good friend but a great admirer of yours. And I consider Mr.
Wirtz one of the most talented men who served in the last administra-
tion.
I am sure no one has to remind you, Dr. Schultz, that directing the
Nation's manpower effort at such problems as poverty, inflationary
skill shortages, and difficult collective-bargaining issues will not be
easy. The programs which you direct have important bearing on the
economic security of individuals and their families and on the effec-
tive functioning of the economy. Because of your background, it is
quite likely that expectations for the effectiveness of manpower pro-
grams will rise sharply. It is also quite clear that the `degree to which
you can apply your talents to these pressing problems depends in no
small part upon the support of this Congress. I think I may speak for
all of the members of this committee, Mr. Secretary, in wishing you
success, and `to offer the `assistance of a~ committee which, by virtue of
its mandate in the Employment Ac't of 146, has a special obligation
to work toward solving the problems that you are centrally concerned
with.
You may go ahead in your own w-ay. You have an excellent state-
ment. It was delivered to my house last night at 9 :30. I stayed up late
studying it.
Senator Javits?
425)
PAGENO="0150"
426
Senator JAvITs. Mr. Chairman, I just want to welcome the Secretary~
I came specially, though we have a Foreign Relations Committee hear-
ing on the Nonproliferation Treaty to which I will have to go, because I
think here is one of the most gifted men recruited by the new adminis-
tration. And he has already emphasized his work in the statement,
which I, too, have gone through. I am very grateful to the Chair for his
fine introduction.
STATEMENT OP HO1~. GEORGE P. SHULTZ, SECRETARY OP LABOR
Secretary SHULTZ. Thank you, Mr. Chairman, and members of
your committee. This is my first venture before your committee and,
as an economist, I take pride in this appearance. But my awareness
of the committee's expertise counsels humility, as does the range and
the complexity of the problems before us.
Mr. chairman, I appreciate your remarks and those of Senator
Javits. I suppose in a sense, after your kind statements, I might quit
while I am ahead. But in any case I would ask your permission to put
the full statement that I have prepared into the record, along with the
charts and tables that accompany it.
Senator PROXMIRE. Without objection that will be done. The charts
and tables are also most helpful.
(The statement and attachments referred to follow:)
PREPARED STATEMENT OF SECRETARY OF LABOR
GEORGE P. SHULTZ
This is my first venture before your committee. As an economist, I take pride
in that appearance but my awareness of the Committee's expertise counsels
humility as does the range and the complexity of the problems before us.
My role today is not of the economic forecaster. The Council of Economic
Advisers has already performed this task, providing an analysis of the current
economic scene together with their broad policy prescriptions for the coming
year.
I will provide an assessment of certain aspects of the economic scene which
are of particular concern to the Secretary of Labor: the job prospects facing
American workers, developments in wages, prices, and labor relations affecting
their welfare, and the programs of the Labor Department which have a direct
bearing on general economic developments.
My remarks will be related to two questions both of which must be listed high
on the agenda of anyone concerned with the future of this country:
1. What steps can help bring the current excessive rate of inflation under
control without an appreciable rise in unemployment?
2. In what ways can this effort be related to a widening of economic oppor-
tunities and thereby contribute toward an end to poverty?
These two questions are closely connected. We cannot expect, on the one hand,
to conquer poverty if advances in income are promptly offset by increases in
the prices of goods and services the additional income was expected to buy. And,
of course, the erosion of savings and of fixed incomes actually sets back the living
levels of many who are only a step or two away from poverty.
On the other hand, a policy prescription that would halt inflation at the cost
of producing a sharply rising level of unemployment would also prove disastrous
for our efforts against poverty. For many families, the way out of poverty is
more productive employment, and firms that are forced to reduce their opera-
tions are not apt to provide this opportunity.
Our sights must, therefore, be set on providing answers to both questions in a
coordinated manner. We must work to check the current rate of inflation with-
out an appreciable rise in unemployment as part of our program to provide
greater economic opportunity for all. The solution will not come easily but the
health of the Nation, both economic and social, depends on it. Our most important
antipoverty program is a healthy economy.
PAGENO="0151"
427
HIGH EMPLOYMENT WITH A OHECK ON INFLATION
I believe there is substantial evidence to support the hope that inflation can
be contained without sacrificing the high level of employment that is required
if we are to attain a measurable degree of success in tackling the problem of
poverty.
Three principal points lead me to this conclusion.
Fir$t, this Administration, as Dr. McCracken indicated Monday, will work to
reduce inflationary pressures gradually, not abruptly. Our aim is not to achieve
a zero price rise this year-this could not occur short of a sizea'ble recession. It
is rather to halt the acceleration in the rate of price increase and then gradually-
to bring the rate to a more acceptable level. In a sense, this operation involves
turning the 1960-64 experience around. Then, a relatively stable price level was
coupled with a gradual reduction in the unemployment rate. Now, we are aiming
to maintain a relatively stable unemployment rate with a gradual reduction in
the rate of increase in prices. To do more than this in a short time involves too
great a risk. We must remember that inflationary expectations have been build-
ing for several years (See chart 1.) and they cannot immediately be dissipated..
By startIng now, and holding firmly and steadily to this objective, we can
accomplish a worthwhile reduction in the rate of price increase this year, and set
the stage for a further reduction next year. At the same time, an opportunity
will be provided for the economy to create the expanding number of jobs that are
required to keep employment in line with the growth in the labor force.
~econd, a growing proportion of workers are now employed in industries that
generally do not lay people off as soon as a slackening in demand occurs. For
various reasons, employment in the so-called service producing industries (trade,
transportation, utilities, finance, services, and government) is far more stable
than in most manufacturing, mining or construction industries. This relatively
stable sector has been growing much more rapidly than the economy as a whole,
and it seems likely that this trend will continue.
In 1950, 59 out of every 100 jobs outside of agriculture were in the service
producing industries. Ten years later, the proportion had risen to 62 out of 100
and today the figure is 65. By 1975, it is projected to rise to about 68 out of 100.
A very large proportion-more than 85%-of the new jobs provided by the
growing economy will be in the service sector.
Chart 2 shows how employment in the service producing industries held up
during each of the four postwar recessions, when employment in the goods.
industries declined. In 1948-49, when employment in the goods industries dropped'
61/2 percent, service employment increased slightly. In 1953-54, goods employment
dropped 6 percent, and again service employment rose slightly. In 1957-58, the
decline in goods employment of 7 percent was accompanied by a very slight de-
cline in service employment. In 1960-61, goods employment declined 3 percent,
while service employment rose 1 percent. Since the last recession, in 1960-61, a
large proportion of workers have obtained jobs in the service industries, and as
I have said, the shift is expected to go farther still.
The hypothetical calculation at the bottom of the chart suggests that, as a~
result of this shift, we can anticipate greater stability in total employment should
a slackening in demand occur. The effect of this shift in any one year is not
large, but it is in a favorable direction and the cumulative impact of this develop--
ment is of fundamental importance to our thinking and policy on economic
stabilization and growth.
Third is the increased variety and growing quantitative importance of policy
instruments available in addition to the traditional tools of fiscal and monetary'
policy. I concetrate, of course, on those policies in the manpower and labor'
market area, but I note the importance here of such matters as vigorous efforts
in the anti-trust field and the further development of freedom in international'
trade.
These manpower policies are aimed at three specific targets: at individual'
groups within the population with markedly high rates of unemployment (e.g.,
disadvantaged teenagers working under the Neighborhood Youth Corps, ghetto
residents newly placed through the JOBS program) ; at the development of
greater supplies of labor where acute shortages exist oh can be foreseen (e.g.,.
MDTA institutional and on-the-job training programs), and at the more efficient
functioning of the labor market (e.g., upgrading and computerizing the work
of the U.S. Employment Service).
PAGENO="0152"
428
It may be noted at the outset that the influence of these programs cannot
be measured by a simple count of trainees in government programs. The con-
structive spirit of the JOBS program, for example, has proved quite contagious.
The development by American business of realistic hiring, training, and up-
grading programs for disadvantaged groups extends far beyond those firms that
have been drawn into official contracts.
There are -a number of ways in which manpower development and training
programs ease the task of checking inflation without an appreciabile rise in
unemployment. By focusing on the disadvantaged these programs concentrate
upon the specific groups whose unemployment rates are the highest. By making
available additional workers not otherwise employable, they help to ease tight
labor market conditions. By training additional skilled workers or alternatively
restructuring jobs requiring skilled workers so that these could be performed
by individuals of lesser skill, they help improve the relation between supply and
~demand in the market for particular goods and services. By improving the
`functioning of the job market they cut the time between the loss of a job
~and the acquisition of a new job. I shall return to this subject to spell out in
greater detail some possible emphases in manpower programs that should
help specifically to meet the current situation.
I do not wish to exaggerate the role that the Department's manpower programs
can play. Obviously they require a considerable period of time to become effective
and alone they would prove powerless to curb inflation. But together with an
-effective use of fiscal and monetary policy, I think the manpower programs
can help make possible a gradual transition to a significantly lower rate of
price inflation while maintaining a high employment economy.
A REVIEW OF So~m RECENT DEVELOPMENTS
I should like to now turn to a brief review of recent developments in employ-
ment and in wage-price-productivity relationships which are of special concern
to the solution of -the two question I posed at -the start of my statement.
Eni ployrnent and Unemployment
One of the dominant factors in the past few years has been the great change
In the allocation of our resources: we have become involved in a very costly
military operation, yet we have continued to expand our civilian economy with
few of the direct restraints upon individuals or enterprises that have been resorted
to in similar earlier periods. In the three years since mid-1965, using the G~T
accounts, direct Federal outlays for goods and services (excluding such items as
grants to States and transfer payments to individuals) rose more than 50 percent,
while total output was expanding 26 percent. The great bulk of the increase
was in defense. Expressed in terms of manpower, the increase is even more
dramatic; about 21,'f~ million more people are working in defense-related activ-
ities or in the armed forces than before the mid-1965 step-up in hostilities.
These activities accounted for about 85 percent of the increase in male em-
ployment (including the armed forces) in these 3 years. This growih of employ-
-ment added to the demand for civilian goods but did not contribute to their
production.
Thus. we have had a major unanticipated shift in the economy's resources which
created some scarcities and labor bottlenecks, and stimulated price and wage
increases which otherwise would not have occurred. This development also, of
-course. highlights the importance of careful planning to avoid unnecessary un-
employment when our defense needs are reduced.
A second important point in the manpower story is that the effects of recent
monetary and fiscal measures are still scarcely visible in terms of the employment
totals and the overall unemployment rate. For most primary workers in the
economy-such as adult men or married men-unemployment rates are 2.0 percent
-or less. which many would call close to the minimum frictional level. Nevertheless,
the work week for production and nonsupervisory workers on private payrolls,
-although still relatively strong, has eased somewhat in recent months. This
may imply some leveling off in the demand for labor.
Another significant aspect of the current employment situation is that there
has been a substantial reduction in the number of those who have lost their
jobs. Some may think of the unemployed as consisting solely of those who,
throuch no fault of their own, have lost their jobs, but this group actually
-consists of only about 40 percent of the unemployed. To these job losers, as a
rule. unemployment is a more serious concern than to those who left their jobs
PAGENO="0153"
429
voluntarily, or who never worked before, or who decided to re-enter the labor
force, all of whom are rightly counted as unemployed. About 40 percent of th&
unemployed new entrants or re-entrants, for example, were seeking part-time
work, nearly all of the adult women and teenagers.
These data make clear that some unemployment arises when the worker has
freedom to quit in order to improve his position, freedom to seek part-time
rather than fu1l-ttme work, and freedom not to take the first job that is offered.
One of the benefits of full employment is that it makes it easier to exercise these
choices-to shift jobs and to be selective. Quit rates are usually high when the'
job market is tight, and low when it becomes less buoyant. Similarly, the num-
ber of new entrants or re-entrants may rise and fall with. job opportunities.
For these reasons, a reduction in demand produces some partial offsets to the
rise in unemployment through layoffs.
The current low unemployment rate, of course, masks wide disparities. Thus,.
although nonwhite workers actually accounted for a larger than proportionate-
share of the total unemployment decline in 1968-reflecting the tight supply
of labor as well as special efforts to reduce discrimination-their rate is still.
slightly more than double that for whites. This is approximately .the same ratio
as in 1961.
The unemployment rate for teenagers remains stubbornly high. The current
teenage rate is significantly below the rates of the first half of this decade, hut
it has changed hardly at all in the last .three years and has not shown the kind
of improvement that has been experienced by adult workers.
The situation of the Negro teenager requires special mention. The jobless rate
for Negro 16-19 yea~-olds was 25 percent in 1968, as against 11 percent for the
white youngsters. Negro teenagers have remained virtually untouched by the re-
cent unemployment reductions where as their white counterparts have experienced
a substantial reduction in joblessness. As a result, the ratio of Negro-to-white
teenage unemployment rates has risen substantially in recent years. In 1954, the'
teenage Negro-to-white ratio was a 1.4 to 1; by 1968 the ratio has risen to 2.3 to 1.
Negro girls have fared somewhat worse than boys. In 1968, their unemployment
rate stood at 29 percent, as compared with 22 percent for Negro boys.
It is important also to note the absolute magnitude of the teenage situation.
With the high rates, the total number ;~f unemployed Negro teenagers averaged'
about 200000 in 1968. Furthermore, over one~third were seeking only part-time
work, mainly because they were still in school.
Another aspect of this diversity among rates of unemployment, is highlighted'
by the findings of a new Department of Labor survey to measure unemployment
and barriers to employment in a selected number of very low income areas in 6
large cities~ This survey, known as the Urban Employment Survey, has two broad'
goals: first, to develop insights into `the special social' and economic charac-~
teristics of slums that affect employment conditions, including slum area resi-
dents' attitudes toward work, training, and other aspects of getting and holding
a job; and second to evaluate the effect of various manpower programs.
This survey is being directed `by the Bureau of Labor Statistics with the'
cooperation and financing of the Manpower Administration. The Bureau `of the'
Census is conducting the survey in the Labor Department's Concentrated Employ-
ment Program' areas of six cities-Atlanta, Chicago, Detroit, Houston, Los
Angeles, and New York City. In addition to these low-income neighborhoods, the
survey in Atlanta and Detroit will develop comparable' information for the'
remainder of each of these cities in order to provide comparison's with the'
findings from the slum areas.
From this first report, being released today, I want to mention three findings.
1. High unemployment rates and low earnings characterize the employment
situation of residents of these 6-slum areas, `almost two~thirds of whom are
Negro and another large proportion (18 percent) either Mexican-American or
Puerto Rican. At 9.5 percent, the overall unemployment rate for workers in
UES shim areas was more than two and one-half times the average for the
total civilian labor force. About 15 percent of the full-time workers in these areas
reported earnings less than $65 a week, about the equivalent of the current
Federal mmnimum wage for a 40 hour week.
2. As expected, the jobless rate for Negro workers in these areas was hirher
than in other areas, 10.4 percent. The comparable unemployment rate for white
workers was also very high, about two-thirds of the Negro rate, partly because
the white rate is affected by the large proportion of Mexican-Americans and'
Puerto Ricans in several of the areas studied. In contrast. for the country as
a w-hole, the white unemployment rate was less than half the rate for NCgroes;.
PAGENO="0154"
430
if supported in further surveys, this would reinforce the point of view that the
difficulties shared by those living in these neighborhoods affect more than a
single racial or ethnic group.
3. While low earnings characterize the residents of these areas, a sizeable pro-
portion reported earnings well above the poverty level. Almost half of the men
and one-fifth of the women earned $100 or more weekly for full-time work. Few
women earned $150 a week at a full-time job, but about one-fifth of the men did.
About 20 percent of the families with 4 persons or more reported incomes of less
than $3,500 during the previous 12 months. On the other hand, nearly one-third
of these families had incomes of $8,000 or more. This finding can be quite help-
ful in making clear that all slum residents are not mired in poverty but rather
that many of them already have been able to raise themselves and their families
to a decent level of living.
The current low national unemployment rates thus. while highly encouraging,
do not permit complacency. Instead, they point to the necessity of a variety of
manpower programs to create work opportunities, especially in an economy
which might be growing at a less hectic pace than that of recent years.
Wage, Price and Productivity Changes
Turning first to wages and earnings, we see a picture with two sides-wages
-as a cost of production and wages as income from work. Looking first at the cost
-side-i.e., not taking into account the deterioration of purchasing power as a
Tesult of inflation-we find, as in the case of prices, a steady uptrend in the
Tate of increase. Average hourly compensation-including social security and
various supplements-of all persons in the private economy rose 7.5 percent
~ 1068, compared with 6.1 percent the previous year and an average of about 5
percent annually between 1947 and 1966.
The 7.5 percent rate was the highest since 1050-51. It was the product not only
of collective bargaining but also of decisions of employers in nonunion estab-
lishments to raise wages. Increases in statutory minimum wage rates and social
-security taxes also raised hourly labor costs.
The key determinant of how much of a wage increase gets into costs is. of
-course. productivity. In 1968, output per man-hour for all persons in the private
economy rose 3.3 percent-returning to its long-term rate of advance. This was
in sharp contrast to the previous year when productivity rose by only 1.6 percent.
As production increased during the year, capital and labor resources tended
to be utilized more efficiently with a resultant improvement in output per man-
hour. Nevertheless, unit labor costs (i.e., compensation per unit of output) rose
about 4 percent in `the private economy. Although this was less than' the rise
for the previous year, it was the third consecutive year in which these costs
have risen more than 3 percent. The yearly increment from 1047 to 1066 averaged
1.7 percent.
Compensation is income from employment as well as a cost of production. As
*such. the trend in compensation per man-hour. adjusted to reflect real purchas-
ing power, can be compared with the trend in out-put per man-hour to deter-
mine whether increases in real earnings have kept pace with productivity gains.
if this were the case then labor's share of total income would not change.
During the first 5 years of this decade (1060-65), real hourly compensation
-did not keep pace with the advances in productivity, so that labor's share of
total product was reduced from 63 percent in 1060 to 61 percent in 1965. The
uncommonly large increases in hourly compensation during the past three years
lave served to restore labor's share to approximately the 1060 level. It is
important to note that over the postwar period real compensation per man-hour
and productivity have kept up with each other.
Turning now to collective bargaining, a record number-~about 6.1 million work-
-ers covered by major collective bargaining contracts-will receive deferred
--wage increases averaging 4.1 percent. In consequence, the average of all wage
increases going into effect as a result of collective bargaining will be dampened
as comnared with 1968, though the pattern for new 1960 contracts has started
at a hiah level.
Increases in the Consumer Price Index will have a limited direct impact on
wages since most cost-of-living clauses have limits on the increases. Apart from
-this direct impact. however, there is an obvious influence of recent price
increases upon this year's wage demands.
Prices of services, many of which have limited potential for productivity
increases, are likely to continue on their rapidly rising trend. The Department
-of Agriculture anticipates an increase of 2 to ~ percent in food prices in 1960
PAGENO="0155"
431
compared with a rise of 31/2 percent from 1967 to 1968. While this will be a
retarding influence on the rate of advance of the OPI as a whole, its magnitude
is not great.
MANPOWER PROGRAMS AND EcoNoMIc AND SocIAL GOALS
The nation's manpower programs have been primarily dir'ectecl at particular
human problems rather than `at their economic effects. They have been concerned
with opening opportunity for persons disadvantaged by technological change,
economic downturn or dislocation, poor and discriminatory educational prepara-
tion, and other `barriers to self-supporting employment.
It has long been recognized that ea'ch of these programs has some economic
effect. But their total economic impact has never been gauged, even though the
manpower program's now run by the Department of Labor alone will total about
~$2 billion in fiscal 1969 and reach almost a million individuals. What has become
clearer during the last decade is that the combined effect of these programs can
be crucial in reaching broad national economic objectives. Historically, economists
have given only a passing nod to' the possibility `that a better functioning labor
market `could contribute `significantly to the overall functioning of the economy.
This is no longer the case. The way we design and run our manpower pro-
grams will, I believe, be an important factor in answering the ba'sic questions I
posed at the outset of this testimony.
I should like to list four ini'tial goals, or points of emphasis, th'at have impor-
tant economic implications, `an'd that are central to both immediate and longer-
range manpower efforts.
First is the importance of being sure `that our manpower programs are targeted
to reach specific groups whose employment problems are sizea'bl'e and serious.
Negro youth unemployment has been the worst unemployment category in our
Nation for more than a decade. In 1968, the nonwhite youth unemployment rates
were 20.4 percent for 16-21 year ol'ds and even higher-25 percent for 16-19
year oids taken separately. Almost 1~ of a million 16 to 21 year old Negro' youths
`are out of school and unemployed over the course o'f a year.
Virtually every one of our manpower programs is focused to' some degree on
this target group. Almost 200,000 o'ut of school Negro youth are being reached
by the JOBS, NYC, MDTA and CEP programs. With an effort of this magnitude
focused on this target group, we should begin to see some effect `on the group's
unemployment rate. It is a matter of concern that the high unemploymeut rate
has persisted, and we are now considering the types of program redirection that
will be most effective.
For example, we are studying `the possibility of a shift in program emphasis
for the older out-of-school teenager from enrollment in the Neighborhood Youth
Corps to enterprise employment, with better career and income possi'bilities.
In this connection, the expansion of the JOBS program to types of enterprises
not now strongly represented would open opportunities for new, regular competi-
tive jobs in the very sectors of the economy that are expanding' the most or Where
personnel problems and skill `shortage's are severe-the non-profit hospital's, the
publicly-owned utilities, the public transit companies, a variety of service and
state and local civil service activities. In other words, there are many types of
`activity, and some growing kind's, that we have not yet adequately brought
within the purview of our training and job programs and which offer special
opportunities for youth.
Similarly, the expan'sion of the JOBS program beyond the present 50 cities,
into other cities and areas of economic growth in the nation, would open many
new development situations.
Beyond improving the targeting of our training programs, we need to give
greater attention `to means for bridging the gap from school to work. A good
part of y'outh unemployment is the result of this gap, which incidentally, is far
greater in the U.S. than in Japan and in European countri'es. Three-quarters of
youth unemployment is accounted for by those who are newly entering or
re-entering the labor force in search of work.
There are several things we can do t'o close this gap nuder autho'rity of the
MDTA, the Vocational Education Act, and the Wagner-Peyser Act. We should
improve relations between the Employment Service and the schools so that
youths receive timely job `coun!seling and are helped to understand how they
might best enter the job market. New opportunities for youth to bridge the gap
can flow from expansion of cooperative education programs in the schools. About
PAGENO="0156"
432
200,000 secondary school students are now involved in cooperative arrangements
with industry, working on jobs on a released time basis. These numbers can be
expanded several fold.
Some part of the youth unemployment program will be influenced by what
we do about the military draft. As new programs are developed to meet the
nation's military manpower obligations, we should be able to find ways of
removing the uncertainties which today make some employers reluctant to employ
young people with future possible draft obligations hanging over their heads.
We are concerned also about high off-season unemployment rates in construc-
tion. Such unemployment wastes skilled manpower, raises unemployment com-
pensation costs, impedes our national housing efforts, and contributes strongly
to the environment that boosts construction wages and costs. Initial findings by
the Departments of Labor and Commerce led last year to a Presidential memo-
randum directing government procurement agencies to develop positive anti-
seasonal programs. The Congress has directed a further study of this subject,
to be completed by the end of this year. We plan to work aggressively on this
problem.
Second, is the importance of building skills that will increase the productive
capacity of the economy and improve its ability to meet the heavy demand for
goods and services which prosperity induces-a demand which can lead, unless
offset by output, to price rises.
Medical service prices and construction prices have been responsible for a
major share of the rise in living costs. Expansion of output to meet growing
demand in both cases comes up against important shortages of trained manpower.
Every projection of future manpower needs, at apprentice, technical and semi-
professional levels, puts demand for manpower far beyond present and planned
training activities.
In the medical field, needs far outrun projected manpower supply, and con-
sideration must be given to programs which expand the supply of labor and
improve manpower utilization practices, thus increasing the productivity espe-
cially of highly skilled medical manpower. Here also, the expansion of JOBS
type program into the nonprofit field should aid in meeting the heavy manpower
demands.
Programs for "upgrading" the work force would open new opportunities for
those who come in at the bottom, as well as relieve the tensions increasingly
associated in our society with routine, lOw-paying work. Our manpower pro-
grams thus far have hardly scratched the surface of the "upgrading" question.~
The view has sometimes been expressed that skill development to meet pro-
duction bottlenecks and add to the productivity of the economy means a different
kind of manpower program, targeted at different people, than a program directed
at the disadvantaged. This is true only in small degree. Getting a disadvantaged
person into a real job means launching him on the path to a skill. Since skill
training in American industry is very largely a matter of expanding skill oppor-
tunity on the job-in the "internal labor market"-the crucial action is t&
overcome the barriers to initial entry. Once that is done for a disadvantaged
person, he is launched on the time worn path that has produced the great variety
of skills that make up the American productive machine.
Third, is the improved efficiency of the labor market itself. Whatever the
economic environment within which the labor market operates, workers will
reap better results from the variety of job-and-people matching arrangements
if these arrangements operate at peak efficiency.
The concept of a Job Bank has recently been put into practice in Baltimore,
Maryland~ The Job Bank is simply a running daily listing of all available job
openings in a labor market area. This listing is furnished to the many public
and non-profit agencies engaged in worker placement activities and has already
shown good results in increasing and speeding worker placements.
A more sophisticated computerized job-matching system has recently been estab-
lished covering the State of Utah. This system is only a beginning. The challenge
is to develop appropriate descriptions of a worker's background and qualifica-
tions to feed into a machine and then match with a job which has also been
appropriately described in machine language. Much developmental work is ahead
of us, but is a most promising area and we are seeing the beginning here of a
nationwide computerized system. While I wish to emphasize the positive on this
subject, I should also add a note of caution. Arrangements on the part of an in-
dividual to take a job and of an employer to put someone to work involve per-
sonal and human considerations that are not subject to computerization and,
indeed, that must be carefully preserved in a free and open labor market. We must
PAGENO="0157"
433
never allow ourselves to forget that the employment process involves funda-
mentally a human relationship.
At any rate, these developments should speed up the reemployment of em-
ployable workers who now spend unnecessary weeks looking for new work
opportunity. Cutting down unemployment time for the so-called "frictional"
group, who are in fact going to be re-employed in fairly short order, will reduce
the total amount of down time in the economy. If the computerization of the
Employment Service can cut only one week's unemployment for those now unem-
ployëd about a month, for example, there would be a small, but noticeable,
reduction in the overall unemployment rate.
Most of our unemployed, particularly those who come into the labor market
for the first time, know little about. the opportunities that exist, even in their
own community. And it is within their own labor market that most opportunities
are to be found, and that computerization would have Jts greatest effect.
Special types of assistance are sometimes useful where jobs are more avail-
able in locations other than the city or town of immediate residence, such as
in the case of the young worker displaced from a technologically advancing rural
area Some experimentation has been done with aids to mobility not to force
or direct people, but to open new opportunities on a purely voluntary basis.
Efforts of this kind, on a more regular. scale-perhaps tying into the growing
body of information at the Department of Commerce on the growth areas of
the nation-would cut into the nation's unemployment down time.
A comprehensive system of job vacancy information would speed up the process
by which workers and jobs come together, and enable us to focus more sharply
on the targets for which training is needed.
It is of course of great importance to take the variety of actions necessary
to end arbitrary discrimination, and to end hiring standards irrelevant to job
performance, as more and more employers are doing, either on their own or with
the aid or prodding of the Government.
Fourth is the importance of cushioning the human and economic losses that
arise when workers lose their jobs through no fault of their own. One of the
quickest and surest measures we have in our group of stabilizers is the unem-
ployment insurance system. It begins to operate automatically, provides an
important income cushion for laid-off workers, and counteracts the effects of
sudden or too abrupt employment adjustments.
This system needs improvement if it is to play a fully effective role in com-
batting economic and human adversity.
* * *
Each of these four areas of emphasis involves many specific actions. Each
action by itself is likely to have a small-often not easily measureable-effect
on the overall unemployment rate, particularly the youth rate. But together they
can have a sizeable impact, and can play an important part in efforts to combine
high employment and a stable price level, while augmenting our drive to put an
end to poverty.
An important companion step to action in each of these four areas is the im-
provement of the Government's ability to administer manpower programs
effectively.
The current organization of the Manpower Administration in the Department
of Labor is not satisfactory. There are toomany lines to the field, and too little
coordination of the planning and qperating aspects of the programs. The states,
cities and towns deserve a more understandable and responsive Federal partner.
Major organizational improvements must be made at an early date. In order to
remedy these deficiencies, alternative organizational structures are under con-
sideration. Consultation is being initiated with interested groups toobtain their
reactions and support.
Concurrently, a strong effort must be made to develop stronger relationships
within the present or any proposed program content in the manpower field.
As the President said in his Message to the Congress yesterday, "One of the
priority aims of the new Administration is the development by the Department
of Labor of a comprehensive manpower program, designed to make centrally
available to the unemployed and the underemployed a full range of Federal job
training and placement services. Toward this end, it is essential that the many
Federal manpower programs be integrated and coordinated."
PAGENO="0158"
434
As we work toward these objectives, we do so with the knowledge that our-
manpower programs are coming of age. They have grown to a size and scope that
gives them strategic significance in our economic as well as social policies.
This significance is enhanced under the current economic c&ndlitions. A strong.
job market makes it possible to move idle and under-utilized human resources
into productive activity. The prospect that this current high level of job demand
will be a stable and continuing one lends internal strength to the manpower'
efforts.
I welcome the growing attention of the Nation's policy makers and of this
committee to the contribution that manpower programs can make, with the grow-
ing and proud realizaion that manpower matters are now too important to be~
left only to the manpower experts.
TABLE 1.-EMPLOYMENT STATUS OF PERSONS 16 YEARS AND OVEIt
tin thousandsJ
Employment status
January
1959 1
Ann
ual averages
-
1960
1968
1967
Civilian labor force
Employed
Agriculture
Nonagricultural industries
Part time for economic reasons
Voluntary part time
Unemployed
Unemployment rate
79,874
77,229
3,752
73, 477
1,605
8,834
2,645
3. 3
78,737
75,920
3,817
72, 103
-1,716
8,452
2,817
3. 6.
77,347
74,372
3,844
70, 527.
1,913
8, 048
2,975
3-. 8
69 628.
65,778
5,458.
60,318
2,560
5, 815.
3,852
5. 5.
I Seasonally adjusted.
TABLE 2.-EMPLOYMENT STATUS OF 16- TO 19-YEAR-OLDS BY FULL- AND PART-TIME STATUS, COLOR AND SEX
1968 ANNUAL AVERAGES
tin thousandsi
Civilian
Characteristic laborforce Employed Unemployed
Unemploy-
ment rate'
Full-time labor force 3, 661 3, 184 476
White 3,153 2,799 354
Male 1,727 1,560 167
Female 1,426 1,239 186
Nonwhite 508 385 123
13. 0
11.2
9.7
13.1
24. 2
Male 290 231 60.
20. 6-
Female 217 155 63
28.9
Part-time labor force 2,958 2,595 362
White 2,686 2,396- 290
Male 1,509 1,346- 161
Female 1,177 1,047 129
Nonwhite 272 200 721
Male 154 116 38
12. 3.
10.8
10.7
11.0
26. g
24.9
Female 117 84 34-
28.7
TABLE 3.-MAJOR UNEMPLOYMENT RATE INDICATORS
Annual averages
January
Characteristic 1969 1 1968 1967
1960
Total (all civilian workers)_ - - - 3. 3 3. 6. 3. 8
Men2O years and over 2.0 121 2.3
Women 20 years and over 3. 5 3. 8 4. 2
Both sexes, 16-18 years 11. 7 1-2. 7 12. 9
White workers 3. 0 3. 2 3. 4
5. 5.
4.7
5. 1
14. 7'
4. 9-
Nonwhite workers 6. 0 6. 7' 7. 4
10. 2'
Married men 1.4 1.6 1. 8
3. 7'
Full-time workers 2. 9 3. 1 3. 4
Unemployed 15 weeks or more . 4 . 5 . 6
(2)
1. 4-
I Seasonally adjusted.
Not available.
PAGENO="0159"
Cl, -
2
-4
2
CD
w
Cr)
CD
C- C)
Cl) -
DC)
><
C)
DC)
CC-c,
C)
C)
DC) ~
~ C
CDl,CD C)
~3~3 ~
0~g-2 -<
C)
C,,
C) C)
CACI CC.-J-N) C)tC)C) ~
.~ ~N)WO)C) 0) ~
~clcN)cc- ~
0) 000~~ ~ (C ~-1 ~ (0 N) - (0 ~CO
Ill
C) (0-JCl) N) ~j C) ~ N) N)c- C) CO N) 000000
N) - N) ~ ~ ~ - - ~
* C)) ~ N?°. -~0?
00 N) 0)00 C) (c~ ~ (C) -J Cr) ~ C)0) ~
PAGENO="0160"
Cl) 3 cxi ~,i
CD
C m ~
.~ ::~: Cl, ~
~ ~
B
~-JNl~ DOCl4C-~-~
CO4~ CQ~D~~
- : I - - - -
~ 00 O~00(T0 ~ C~o~)0o4~ -
PAGENO="0161"
Measure
1965
1966
1967
1968
Compensation per hour, private nonfarm economy, all employees (4th to
4th quarter)
Real compensation per hour, private nonlarm economy (4th to 4th quarter).....
Average hourly earnings, private nonfarm economy (December to Decem-
ber)
Real average hourly earnings, private nonfarm economy (December to
December)
3.8
2. 0
3. 8
1. 4
6.3
2. 7
4. 8
1. 8
5.9
3. 0
5. 0
1. 8
`7.5
2. 7
1 7 3
1 2. 6
Real average weekly earnings, private nonfarm economy (December to
December)
Real spendable average weekly earnings (worker and 3 dependents)
(December to December)
1. 7
2. 2
. 1
-1. 0
- 6
(2)
`2. 0
`.8
TABLE 8.-ANNUAL RATE OF INCREASE IN WAGES AND WAGES AND BENEFITS UNDER MAJOR COLLECTIVE
BARGAINING SETTLEMENTS, 1965 THROUGH 1968
Type of measure
Annual rate of
increase (in percent) in set
concluded during-
tlements
1965
1966 1957
1968
1st-year wage adjustment
Wage changes over life of contract
Wages and benefits (equal timing)'
Wages and benefits (actual timing)'
3. 8
3. 3
3. 3
(2)
4. 8 5 6
3 9 5. 0
4. 1 5. 2
4.5 5.6
7. 5
5. 1
6. 0
6.6
Item
1947-66
1966-67
1967-68
Total private economy:
Output per man-hour 2
Outputs
Employment
Man-hours
3. 2
3. 7
. 9
.4
.
1. 6
2. 0
1. 7
.4
3, 3
5. 0
2. 2
1. 6
Farm:
Output per man-hour
Output
Employment
Man-hours
5. 9
1. 4
-3.6
-4. 2
12. 3
8. 6
-2.4.
-3.3
- 2
-1.3
-1.0
-1. 5
Nonfarm:
Output per man-hour
Output
Employment
Man-hours
2. 7
3.8
1. 4
1. 1
1. 0
1.7
1. 9
. 7
3. 3
5.2
2. 4
1. 9
Computed from least squares trend of the logarithms of the indexes.
2 Output refers to gross national product in 1958 dollars; man-hours based primarily on establishment reports.
TABLE 10.-AVERAGE ANNUAL RATES OF CHANGE IN OUTPUT PER MAN-HOUR, HOURLY COMPENSATION, AND
UNIT LABOR COSTS IN THE PRIVATE ECONOMY FOR SELECTED YEARS'
Item
1947-66
1966-67
1967-68
Unitloborcosts
1.7
4.4
4.1
Output per man-boor
3.2
1. 6
3. 3
Compensation per mon-hour
5. 0
6. 1
7. 5
Real compensation per man-hour
3.2
3.2
3.2
All rates computed from the least squares trend of the logarithms of the i
ndex numbers.
437
TABLE 7.-ANNUAL RATES OF CHANGE IN COMPENSATION AND EARNINGS
Preliminary.
2 Change of less than 0.05 percent.
Limited to settlements of 5,000 or more and, in 1965, 10,000 or more.
Not available.
TABLE 9.-AVERAGE ANNUAL PERCENT CHANGE' IN OUTPUT PER MAN-HOUR AND RELATED DATA, 1947-68
24-S33--09--pt. 2---11
PAGENO="0162"
438
Chart 1.
Inflationary Expectations Have Been Building Up
Since 1965
Percentage of
respondents
anticipating further
price increases 1'
100
UNITED STATES DEPARTMENT OF LABOR
BUREAU OF LAB~B STATISTICS
jj Four-quarter span, plotted at final quarter.
Souruns: Manufacturers and Retailers,
ccpyri~ho by Due erd Beedstteet.
Used by par-.issioe. Thestsntios nay
nutloeepauiredesithuuteyister
Censurrnrs. Uniusrsity of Michigan
CorsunrerSurnay.
Manufacturers
50
1953 1955 1960 1965 1969
100
50
Retailers
~~~fff
1ff
1953 1955 1960 1965 1969
Consumers
~//I
......L........_
I
I
100
50
1953 1955 1960 1965
1969
PAGENO="0163"
439
Chart 2.
The Role of Service Industries in Stabilizing Employment
The Share of the Service Industries in Total Employment is Increasing
Millions
50
40
30
Se-
~s
20
10 -
1948 1960 1968 1975
Stability in Employment is Enhanced by Growt
Percent Decline
3 -2
Actual decline in Nonfarm Employment,
h in Se
-1
rvice Industries
0 1
average of 4 postwar recessions
Estimated decline, weighted by 1968 proportions
of goods and service employment
[,_____________
Estimated decline, weighted by 1975 proportions
of goods and service employment
.
[
.~.
-
UNITED STATES DEPARTMENT OF LABOR
BUREAU OF LAFOR STATSUCS
Service Industries Maintain Employment During Recessions
Percent change in employment
1948-49 1953-54 1957-58 1960-61
.5% 0 45% ~5% 0 +5% `5% 0 45% 5% 0 +5%
Goods Industries - I. _________ ~ ::
Service Industries
Total Nonfarm
PAGENO="0164"
440
Chart 3.
Payroll Employment in Goods-Producing Industries
1957 to date
(Seasonally adjusted) MILI050
~~i~i:
1967 1968 1969 1970
Monthly data
UNITED STATES DEPARTMENT OF LABOR 1~e~~s&f ~up!eyrd ~rd urp~d f~rIy *n~kru.
Bureau of Labor Statistics 5nt~ D.t. er 2 rust rsnrrt r~ nrths~~ prrI!rsus~y.
Chart 4.
Payroll Employment in Service-Producing Industries
1957 to date
MILlIONS (Seasonally adjusted) otaroro
~L1dt1td~~~
~
:t~:::!: and utiltils ~t
~ ~
1937 1939 1961 1953 1965 1966 1967 1958 1969 1970
Quarterly averages Monthly data
UNITED STATES DEPARTMENT OF LABOR
Bureau of Labor Statistics Netr: Osts let 2 uvst rtr~t ~v~t s~sp~r
Quarterly averages
PAGENO="0165"
441
Chart 5.
42.C
:~
3t.t
~
Wholesale and retail trade
E
~c
-------
construct
-
on_
35G
-
~1
.-
-
-
-
-
--
-
-
r~
c~
410
L
-~.
~-~r~-4
390
300
37.0
36.0
.~
350
.LLLLLLLI.LL
ŁI.1~1.UJ.1~1~1~
LLLLLLLLL1.
LLU.LLILUJ
)
facturing
Hours of Work in Manufacturing, Contract Construction, and Trade
1957 to date
HOURS (Seasonally adjusted)
HOURS
Ov~;rtime Hour; in Maiu
1957 1959 1961 1963 1965 1966 1067 1968 1969 1970
Quarterly averages Monthly data
UNITED STATES DEPARTMENT OF LABOR
Bureau of Labor Statistics
Chart 6.
Unemployed Persons by Reasons for Seeking Work
1968 Annual Averages
UNITED STATE5 DEPARTMENT OF LABOR
PAGENO="0166"
442
Chart 7.
Unemployment Rates for Teenagers by Color
(Seasonally adjusted quarterly averages)
~954 to date
Rate
32.0
28.0
24.0
20.0
16.0
12.0
t.0
1954 1956 1953 1960 1962 1964 1960 1968 1970 1971
UNITED STATES DEPARTMENT OF LABOR
Chart 8.
Wholesale Price Indexes
UNITED STATES DEPARTMENT OF LABOR
SeeNTMaIIy Ad1I~ted
Latest DMa: J'~a~Y 1969 IPeIUUMyI
PAGENO="0167"
443
140
:::
125
125
115
~
] ALL~CE~""-~8%
~
A
~
~
~~AlIIt:s .S~
II Services
;n~~
!!
!!
FOOd ~
~
Nondurables Less FOOd
~.djab1e5~
1957-59 ~1C0
Chart 9.
Consumer Price Indexes: Commodities and Services
1960 1961
1962
UNITED STATES DEPARTMENT OF LABOR
1963
1964
1965
1966
1967
1968
1969
Seoscnally Adjusted
Latest Data: Dovetboe 1968
Chart 10.
Indexes of Average Hourly Earnings, Real Average Hourly Earnings,
and the Consumer Price Index-1957-59 Dollars
Annual Averages
UNITED STATES DEPARTI.TENT OF LABOR
PAGENO="0168"
444
chart ii.
Output Per Man-Hour, Total Private Economy, Farm
and Nonfarm, 1947-6 8
PAGENO="0169"
445
Secretary SHULTZ. You remarked on Secretary Wirtz and his nice
comments about me. I would respond in kind. I consider him a good
friend and very fine man. I hope to be a worthy successor. I thought
I might go through the written testimony and paraphrase it and then
respond to your questions.
I appreciate your comment about getting the statement late. It is
practically a throwback, I guess for me anyway, to the typical academic
professional meeting when you always get the paper too late to develop
real comments on it. But I am reassured by the fact that you have gone
through it., and I am very grateful to you for that.
My role is not that of economic forecaster today. That task has
already been performed by Dr. McCracken of the Council of Economic
Advisers. What I would like to do is examine the economic scene with
a special view of those matters of particular concern to the Secretary
of Labor, the questions of jobs and wages, labor relations, and man-
power policies.
I would like to focus my comments on two questions that seem to me
to be very important and necessarily high on anyone's agenda. The
questions are:
What steps can help bring the current excessive rate of inflation
under control without an appreciable rise in unemployment?
And second, in what ways can this effort be related to a widening
of economic opportunities and thereby contribute toward an end to
poverty?
Now, I view these two questions as closely connected. Inflation hurts
the poor, and so does unemployment. So somehow in the axes of these
two questions we need to develop an answer in a coordinated manner.
Let me address. myself to the first questioh and say that I believe
there is substantial evidence to support the hope that inflation can be
Chart 13.
Output Per Man-Hour and Real Compensation Per Man-Hour,
Total Private Economy, 1947-68
1947 1950 1955 1960
UNITED STATES DEPARTMENT OF LASTS . .
1965
1968
PAGENO="0170"
446
contained without sacrificing the high level of employment, that is
required if we are to attain a measurable degree of success in attacking
the problem of poverty. I might say that I recognize as an economist
that that is a bold statement. But I believe there is a lot of evidence to
support it.
And I rest for the moment on three principal points. The. first one
is that this administration, as Dr. McCracken indicated to you on
Monday, will work to reduce inflationary pressures gradually, not
abruptly.
It seems to me we can say that what we would like to do is turn the
1960 to 1964 period around. At that time, as you know, the effort was
to bring unemployment down in a gradual manner while not having a.
sharp increase in prices. And that was achieved. Now we find ourselves
with rapidly rising price level and low unemployment. It seems to me
our approa.ch should be to top out this rate of increase in prices and
get it turned around and pointed down again, and at the same time try
to maintain the low level of unemployment. And in a sense the earlier
experience, I think, suggests that this approach of gradualism, mild-
ness, but steadiness has some chance of working.
The second point is in a. sense an analytical one about the nature of
the economy and how it has developed. A growing proportion of
workers are now employed in industries that generally do not lay
people off as soon as a slackening in demand occurs. Here I point to the
well-known fact that the so-called service producing sector-trade,
transportation, utilities, finance, services, and government-is more
stable insofar as employment is concerned than the goods producing
sector-manufacturing, mining, and construction.
Thus, in 1950, 59 out of a hundred jobs outside of agriculture were in
the service industries. Ten years later 62 out of a hundred, and today
65 out of a hundred. By 1915 it will be 68 out of a hundred. So a very
large proportion of the new jobs as well as existing jobs are in this
sector.
I think chart 2 brings out rather dramatically the meaning of this
insofar as our chances of dampening inflation without having the rise
in unemployment is concerned.
Secretary SHDLTZ. You can see on the top line what has happened
during four post-war recessions in t.he goods producing industries. In
1948-49 there was a decline in employment of around 7 percent there.
Meanwhile the service industries actually grew a. bit in employment.
And you can follow that across the chart.
The second line on this chart or box is that a share of service indus-
tries in tota.l employment-you ca.n see how t.hat is increasing.
Then t.here is a hypothetical calculation in the bottom box, in effect
projecting t.he 1968 and then the 1975 proportions of services and
goods industries into the average decline in employment for these
four periods, showing the difference that it. makes.
So as an analytical point we have a shift in composition of the
economy toward more stability in the private sect.or. This stable
base, I think, gives us some hope t.hat the kind of outcome that. we
seek can be `attained.
Third, I point to the increased variety and growing quantitative
importance of policy instruments available, in addition t.o the tra-
ditional tools of fiscal and monetary policy.
PAGENO="0171"
447
I am going to concentrate in my remarks, as you would expect,
on the labor market and manpower area. But I would like to take
note of the fact in passing that there are a great number of other
matters of direct economic policy that are important here. I mention
particularly the antitrust field and the international trade field as
important ones.
On the manpower side there are three particular things, it seems to
me, to note as policy considerations in the sol~ution of this problem.
The first is that with the present unemployment, even though it is low~
there are great disparities in the unemployment rate by groups of
people. So one thing that manpower policy can do is work directly in
those areas where you have exceedingly high unemployment. That is
target No. 1.
Second, it is possible to direct these policies toward areas where
we have special shortages and try to build up our supply of labor in
these shortage areas to cool things down.
And third, we can direct our efforts toward improving the quality
of performance of the labor market as a market, and thereby reduce
somewhat the unemployment experience.
So these three things, I think, in the manpower area can be helpful
as matters of general economic policy.
I might just note in passing that Government manpower policy,
* from my observation, has an influence that is not limited simply to
what happens in Government programs. There seems to have been a
kind of rippling effect in industry. We see a lot of compa.nies~ for
example, doing things about the disadvantaged unemployed on their
own. This reflects their own feeling, but it also represents, I believe,
the influence of Government programs.
I don't wish to exaggerate the role that the Department manpower
programs can play. Obviously, they require a considerable period of
time to become effective, and alone they would prove powerless to curb
inflation. But together with an effective use of fiscal and monetary
policy, I think the manpower programs can help make possible a
gradual transition to a significantly lower rate of price inflation,
while maintaining a high employment economy.
Mr. Chairman, I would like to turn to a brief review of some recent
developments. I am trying to refrain from a description of statistics
here, and will pick out a few points that seem to me of special impor-
tance a.s we analyze the current situation and try to devise our policies
to meet it.
First, I will turn to the area of employment and unemployment. The
first point that I would make is that when you look at what. has hap-
pened smce mid-1965, a rather stunning fact emerges: the great im-
pact of the military buildup. We estimate that nearly 2.5 million
individuals since mid-1965 have been added to employment either in
the Armed Forces or in defense-related activities in this period. That
is 85 percent of the increase in male employment. So we have had a
b1g buildup here.
Looking at it from the point of view of the inflation problem~ we
see that there has been a big increase of people in employment. They
are receiving income from that employment and are able to demand
civilian goods for that income. But the nature of their employment
means that they aren't contributing anything to the production of
PAGENO="0172"
448
civilian goods. So you see the impact of that in terms of the inflationary
problem. Of course this fact points up for us the importance of post.-
Vietnam planning. This work, as you know, is under the leadership of
Herb Stein of the Council of Economic Advisers.
A second point in the manpower story is that when you look at the
employment picture you see very little impact of the fiscal restraint
that has been introduced. Perhaps you can see some reduction in the
workweek but I think you have to look pretty hard at these figures to
see any impact.
Next, I think it is significant to notice the substantial reduction in
the number of people who have lost their jobs. I think it is a mistake
to think of the unemployed purely in these terms, but at any rate, we
see a reduction of about. 40 perceiit in people who are unemployed be-
cause they have lost their jobs, as distinct from people who quit their
jobs voluntarily, and new entrants.
Chart 6 is an interesting one on this account since it shows unern-
ployed persons by reason for seeking work. You can see on this chart
the numbes of those who have lost their jobs. as distinct from voluntary
quits, and new entrants. This gives a picture of the composition of the
unemployed. . S
These data make clear that some unemployment arises when the
worker has freedom to quit in order to improve his position, freedom
to seek pa it-time rather than full-time work, and freedom not to take
the first job that is offered. One of the benefits then, of full employ-
ment-I think this is a benefit that shouldn't be underrated-is that
it makes it easier to exercise these choices, to shift jobs and to be selec-
ti ye. Quit rates are usually high when the job market. is tight and low
when it becomes less buoyant. Similarly, the number of new entrants
or reentrants may rise and fall with job opportunities.
rube next point I would like to make is that the current low overall
employment rate masks wide disparities. In some areas, especially
the married male supporting a family, unemployment is very low;
below 2 percent, and this is probably down to about the lowest frac-
tional rate of unemployment. On the other handi there are areas where
unemployment is quite high. And I think particularly the teenagers
deserve attention here. The unemployment, rate for teenagers remains
stubbornly high. The current teenage rate is significantly below the
rates for the first. half of this decade. But it has hardly changed in
the last 3 years: it has not shown the kind of improvement, that has
been experienced by adult workers.
The situation of the Negro teenager requires special mention. The
jobless rates for Negroes 16 to 19 years old was 25 percent, as against
ii i~icent for white youngsters. I might say that unemployment rate
for Negro teenagers has really not changed ver much in a decade.
it was high a long while ago, and it is still high. Negro teenagers have
rem ai ii edl virtually untouchedi by the recent employment redlUCtionS,
whereas their white counterparts have experieliCedi a substantial re-
duction in joblessness. As a result, the ratio of Negro-to-white teen-
ager unemployment rates has risen substantially in recent years. In
1954 the teenage Negro-to-white ratio was 1.4 to 1. By 1968 the ratio
had risen to 2.3 to 1. And Negro girls have faired somewhat worse
than boys.
PAGENO="0173"
449
I think in terms of perspective it is important to note the absolute
magnitude that we are talking about. Even with the high rates the
total number of unemployed Negro teenagers averaged about 200,000
in 1968. Furthermore, over one-third were seeking only part-time
work, mainly because they are still in school.
There is another aspect of this diversity that is brought out in a new
survey that is being conducted in the Department of Labor by the
BLS, the Manpower Administration, and with the Census Bureau
doing the data collection. This new survey is aimed at finding out more
about what is happening in the slum areas and will be a useful aclcli-
tion to our flow of information about employment and unemployment.
The first report is being released today and I want to call attention to
three of its findings.
Senator PRox~rniE. I would like to interrupt for a moment, Mr.
Secretary, to suggest that you are referring to the release of this
morning, Thursday, February 20, on the "Employment Situation
Surveyed in Slum Areas of Six Large Cities?"
Secretary SIrnLTz. That is right, sir.
Senator Piiox~rIRE (presiding). I ask unanimous consent that that
statement, which is brief, a little over four pages, be printed in the
record right after your remarks. (See p. 453.)
Secretary ST-ruLTz. Fine. Thank you.
First, and I wouldn't say these findings are surprising, we see that
high unemployment rates and low earnings characterize the employ-
ment situation of residents in these six slum areas.
Second, that the jobless rate for Negro workers in these areas is
higher than in other areas, 10.4 percent. But it is interesting to note
that it is also higher for other groups in those areas, such as Mexican-
Americans and Puerto Ricans. This tends to reinforce the point of
view that the difficulties shared by those living in these neighborhoods
affect more than a single racial or ethnic group.
It is also an interesting fact that while low incomes characterize
these residents, a sizable proportion reported earnings well above the
poverty level. This suggests to us that there is success as well as prob-
lems in those areas. We want to ask ourselves, can we learn anything
from the success that would be applicable to situations where we have
more problems.
rfhe current low national unemployment rates, while really en-
couraging, thus do not permit complacency. Instead they point to the
need for a variety of manpower programs to create work opportunities,
specially in an economy that might be growing at a slower pace than
that of recent years.
I will skip through the material on wage, price, and productivity
changes, noting, first, that the average hourly compensation of all
persons in the private economy rose by 7.5 percent in 1968, compared
to 6.1 perceut the previous year, and an average from 1947 to 1966 of
5 percent. This is a measure of the inflation on the other side. I
think it is important to note that this is not simply a collective bar-
gaining development, but that you see this increase broadly in the
economy in nonunion as well as union establishments. To put it an-
other way, it is essentially a labor market phenomenon rather than
a collective bargaining phenomenon.
PAGENO="0174"
450
Productivity in the economy as a whole rebounded last year to a
rate of 3.3 from `the low rate of 1.6 pe.rcent. in the prior year. Never-
theless, unit labor costs rose by about 4 percent in `the private economy.
If we put the productivity material together with the compensation
and price material and look at real hourly compensation we see that
in the first 5 years of this decade real compensation did not keep pace
with the advances in productivity.
Thus, labor's share of the total product. was reduced from 63 to 61
percent. But then the uncommonly large increases in hourly compen-
sation during the past 3 years have restored labor's share to approxi-
mately the 1960 level.
Wrlien we look at collective bargaining, it is good sport to speculate
on the future. We do have one fact about what is going to happen in
1969 that is of considerable importance. About 6.1 million workers
covered by collective bargaining agreements will receive deferred
wage increases this year averaging about 4.1 percent. Now, that is the
largest number of people who are covered by deferred wage increases
that we have had. It reflects the front-end loading in a number of the
contract negotiations. And of course it will have a dampening influence
on the average of collective bargaining wage increases, whatever the
1969 picture works out to be. It seems to me the 1969 contracts are
starting out with pretty high pitdi to them. But at any rate, there are
these 6.1 million at. the 4.1 percent level.
The cost-of-living clauses in contracts will result in some wage
increases. But it is interesting to note that there are limits on most of
them now. There has been an effort in collective bargaining to put
a lid on these clauses.
The prices of services, many of which have limited potential for
productivity increases, are likely to continue their rapidly rising trend.
The Department of Agriculture anticipates an increase in prices of
2 to 21/2 percent in food prices as compared to 31/2 percent from 1967
to 1968. That will serve as a retarding influence on t.he rate of increase
of t.he economy as a w-hole.
Let me turn now to the subject of manpower programs and their
relation to economic and social goals. The Nation's manpower pro-
grams have been primarily directed at human problems while their
economic effects got secondary consideration. They have been con-
cerned with opening opportunities for iersons disadvantaged by
tecimological change, economic downturn, or dislocation, poor and
discriminatory educational preparation, and other barriers to self-
supporting employment.. It. has long been recognized that each of these
programs has some economic effect. But their total economic impact
has never been gaged, even though the manpower programs now run
by the Department of Labor alone will total about $2 billion for fiscal
1969, and reach almost a million individuals. What has become clear
during the last decade is that the combined effect of these programs
can be crucial in reaching broad national economic objectives. His-
torically, economists have given only a passing nod to the possibility
that a better functioning labor market could contribute significai~tly
to the overall fiuiction of the economy.
This is no longer the case. The way we design and run our manpower
programs will, I believe, be an important factor in answering the
basic questions posed at the outset of this testimony.
PAGENO="0175"
451
I would like to point out four points of emphasis within the man-
power area.
The first is the importance of being sure that our manpower pro-
grams are targeted to reach these groups whose employment problems
are sizable and serious.
We talked about youth, particularly Negro youth. There is much
emphasis now in the manpower programs in that direction. But the
Problem persists. And it is serious, somewhat baffling. And it calls
sharp attention to itself.
But we are studying a variety of things that we think may be help-
ful here. There is a possibility of some shift in emphasis in the case of
the older, out-of-school teenager from enrollment in NYC programs
to enterprise employment training where they have better career
income possibilities. I think there is some possibility in having a shift
in emphasis a bit in the JOBS program run by the National Alliance
of Businessmen, and an expansion in coverage of that program, which
has worked very well.
It. seems to me, also, we should be giving more attention to the
whole Problem of the transition from school to work. WThile I have
not been one of those who has felt that you could look at the European
countries-and Sweden particularly gets a lot of attention in this
area-and transpose their programs to our much more complicated and
larger environment, we, nevertheless, can learn some things. It is par-
ticularly interestinQ~ to note that the youth unemployment l)roblems
are greater in the United States than they are, say, in *Japan, or in
the European countries generally. It is also important to recognize
that three-quarters of the unemployed youth are accounted for by
those who are newly entering or reentering the labor force in search
of work. This transition problem is an important and large one.
There are some things that we can do about that. WT0 can improve
the relations between the Employment Service and the schools. We
can expand the cooperative education programs in the schools. We
have an opportunity for a considerable expansion there.
Some part of the youth unemployment problem will be influenced
by what we do about the military draft. As new programs are devel-
opeci to meet the Nation's military manpower obligations, we should
be able to find was of removing the uncertainties which today make
some employers reluctant to employ young people with future possi-
ble draft. obligations hanging over their heads. This is an additional
burden on youth.
We are concerned also about seasonal problems, particularly in
construction. There are some things underway that should help us do
something about that problem. This is an area. where we want to work
aggressively.
Second is the importance of building sldlls that will increase the
productive capacity of the economy and improve its ability to meet
the heavy demand for goods and services which prosperity induces-
a demand which can lead, unless offset by output, to price rises.
The medical and construction areas are two that have severe short-
ages in them. The manpower programs need to be directed more into
these areas.
We intend to put more emphasis on upgrading. This builds skills
and can help in meeting labor shortages.
PAGENO="0176"
452
A third area that I want to comment on involves improved efficiency
of the labor market itself. There are some interesting developments
coming along in that field. One is the job bank that is now operating
in Baltimore, Md. A daily list of job openings in the area is run
through a con~uter and that list is made available to all the Employ-
ment Service offices. I am going to talk in a minute about national
or regional labor markets, but most jobs, of course, are found in a local
labor area. This important device should be some help.
In Utah we have the beginnings of a job-matching system that has
just been put into place. We are watching its development and trying
to learn from Utah's experience. I feel that it has national potential.
Now, I have been emphasizing the positive aspects of t.his subject.
But I want to add a note of caution. Arrangements on the part of an
individual to take a job and of an employer to put someone to work
involve personal considerations tha.t are not subject to computeriza-
tion and, indeed, these must be carefully preserved in a free and open
labor market. IVe must never allow ourselves to forget that the em-
ployment process fundamentally involves a human relationship, an
intense human search which may be assisted by a computer process.
There have been some experiments with mobility benefits. not to
direct people forcibly, but to open new opportunities on a voluntary
basis. These experiments are worth following and continuing, and
perhaps we can tie them into the growing body of information the
Department of Commerce is developing on growth areas of the Nation.
We are also working on the job vacancy data and hope to develop
a better system of job vacancies information.
I can't pass by this subject without taking note of the fact that
discrimination in employment continues to exist. It is important to
keep working on the elimination of arbitrary discrimination through
hiring standards irrelevant to job performance. More and more em-
ployers recognize this. Employers have had the interesting experience
of working with the hard core and being surprised at how well things
have actually worked out. This has had quite some impact on their
own thinking about what they do in the vestibule of employment in
indoctrinating people and bringing them into the work force.
Fourth, I want to call attention to the importance of cushioning the
human and economic losses that arise when workers lose their jobs
through no fault of their own. I believe our unemployment insurance
system is exceedingly important. We need to study it and improve it if
it is to play a fully effective role in combating economic and human
adversity.
Each of these four areas of emphasis involves mani- specific ac-
tions. Each action by itself is likely to have a small, often not easily
measured effect on the overall unemployment rate, particularly the
youth rate. But together they can have a sizable impact. They can
play an important part in efforts to combine high employment, and
a stable price level while augmenting our drive to put an end to
I think in the manpower area an important thing for us to do and
which we have been working on very hard, particularly Arnold
Weber, Assistant Secretary of Labor for Manpower, is to see if we
can't organize the management of this flow of funds better. And we
are working, as I say, very hard on that. We think the States, cities,
PAGENO="0177"
453
and towns deserve a more understandable and responsive Federal
partner. We hope to make major organizational improvements at an
early date.
Concurrently, a strong effort must be made to develop stronger re-
lationships within the pieseiit or any proposed program content in the
manpower field. As the President said in his message to Congress
yesterday:
One of the priority aims in the new Administration is the development by
the Department of Labor of a comprehensive manpower program, designed
to make centrally available to the unemployed and the underemployed a full
range of federal job training and placement services. Toward this and it is
essential that the many federal manpower programs be integrated and co-
ordinated.
I think this is a most important and serious responsibility.
As we work toward those objectives, we do so with the knowledge
that our manpower programs are coming of age. They have grown
to a size and scope that gives them strategic significance in our eco-
nomics as well as social policies.
This significance is enhanced under current economic conditions. A
strong job market makes it possible to move idle and underutilized
human resources into productive activity. The prospect that this cur-
rent high level of job demand will be a stable and continuing one
lends internal strength to the manpower efforts.
I welcome the growing attention of the Nation's policymakers and
of this committee to the contribution that manpower programs can
make, with the growing and proud realization that manpower matters
are now too important to be left only to the manpower experts.
(The news release referred to earlier follows:)
U.S. DEPARTMENT OF LABOR: OFFICE OF INFORMATION
EMPLOYMENT SITUATION SURVEYED IN SLUM AREAS OF Six LARGE CITIES
-Workers living in slum areas have an unemployment rate 21/~ times higher
than tile national average.
-Unemployment among teenagers is especially severe: 30 percent of slum
youths are unemployed.
_Wreekly earnings under $65 were reported by 1 out of 6 full-time workers.
These are the highlights of the first Urban Employment Survey, a new
data collection program established by the Department of Labor to examine
the employment situation, barriers to employment, attitudes and motivations
of slum area residents. Included in tile survey are the Concentrated Employ-
ment Program areas of Atlanta, Chicago, Detroit, Houston, Los Angeles, and
New York City.'
The survey is being directed by the Bureau of Labor Statistics with the
cooperation and financing of the Manpower Administration. Tile Bureau of
the Census is collecting the information.
The first results of the Urban Employment Survey cover basic labor force
information for all six slum *areas combined for the 3-month period July-Sep-
tember 1968. Similar information covering a 6-month period for the 6 indi-
vidual areas will be published later. Additional data for each area will become
available later this year.
Here are additional findings of the Urban Employment Survey.
1 The survey area in New York City includes additional target neighborhoods outside the
CEP designated areas. The balance of the cities of Atlanta and Detroit are also included in
the survey.
24-833-69-pt. 2-12
PAGENO="0178"
4M
Pop ulation.
Approximately 82.5,000 men and women 10 years old and over resided in the
selected shun areas of the six cities. Of the residents, 68 percent were Negro;
the remainder were about equally divided between Spanish-American and other
white persons.
Educatio~va.i attainment
Workers living in the Urban Employment Survey areas had not completed
as much schooling as their counterparts in the Nation as a whole. Slum area
workers 18 years and over averaged 10.7 years of school completed, compared
with 12.3 years for aU the Nation's w-orkers and 11.1 years for Negro workers
in March 1968. Only 37 percent of the workers in these areas. compared to 60
percent of the workers in the Nation as a whole, had completed 4 years of high
school or more. About the same proportion of Negro and white workers in the
survey areas had completed high school.
Adult women workers (25 years and over) living in UES slum areas were
better educated than men. The proportions who completed 4 years of high school
or more were 39 percent for women and 30 percent for men. In the Nation as
a n-hole, about three out of five of both adult men and n-omen w-orkers had com-
pleted at least 4 years of high school.
Labor force participation and elnployn7 cot
During the third quarter of 1968, 59 percent of the persons 16 years and
over living in the IJES slum areas were in the Labor force-working or look-
ing for work. That was about the same as the national proportion. Adult women
in the survey areas were more likely to be in the labor force than n-omen in
the Nation as a whole. In the case of adult men, the labor force participation
rate n-as lower in the slum areas than nationally.
An unusually large proportion of the persons not in the labor force re-
l)Orted that they wanted work; 2.3 percent of the slum resident who were not
in the labor force reported that they wanted a job "now." as compared to 8
percent of the nonparticipants nationally. More than half of those in slum
areas n-ho w-'anted a job indicated that they intended to look for work during
the next 12 months: this compares with 78 percent in the Nation as a n-hole.
Nearly half of the men in the Urban Employment Survey areas who were
not in the labor force but n-anted a job, listed health problems as one of the
reasons they were not looking for w-ork. Health problems and family respon-
sibilities were the main reasons given by women for nonparticipation.
About 80 percent of the employed persons at work in TIES areas were working
full time (35 hours or more weekly) during the third quarter of 1908, less than
the national average (86 percent). Of those who were working part time, most
did so voluntarily, although others wanted but couldn't find full-time jobs.
About 1 out of every 5 slum area part-time workers was on short hours because
of circumstances beyond his control. such as slack work, material shortages. and
repairs to plant and equipment. That was about the same proportion as in
the Nation as a whole.
lncinpioynient
At 9.5 percent. the unemployment rate for workers in the TIES slum areas
n-as more than two and one-half times the national average (3.0 percent) during
the third quarter of 1908. The jobless rate for Negro workers in the TIES slum
areas w-as 10.4 percent compared with 0.8 percent for all Negro workers in the
United States. White workers in the TIES areas and in the Nation as a whole
had unemployment rates of 7.2 and 3.2 percent, respectively.
Teenagers residing in these slum areas were particularly affected by unem-
ployment. The teenage unemployment rate was 30 percent in the TIES areas;
this compares with 12.2 percent for all teenagers and 24.4 percent for Negro
teenagers in the entire country. Jobless rates in these slum areas were 5.2
percent for adult men and 9.3 percent for adult women, compared to respective
rates of 1.9 and 4.0 percent for all adult workers in the Nation. Heads of house-
holds had an unemployment of 4.2 percent for men and 8.0 percent for women,
about three times the corresponding national averages.
Work eaperience
One of the best measures of the employment problems faced by residents
of slum areas is their work experience over a full year. This contrasts with the
labor force status information described earlier which relates to an individual's
PAGENO="0179"
455
employment and unemployment experience during the calendar week immediately
prior to the interview.
Nearly 110,000 persons living in the UES areas-about one out of every five
who worked or looked for work-were unemployed at some time during the
12 months prior to the survey week. This contrasts with about one out of
every eight in the Nation as a whole in 1967. Negro workers were more likely
than white workers to be jobless at some time during the year. About one out
of four slum residents who experienced unemployment did iiot work at all dur-
ing the year; this was more than twice the proportion in the entire Nation.
Of the 110,000 persons with some unemployment during the year, one-fourth
were out of work for a total of 15 or more weeks-about the same proportion
as in the Nation as a whole. For men 20 to 64 years old who were heads of
households, the proportion was much higher-38 percent. Another one-third of
the unemployed experienced a total of 5 to 14 weeks of joblessness. Thus, well
over half of those who experienced some unemployment during the previous 12
month period were out of w-ork 5 weeks or more, slightly higher than the propor-
tion in the entire Nation.
Earnings
About 1 out of 6 full-time workers from the UES areas reported earning less
than $65 a week, or about the equivalent of the current Federal minimum wage
for a 40-hour w-eek. Women were four times more likely than men to be among
the low earners. There was little variation in the proportion of Negro and
white workers earning less than $65 weekly.
Although a large proportion of slum area workers received low earnings,
many other UES residents had substantial weekly earnings; about one out of
seven full-time workers earned $150 or more a. week. Median weekly earnings
for all full-time workers were $92, with men averaging $106 and women $74.
Median earnings for all workers in the UES areas (including both full- and
part-time workers) were $85 a week in the third quarter of 1968. About 1 out
of 4 earned less than $65 weekly, while more than one out of three workers earned
more than $100 a week.
Family income
A disproportionate number of slum area residents are members of families
with very low yearly incomes-which include earnings, welfare payments, rents,
and money from all sources. About 20 percent of the UES area families with
4 persons or more reported incomes of less than $3,500 during the previous 12
months. This level of income approximates the "poverty line" developed by
the Social Security Administration, which takes into account such factors as
family size, number of children, and farm-nonfarm residence, as well as the
amount of money income. On the other band, nearly one-third of these families
had incomes of $8000 or more. There was little difference in the proportion of
white and Negro UES area families with that level of income. The median annual
income for all UES families was $5,400, compared to the 1967 U.S. average
(median) of $8,000 for all families and $5,100 for all Negro families. Although
median income levels were significantly lower than the U.S. average for families
in the slum areas, about 1 out of 4 slum area families received $8,000 or more.
Unrelated individuals residing in the UES slums reported a median annual
income of $2,500. Two-thirds of them received incomes of less than $3,500 during
the 12 month period.
Future T]ES Reports
Tl1is preliminary release has furnished basic labor force information for the
six poverty areas combined, although there are significant variations in the
economic and social characteristics of persons residing in the separate UES areas.
As the UES sample is accumulated to a satisfactory degree of statistical re-
liability, the data for each individual UES area will be published. Subsequent
reports w-ill also provide additional information on employment and unemploy-
ment as w-ell as detailed data on job seeking methods, work history, job mobility,
migration patterns, job skills, transportation problems, and attitudes towards
w-ork.
Senator Puox~rinu (presiding). Thank you, Mr. Secretary, for a
thoughtfu', intelligent, and I think most encouragmg statement.
Mr. Secretary, do you envision your job as being the man t.o speak
vigorous'y in the counse's of the administration for the migrant
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456
worker, the unemployed, or those. on a minimum wage, the ~ is that
part of your job?
Secretary SIIULTz. Yes, sir.
Senator PROXMIRE. This has always been a lonely job in every ad-
ministration. And it seems to me that it is most important that a man
in your high position, and with your intelligence and ability to articu-
late the position, should envision that very strongly.
As I see it., the way you spell this out, you say that you feel that
stability in the service inclustries-which you point up very well, I
don't know of anybody who has emphasized this as clearly and con-
vincingly as you have this morning-better targeted manpower por-
grams, better and more efficient labor markets, the use of something
like the Baltimore and Utah job matching approach-these are the
kinds of things that you feel would be helpful. Now, yesterday the Sec-
retary of the Treasury said the administration would persist in eco-
nomic restraint until there are unmistakable signs that inflation is
under control, or at least inflation is no longer as serious a threat as it
has been. And his was one of the most helpful statements we had in-
dicating what the administration has in mind. He indicated that in
1967 there was a. mistake on our part. In 1967 in the first half, growth
slowed to about 1 percent in real terms. Unemployment went up at
one pomt over 4 percent. Now, according to Mr. Kennedy, this would
not be sufficient evidence of a slowdown in the economy to indicate
that we should let up on restraint, we should still persist under those
circumstances. This would mean that if we do that, unemployment for
Negroes would exceed 10 percent., and it would mean, of course, that
in the view of many people, including many Members of Congress, we
would have a situation in which there was a. stagnation in the economy.
Now, would you concur with Mr. Kennedy, or would you counsel the
President against such a price for continuing the fight on inflation?
Secretary SHuLTZ. I believe, as I have, said in my statement, that our
initial objective should be to top out the rate of increase in prices; to
get the rate of increase moving down from its current roughly 5 per-
cent level; down to 4 percent, and so on. If we can top it out and get
it moving downward, that is a major achievement. What we should be
doing, is working toward that end while watching very carefully the
employment situation.
Senator PROXMTRE. Of course, if we can do that we would all like
it. It is very appe.aling the way you put it. the contrast with the early
sixties, where we had a situation where we were able to keep stable
prices and reduce unemployment. And you say we ought to keep stable
levels of low unemployment and work on getting prices down. We
haven't ever been able to do that before.
You reject one device which the administration seemed to think
was a very useful one. John Sheehan made a study which I thought
was a most impressive study, "Wage-Price Guidelines." WTe had hear-
ing on it before this committee with four experts all agreeing that if
you had the right kind of fiscal and monetary policy, that these are a
useful adjunct, certainly not the whole show, but certainly useful. And
you reject them out of hand, I take it. And, yet, you somehow feel
somewhere, some way, we can maintain this low level of unemploy-
ment and overcome inflation. It seems to me that to rely on the very
important but quite limited program you suggested isn't very
encoura.ging.
PAGENO="0181"
457
Secretary SHULTZ. WTell, I agree with you that the problem is a
tough one, and that it hasn't really been resolved successfully any-
where. I believe that it is extremely important to keep your eye on this
unemployment picture as well as on the inflation side of life.
Senator PRox~rIRE. You say keep your eye on it, but you are going
to be the man in the administration who under these circumstances is
going to say, we simply shouldn't pay this price. This is something
that we simply must not let. unemployment do, rise significantly.
Secretary SnuLTz. I don't expect that my voice or my concern about
unemployment will be the only one by any means. The President cer-
tainly is conscious of this. Mr. Kennedy is very conscious of it.
Senator PRox~iInE. But you are one of the most vigorous proponents
of providing adequate growth in employment.
Secretary SiiuLTz. Well, I expect to have equally vigorous col-
leagues.. .
Senator PRox~rIRE. I don't want to put ivords in your mouth. I take
it you do reject w-age-price guidelines. I heard you on television say
so. I just want to be sure that I am not speaking out of turn. Do you
feel that wage-price guidelines are something that we should reject?
Secretary SHULTZ. Yes, I do.. . .
Senator Pnox~rnm. .WTould you go so far as to say that we shouldn't
use President Kennedy and President Johnson's way, which many
peoi~e feel is very., effective,, with the President speaking out. vigor-
ously when prices are increased, such as in the steel industry?
Secretary SHULTZ. I don't believe that the Preside.ntia.l efforts have
been all that effective.
Senator PR0XMIRE. In other words, you don't think he should do it?
Secretary Si-rnrirz. I think as a practical matter the guideposts did
not work in this country. They have been tried in one form or an-
other in practically all of the democratic countries of the world and
they haven't worked anyw-here. I think that it is in some ways, sir, a
deceiving kind of policy to follow. As you point out, what I have
suggested as an approach to resolving this problem is certainly not
sure fire, on the other hand, I think the experience of the guideposts
and similar arrangements-income policies of various kinds-while
they have not worked, they have led people to feel that they would,
and thereby relax their attention on the monetary, fiscal, manpower,
and other kinds of activities that are the fundamental ways to get at the
problem.
Senator PRox~rIRE. But do not the statistics show that in the period
from 1962 through 1965, those 5 years, we had dropping unemploy-
ment and we did not have a sharp increase, in the cost of living, and
it was an unusua.l performance on the basis of historical experience?
There may have been many reasons for it. But wage guidelines were
one of the policies that the past administrations pursued that seemed
to help. They feel so strongly about it that they recommend that we
still try to proceed with it.
Secretary SHnLTZ. My view on that., if I can just take a moment to
develop it, is, first of all, to be dubious that the guideposts did play
much if any part in what I agree with you was a good performance.
Second, I feel that the guideposts did quite a lot of damage when
they blew up. They probably contributed to a higher level of wage
settlements than we otherwise would have had, and greater strife
PAGENO="0182"
458
on the collecting bargaining scene. The airlines example is a key one.
I think the guideposts contributed there to a higher settlement than
otherwise would have taken place, and to a longer strike.
In addition, the guidepost philosophy led the Government into what
I would regard as a highly undesirable type of behavior, with the
President, the Council of Economic Advisers, and various Cabinet, of-
ficers calling people in from industries to discuss their pricing. We
have an antitrust law that says that companies shouldn't get together
and conspire about pricing. In the fact of that the Government calls
people in and says, let's get together, boys, and have an agreement
about prices. It seems to me that that is antithetical to the kind of com-
petitive economy we want to promote. So my view is that the guideposts
lead us into no end of trouble. Furthermore, they are discriminatory.
Senator Pnox~rIRE. You see, the difficulty is that in some major areas
we don't have competition, and we know that Antitrust will take many
years to get it. And we probably will never get it in steel, nobody can
pretend that pricing in steel is competive. And nobody can
pretend in some of these other areas-for example, in automobiles,
where you have three companies that dominate-that pricing is as
competitive as it is in many other areas. Under these circumstances
there isn't any question that you have administrative decisions that
have a profound effect on prices and on the price level. And of course,
these are bellwether industries that do affect others.
I am sorry, if you want to proceed. go ahead, because of course you
are the witness. But -there are other things I want to get to. But I can
do it later. But go right ahead.
Secretary SHULTZ. I wanted to follow along with your comments
about steel and automobiles, because I think they are good selections
from the administered price standpoint. But I point, out that in 1)0th
cases you have had quite an impact of competition. The picture of
steel prices in the period since, say roughly 1060, is a very different
one than the picture prior to that. date. And I think the reason is
perfectly clear.
Senator PRox~rIRE. Imports.
Secretary SHt~LTZ. Imports is Part of it. and competition from other
materials is the other part. So it. seems to me that. the steel industr
has been locked in a. competitive vice, and that. this competition has
resulted in relative stability of steel prices compared with the earlier
period: they have gone up, but. not. anywhere near like they had been.
The reason for that. was not presidential jaw-boning. not calling the
companies in and giving them the word. but. competition.
Now, in the automobile case I think that even there the imports of
foreign cars as well as product type competition had an impact. It.
was well know some years ago that. the Big Three auto makers dicln~t
want to make small cars. But here they are making them. Why? Well.
George Romnev put'them on the spot with the Rambler, as you well
know.
Senator PROXMIRE. In Wisconsin.
Secretary SHULTZ. In lViseonsin. The foreign imports also put them
on the. spot.. and competition forced them into the smaller cars, whether
they liked it or not. So I think that. competition "and `supply. and de-
mand factors are going to he the basic determinants.
Senator PR0XMIRE (presiding). Senator Jordan?
Senator JORDAN. Thank you.
PAGENO="0183"
459
Mr. Secretary, I want to commend you for what I regard as a very
fine statement.
First, I should like to ask a question that Senator Javits would
have asked if he had not been called to another committee. There has
been a great deal of interest recently in improving the Government's
ability to deal with strikes in industries strategic to the economy. Do
you have any proposals to deal with national emergency strikes, and
does the administration contemplate any recommendation? Do you see
any objection to congressional hearings on this subject?
Secretary Sm.iLTz. Let me take the second question first. I am very
new to the WTashington scene. But I sense that it would be out of
place for me to comment on the appropriateness or the inappropri-
ateness of congressional hearings about anything. That is Congress'
business, and I will stay out of it.
But as fa.r as the issue itself is concerned, the President, I think,
has spoken publicly on that.. We said that we are concerned about that
area. And we are studying it. And we will bring recommendations to
the Congress and state our views on that subject.
Since we are just beginning, I don't have a program to present
to you at this time. But there are various kinds of things that might
be considered. Most of these are very well known but it may be that
we can think of something that hasn't been thought of before. At the
same time, I think this is a question of what can you put together at
this particular moment that will improve matters. And I think there
are, myself, some things that can be done that would improve our
ability to handle these emergency strike situations.
Senator JORDAN. Do you think the administration will have more
to say about it. at a later date?
Secretary SHULTZ. I am sure we will, sir.
Senator JORDAN. When the Council of Economic Advisers appeared
before us on Monday, Mr. Secretary, they stat.ed that the rapid flower-
ing of new manpower programs in recent years has created an un-
manageable system. You deal with that shbstantially in your state-
ment. And you remarked that there was going to be a great effort to
consolidate manpower training programs, and I commend you for
that. I think it is a step in the right direction. What exact plans do
you have, for instance, for assimilating the Job Corps into your Labor
Department, and how will you change it if you do?
Secretary SHTJLTZ. First of all, sir, there is the problem of a strong
administrative structure for managing the manpower programs now in
the Department of Labor. And as I said in my statement, we are
working on that very actively, developing our own ideas, and consult-
ing with all of those we know who are interested and knowledgeable
on this subject.. WTe have ideas but we haven't. firmed them up in our
minds. We are engaging in genuine consultation. But I hope that by
the end of the month we will have firmed these ideas up, and very
soon we will have an organiza't.ion~ml structure that we think will be
simpler and more manageable. And we will concentrate our staff in a
more effective way. and in general it will give us a stronger stance.
Now, so far as the ,Job Corps is concerned, this is something that
will be coming into the operating sphere of the Department of Labor
in July. Our intention at the moment-and of course, we are really
just getting into this-but. our intention is to bring the Job Corps into
PAGENO="0184"
460
the Department as an operating entity, and to work with the current
arrangement of the Job Corps and come to understand it. As we go
along, then, we will try to see. where we can add to the effectiveness
of the Job Corps with resources in the Department, and at the same
time add to the Department's effectiveness in its current programs by
drawing on things going on in the Job Corps. We will see how this
effort can fit together as part of a comprehensive manpower program
with the other things we are doing.
The Job Corps has certainly had its share of criticism, and I expect
some of it was deserved. At the same time I think it has had some
things to be proud of. It. has dealt with the difficult cases. And I think
that that. is something to be proud of and to keep your eve on.
The concept of the residential center is part of the whole picture
of manpower program. and I think it is a good concept. We certa1nly
want to keepthat.. They have done. a. good job inmany cases involving
the private sector in the operation'of the Job Corps. and that aspect.
of it has been positive. At the same time I `think there are ways in
which we can help improve the operation of the Job Corps. particii-
lan getting people. on the job, and trying to get. costs down.
So that this is our approach toiL sir.
Senator JORDAN. lou will.try to relate it more directly to placing
those men after they have completed the course and making them em-
ployable. and finding jobs for them in the private sector?
Secretary SI-ruLTz. That is `the idlea. `And we think that that aspect
of it will be. improved.
Senator JORDAN. The statistics about unemployment are always con-
fusing. Mr. Secretary. Even though we approach an average of about
~ percent of unemployment, which is relatively good, yet. as you so
ably pointed out in your statement, there are many soft. spots in this
statistic, the fact that with respect to certain teenage groups the un-
employment runs as high as 18 to 20 percent and higher. which inch-
cafes that we do have a real problem in this area.
And that brings up the question of dropouts and what we can do
aI)out it.. Several years ago I was privileged to serve on the subcom-
mittee of the Committee on Labor and Public Welfare which had to
do with manpower problems. And at one time we had a panel of Swecles
before. that committee, a panel of three people. one representmg gov-
ernment~ one representing the labor unions, and one representing pri-
vate. ~ect.or. And I asked them, "What do you do in your country about
the dropout problem?
And they saidl, "We don't have a dropout problem, we don't have any
word for dropout. We keep these youngsters in school until they are
emnl ovable."
Of course, I can appreciate that what. they can do in Sweden might
not work here. But it does point the way. it seems to me, toward a
greater effort in that direction to try andl keel) these youngsters in
school until they are employable. Do you have any comment on that?
Secretary SHULTZ. I think you are directing your attention to a very
important point. I believe this whole subject of the transition from
school to work is one we should concentrate a lot of our attention on.
I touched on a. few things in my testimony about what we may do
with the Employment Service, what we may do with the cooperative
programs in which young people ~1ho are in school work on part~tirne
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461
jobs and gradually make that transition. I think tl1e shifts that have
been made in vocational education should help bring that area of ac-
tivity into this field more effectively. There are a number of ways in
which it seems to me we can work on this. And I agree with you that
it is a very important thing to work on, and get people started in the
labor market the right way. The fact that in Sweden and in most Euro-
peai~ countries, and Japan, they don't have this pioblem suggests that
somehow or other it must be that there are things we can learn and
do that will enable us to improve on our performai~ce.
Senator JORDAN. I hope so, because that was a revelation to me. One
country has apparently solved the problem. But they don't have the
problems we do in that respect. But they certainly worked out their
own solution for it. And I hope we can borrow some pages from their
experience and maybe adopt them to our use here.
Secretary SHULTZ. I hope so. It is always interesting in international
conferences on this that most country representatives go to the confer-
ence with questions, and before long the Swedes are always giving the
answers.
Senator JORDAN. Thank you, Mr. Secretary.
Senator PROXMIRE (presiding). Mr. Reuss?
Representative REuss. Thank you, Mr. Chairman.
And welcome, Mr. Shultz. And thank you for a. very intelligent
and humane statement.
I don't find anywhere in your statement an estimate of the number
of people who will be unemployed by the end of this year as a result
of the administration's demand killing programs. Did I overlook
something? Do you have one in here?
Secretary SHULTZ. No, I don't..
Representative REuss. Then I think we will have to look at what
the chairman of the Council of Economic Advisers said the other
day when he testified that unemployment in the first 6 months of this
year will-and here I am reading from his statement-will rise
slightly, and then in the second 6 months of this year it will continue
to rise. And he says that unemployment at the end of the year would
still be below 4 percent. But the implication is that it will not be very
much below, let's say 3.9, it is now 3.3, that is 0.6 difference, which I
translate into human terms at something between 300,000 and 500,000
people who by the end of the year will be walking the streets looking
for work. Do you find anything erroneous in my arithmetic
Secretary SHuLTZ.I am sure your arithmetic is accurate.
I said in my statement that I was not here as a forecaster, and I guess
I mean that in two senses. One is tha.t I haven't tried to make this kind
of forecast. The other is that I notice. that people who are renowned in
the forecasting business are often wrong. For example, the Wash-
ington economic community all felt last fall that we should be pre-
paring for a real recession which they were predicting as a result of
the surtax. You may remember the testimony that was given by the
past Secretary of the Treasury and the Council of Economic Advisers
about the surtax, and how important it was, and tha.t somehow or
other it was a life and death matter to the economy. It was going to
change everything around, and so on. Well, that hasn't turned out
to be iight.. So my approach to this is to say, well, let's use these
fiscal and monetary tools. I am sure it is important to forecast and
PAGENO="0186"
462
look at the implications, of what is going on and try to do that.
But also let's keep our eyes very much on what is going on and what.
we see, and try to adjust ourselves to the situation as it emerges.
Representative REtSS. I don't criticize you for not. forecasting.
Let's ou and I leave the forecasting to the Council of Economic Ad-
visers, and stipulate that. the blunt arithmetic seems to work out at.
300.000 to 500,000 unemployed.
Your excellent study of unemployment in slum areas of six large
cities furnishes a clue as to who the unemployed will be. And it
wouldn't be white Anglo Saxon Protestants in any large number.
So that. I would envisage a very, very serious situation.
Which now brings me to my point. Is there any reason why you,
as Secretary of Labor. cannot make an all-American try at finding
jobs by structural methods for those 400,000 people who are going
to be thrust out of work, by a combination of training and payment
during the training period, if a job itself cannot be created in the
private sector by getting the Nation some of the automobile mechanics
and TV repairmen which it obviously needs, and in the public sector
by providing the hospital orderlies, the park and recreational attend-
ants, the municipal waste collection service employees that are so
palpably needed? What is the hangup here? It seems to me solely
money-which you could get by plugging a. few tax loopholes. Why
don't. we get at this, why don't. we say that we are not going to have
any more unemployed than 3.3 percent. and that the Department. of
Labor will find jobs-or the equivalent in human and monetary value
of jobs-for those people who step up to answer the call of the Council
of Economic Advisers for 400.000 new unemployed?
Secretary SH~LTZ. I don't think that is a fair way to put the Coun-
cil's position.
Representative R.EvSS. That is t.l1e result, though, isn't it? I am not
saving that there is anything wrong with the posit.ion that the demand
method of making jobs has for the moment seemingly, particularly
if von throw out wage price guideposts, run its course, and therefore
we have to pursue it as a structural problem. And my question is, is
there any reason why we can't solve it. on a structural basis?
Secretary SHm~~Tz. The fact of the matter is that there has been very
little decline in unemployment connected with the inflationary period
that has gone on since 1965. There has been some. The last 2 months
have showed this 3.3. but it has been running in the neighborhood
of 3.5. 3.7, along in there. There was not much more mileage in the
piling on of demands that we noted here.
Representative REuss. True. But when we look at it the other way,
sir, it seems to me that. turning off the demand spigot will create un-
employment. And my sug~estion is not. that we don't get a little tighter
in money and fiscality, but that we pick up the unemployed in a
humane way by some sort of concentrated public-private employ-
ment program in the appronriate centers-and you pinpointed them
very well-because a manfrom Mavs wou1d have a terribly difficult
time sPeing why this country should sit. still for 400,000 new unem-
ploved.
Secretary SHULTZ. Well, I hope that the burden of my testimony
has supported in a broad way the point that you are making, namely,
that we should conceive of manp&wer nolicies as part of a coordinated
set of economic policies. We should be using manpower policies, as
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463
we have discussed to reduce the unemployment rate of the Negro teen-
ager, for example, where the unemployment rate is extraordinarily
high. The impactof that on the average is to bring the unemployment
rate down, whatever it is. If we are successful in reducing this very
high rate to something lower, we will be using these manpower policies
in a coordinated fashion as a. matter of economic policy. I think it is
only recently that the scale of manpower policies has approached the
level at which it is realistically possible to conceive of it in this way.
Maybe the scale isn't quite large enough, but it is quite large now. And
if we can manage it properly we can probably make some important
contributions in the overall economic policy area.
Representative REUSS. What I am saying, though, is that your ad-
ministration comes in and tells us in effect that the scale of these man-
power programs falls short, and that we are going to have to sit still
for some 400,000 new unemployed. I see no need for this. I would think
that the course of wise statemanship would be to augment the scale-
if it costs a billion or two, find it overnight by plugging tax loopholes,
or a number of `other ways-
Secretary SHULTZ. What particular tax loopholes do you have in
mind, sir?
Representative REUSS. See the Reuss 13-point program-oil deple-
hon, the very inflationary 10-percent investment credit, hobby farms,
accelerated depreciation of slum property-I think if you put your
active mind on it you could improve my program and make it a 20-
point program. But anyway, we are talking about just a fraction of
the revenue that would raise. And I don't see why the job of the Sec-
retary of Labor within the total team is not to be the standard bearer
of a program which would take care of~those 400,000 upcoming un-
employed by an expansion of these excellent programs that we now
have on the books, and which I am confident are in humane hands
under your administration. As I said, I think the tone of this paper is
fine. The only thing' is, you leave out the `arithmetic. But the Council's
arithmetic says, as I read it, we are going to have 400,000 more un-
employed by the year's end. Well, the unemployed are going to have
great difficulty in figuring out why the Nation leaves them high and
dry, why we couldn't have found a billion dollars or so, or whatever
it would cost, to get jobs, or their equivalent, for them.
Secretary SJIULTZ. As I read the Council's testimony, they did
sort of throw the ball in part to manpower programs, and pointed this
up. As I read the President's message yesterday, he also pointed up the
importance of regarding the manpower area as one to be made more
comprehensive, to be coordinated in a. better manner, and in general
to be made more useful in the way that you are suggesting.
Representative REUSS. The fact he is shifting the Job Corps from
one agency to another, doesn't raise the level of jobs at all. What is
needed, I think, is more money spent on manpower training and job
programs. Mr. Moynihan's residual employer philosophy. And it seems
to me that we ought at least to,shoot. at not creating any more unem-
ploved than we now have. We have a very fragile social situation as it
is. I think it is a very poor time to throw 400,000 people out of work.
My time is up. May I ask you to do this. Would you file at this point
in the record, at my request, the dimensions of a Department of Labor
program desigiied to sop up the unemployment caused by the slowing
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464
down of demand. WTe. have quantified this as something like 300~000 or
400,000 people by the end of the year. What would be necessary in ex-
penditures to have a. conc.entrat.ed public~ works program, a subprofes-
sional employment program, a. business-Government manpower train-
ing program? I am sure that it can be. done. And I think it would be
very helpful to the Congress if we knew how much it would cost..
Would you be able to have your excellent people with the sharp pencils
work out something like that. for us?
Secretary SHULTZ. Yes; certainly, we will make an effort to provide
that kind of information. I would say that. it. is not simply a. matter
of sharp pencils. I think it. is a. hard problem to grapple with in prac.-
t.ic.al terms. It is easy to kind of conceptualize it. and intellectualize it.
I have lots of numbers here that I didn't include in mv testimony that
in part go to your question. But the reason I didn't use them is that
they are difficult and uncertain to work with. You have to ask your-
self, for example, how many slots, as the saving goes around Wash-
ington, do you need to create in order to, let's say. get one person out.
of unemployment? The figure that it takes has a great range of error
in it., I find. I believe we need to study that more closely and get a. bet.-
ter understanding of how well you can bring that number under some
control.
So I don't think it is just. a. matter of going back to the t.oolroom
and making a few calculations to come up with the figure that you
are looking for. I think it is a rather difficult. problem, but it is just. the
kind of problem that I feel we should be working on, a.nd that. is part.
of the process of thinking through the potential economic policy im-
pact of the manpower area..
So I welcome the quest.ion. But. I hope you won't expect an answer
clown tomorrow.
Representative RE~SS. No. But with whatever methodological ca-
veats von need, tell us what we need to do and how much it would
cost-unless it is your conclusion that it is impossible by any stretch
of statesmanship to employ the 400,000-odd people who will be thrown
out of jobs. And I am sure you won't come up with that.
(The Labor Department subsequently supplied the following:)
The basic question, raised by Representative Reuss. was to file a statement
indicating-
the dimensions of a Department of Labor program designed to sop up the
unemployment caused by the slowing down of demand. We have quantified this
as something like 300 to 400,000 people by the end of the year. What would be
necessary in expenditures to have a concentrated public work-s program, a sub-
professional employment program, a business-government manpower training
program?
At the outset it is important to indicate that we are not at all predicting that
anything like this will occur. We hope that the combined efforts of the policies set
in motion under our monetary and fiscal programs as well as those of manpower
programs now authorized and a series of preventive actions and structural
adaptations that permit a rise in employment without inflationary pressures
will enable us to arrest the rise in prices and thereafter to diminish the rate
of price rise, with a minimum of increase in unemployment. Under these cir-
cumstances, any calculation included in this reply is entirely hypothetical.
However, as I indicated during my testimony, the problem posed is nonethe-
less important because a carefully administered and pin-pointed manpower pro-
gram can be very useful in keeping the unemployment rate from rising.
In my testimony I summarized the key ways in which a manpower program
does this. as follows:
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465
-First, by concentrating on groups with particularly high unemployment
rates like youth, and by acting to deal with the special problems involved,
e.g., by improving the transition from school to work which is a very im-
portant part of current youth joblessness.
-Second, by training people to improve the skills in our economy and by
tackling specific situations in which there are skill shortages, through new
upgrading efforts as well as by initial training.
-Third, by improving the operation of the labor market so that idle time
between jobs is curtailed, and
-Fourth, by improving the operation of the unemployment insurance system.
These are more fully set forth in my testimony before the Committee.
The matter is not at all merely one of assuming a certain number of unem-
ployed and calculating, on the basis of an assumed cost per job, the total cost
to put .them into a certain type of public or private employment to meet unme,t
needs. I recognize that there are long lists of unmet needs that would require
manpower in our economy if goals of health, education, sanitation, etc., are to be
met, but the meeting of these goals is a long-range matter that requires planning,
training, and the allocation of resources of such magnitude as to require priority
choices among them.
It is important at the outset, before engaging in any mechanical calculations,
to recognize a number of factors that will affect both the size and the composition
of the unemployed, if there were to be an increase in their numbers, and that
therefore would affect the character of any special program to be developed.
First,. it is important to recognize that the objective of the action taken
against inflation is to top off the rate of increase in the price level, and gradually
to obtain a lower, more acceptable rate of increase. It is not the intention of the
Administration to precipitate a sizeable decline in prices or economic activity.
The very slowness of the pace envisaged would make it possible to assess the
size and design the necessary steps to meet needs that emerge.
Second, in a gradual slowing down of the type envisaged, a reduction in
the work week, rather than a reduction of employment, is likely to be the initial
reaction, and possibly the only reaction, of employers.
Third is the importance of recognizing the need to attack the unemployment
problems of thos.e who might be affected first if unemployment were to rise.
Since the economy is strong and will continue strong even under the assumptions
of the question posed, a rise in unemployment is not likely for the most part to
take the form of sudden or sizeable lay-offs. As I indicated in my testimony,
lay-offs are the cause of much less than half the total jobless at the present time.
It is to be expected that new hires would be the first affected. The first effect
would most likely fall on young people entering the labor market, on women re-
entering-including secondary wage earners-and in both cases on reentrants
without experience. It is also to be expected that there will be substantial hiring
still taking place and that the job of improving the process of matching people
coming into the labor force with existing vacancies will be of great importance.
Our present plans already call for substantially increased programs along these
lines..
Fourth is the question that arises, in the event hiring is affected rather than
lay-offs, whether employers would not, in a slightly softer labor market, con-
tinue the positive hiring policies that they have begun with respect to the dis-
advantaged in the last several years. If they do not we would have additional
problems with respect to young people and minority groups. If they do, we
might continue to see further attacks upon the high unemployment rates of
youth and Negroes regardless of what happens to the overall rate. I think
it likely that U.S. employers are now committed to their new policies. I cannot
make a numercial estimate of the extent to which employers would reassess
their policies in the event of a very soft labor market, but I think that in the
situation which would likely arise, under the circumstances posed, most em-
ployers w-ould continue what they have begun. This is already indicated by the
fact that the NAB program, for example, has had substantial success in cities
of the country with unemployment rates up to and above 4%. In many cases,
performance in these cities has been greater than performance in cities of low
unemployment (below 3%) indicating that the commitment of employers and
the institutional factors may be as important as the overall situation.
Fifth, since young entrants will be most heavily affected, it is important to
realize that the volume of young people enteriiig the labor market-which was
unusually great during the first five years of this decade-is now beginning to
stabilize and will in another two years slow down. At the same time, the pro-
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466
portion of young people moving on to higher education is increasing, so that the
numbers of entrants that our economy has to absorb-particularly those who
are untrained or uneducated or unprepared to cope with the problems Of entry-
will be increasingly smaller.
Sixth, the situation of young entrants will be very heavily affected by what
we do in our Nation with respect to military service. As indicated in my testi-
mony, there is at the present time some discrimination against young people
who have not yet fulfilled their military obligation. I w-ould expect that new
policy respecting the draft-a matter now under consideration-will be of a
kind which would diminish this discrimination.
It is readily apparent, when all of these factors are taken into account, that
the matter of estimating the size of the program necessary to "sop up" the
unemployment of a given size which might take place is not merely a matter
of multiplying an assumed unemployment figure by some estimated average
cost of a job spent in the public sector or the special cost of training and devel-
opment of a job in the private sector.
Nonetheless, it is illuminating to indicate the range of detailed considerations
w-hich would have to be taken into account in making an estimate, assuming
that none of the factors mentioned above would decrease the size of the group
for whom the program was necessary-a completely unrealistic assumption, of
course.
First is the relation of the unemployment rate to those who would be involved
111 the program-the size of the program needed to bring unemployment down
by a certain amount, given the method by which unemployment is counted for
statistical purposes. In this connection it is important to realize that the un-
employment statistics collected by the Bureau of Census through the Current
Population Survey for the BLS of the Department of Labor measures unemploy-
ment at a single point in time. Thus the people who are unemployed in one
month w-ill be, to a very considerable degree, different from those who are im-
employed in other months; there is a great deal of short-term unemployment
in the Nation. It makes a difference whether we aim a program at those who
are unemployed no matter what the duration of their unemployment, or at
those who are unemployed for a certain minimum period of time.
In general, there are approximately 21/2 to 3 times as many people w-ho ex-
perience some unemployment during the year as there are people who are un-
employed during the weekly period of the single monthly count. To the extent
that operating manpower programs draw from the entire population of the unem-
ployed, they therefore would have to be aimed at a somewhat larger target in
terms of numbers than the size of the one-time unemployed group, if it is to affect
the statistical count. Moreover, a program will inevitably reach not only those
w-ho are unemployed at any time during the year but will also draw some w-ho
are now out of the labor force into the labor force, w-ill draw new entrants who
are only newly entering the labor force, and will even in some cases draw- under-
employed people, particularly those employed at very low wages. Thus, even
assuming that none of the factors mentioned earlier would affect the situation,
a program designed to offset a rise in unemployment rate by something like
400,000 might have to reach several times this number of people.
Some of the people to be reached. of course, can be handled by quick re-
ferral to jobs through normal operations of the Employment Service. Insofar
as it was necessary to tackle a very large group, it w-ould be necessary to assign
a high priority to the improved operations of the Federal-State Employment
Service so that it could handle w-ith the greatest possible rapidity those w-ho
have the education or the training to get into the available jobs in short order.
In this connection it is important to realize that probably half of our unemploy-
ment is normally of a short-term character, and that a reduction of only one
w-eek in the average duration of unemployment as a result of improved Em-
ployment Service operation-such as a development of Job Banks or other
computerization of the Service-would have tl1e effect of lo~vering the overall
rate of unemployment by some sizeable portion of the 400.000 that is the con-
cern of this discussion. Thus, improved Employment Service operation w-ould
clearly be a priority matter for any manpower program, as in fact it is at
the present time in budget submission.
For some. training w-ill be important as u-c develop an improved system
of job vacancy reporting and are able to put people into job opportunities
w-ith additional preparation. For still others. the special costs of being sup-
ported w-hile on the job u-ill be important. In some cases such costs are now
being met by employers or are reimbursed. It is to be expected that employers
PAGENO="0191"
467
would continue to meet large portions of the costs, for example those that
the JOBS program involves. But it is also conceivable that in an economic
slow--down some employers, to maintain the policies that they have embarked
upon under their own financing, will turn to Government financial resources
that they have hitherto felt were unnecessary to support their operations.
In each of the situations above described there will be differeat costs as-
sociated with each of the different program elements and different ratios of
success to total effort, just as there are in the broad range of manpower
programs at present. When all of these factors are added and account taken
of the great range of the costs that w-ill occur, it will be apparent that the
total cost of a program to deal with a potential use of 400,000 unemployed
people could be as much as an amount equal in size to the present manpower
efforts (almost $2 billion). The key point, however, is that the size will be
affected very considerably by the character of the elements listed above.
Increased resources for manpower programs, such as those in the budgets which
are now and w-ill be before the Congress will permit increased capability of cop-
ing with the possibility of a rise in the unemployment rate such as that hy-
pothesized by Representative Reuss. It will certainly permit quick attention to
any unusual and particular problems that arise. Most important, it will permit
the sound development of the Nation's manpower efforts to make manpower pro-
grains a significant tool that, with the proper mix of monetary and fiscal policy,
and in coordination with them, can help us successfully deal with the problems
that confront us.
Secretary SI-ruLTz. Could I make a further comment, Mr. Chair-
man, on the phraseology of 400,000 thrown out of jobs.
I think that unemployment does not occur that w-ay.
Representative REuss. Or otherwise unablc to find jobs which they
otherwise could find.
Secretary SI-HJLTZ. Thcre are an awful lot of intervemng variables
between the slowing down of demand somewhat and what happens to
the layof rate. As you can see from some of these charts and tables, the
number of people who have lost a job as a result of a layoff is, I think,
around 40 percent of the total unemployed as we now see them. And
that is a part of the way in which unemployment takes place. But I
don't think that that is the sole way by any means.
Representative REuss. To us a 22-year-old who has not been able
to find a job, but would have been able to find a job otherwise, repre-
sents himself a social problem. And he has to be put into the program.
Secretary SHULTZ. I agree with that. I am just trying to pick up
the phraseology of thrown out of jobs, because I do not think that
anybody in this administration or any other administration is in favor
of unemployment or is in favor of throwing people out of jobs, or
wants to do anything except work in the other direction.
Senator Piiox~rnm (presiding). Mr. Brock?
Representative Buocw. Mr. Secretary, I have enjoyed your very
thoughtful presentation. And I think the last time I had an oppor-
tunity to talk to you it was a little less pressurized, in the intellectual
calm of a university.
Secretary SHuLTz. W~e had a conference on race and unemployment.
Representative BROCK. Correct. And we had a lot of interesting dis-
cussions there. I delivered the same speech then.
I was very interested in the colloquy with the gentleman from Wis-
con5m. I can't help but react that I see no intellectual justification
for the reaction that automatically the exercise of fiscal responsibility
is going to create 400,000 jobseekers. I don't think that is necessarily
so. And I don't believe the administration does either. It seems to me
that the sensible testimony that we have had today is that the admin-
istration is trying very hard to enhance the job opportunities, and
PAGENO="0192"
468
that we have an excellent prospect of doing so. Do you not agree with
that?
Secretary SHULTZ. That is my reading of it; yes, sir.
Representative BROCK. In terms of these specific programs, I think
some of them, from my own experience, have a great deal of concern
in a couple of areas. First of all, in the area of coordination, we have
such a proliferation of programs here coming out of the administra-
tive process. I have seen efforts in these fields by HEW, HUD, OEO,
Labor, and even Agriculture. And I am interested in the comment
which you made that there is going to be a sincere effort for increased
cooperation and coordination, bringing together the maximization and
efficiency of related programs with coordinating them. I think that is
very important. We have the situation in this country today that 99
percent of the American mayors don't know what is available. It isn't
a matter of lack of resources being made available; it is a lack of
knowledgeable resources on the part of the individual political and
business leadership to maximize their utilization. And I appreciate
your interest in the area. I wish you well.
Is there some effort, not just within your Department, but within
the structure of the executive branch in total, to achieve greater co-
operation? And if so, what can we expect?
Secretary SHULTZ. Well, I think the answer to your question is
certainly yes. In its broadest sense it seems to me that this will be
one of the objectives of the Urban Affairs Council that the President
established as one of his principal Cabinet groups. Through the formal
work of various subcommittees of that Council, and the Council as
a whole, we hope to move constructively in this direction. I think
also through the sort of informal relationships that develop that way
at the Cabinet level and then through the supporting staff we will be
able to develop a better working relationship in many of these areas.
So I think that the administration is keenly conscious of this problem.
~Te are certainly working at it. The creation of the Urban Affairs
Council, one of the first things the President did, suggests the priority
attached to it.
Representative BROCK. I appreciate your interest in the area. I sym-
pathize with you as to the difficulty of completing it successfully, be-
cause I think the special interests are going to be very difficult to
change.
I noticed the reaction of one of my colleagues in the House yesterday
to the proposed change in OEO, which I considered minimum, which
is almost Pavlovian in its nature. And I wish you well.
You mentioned this increased emphasis in the service area and its
impact on employment. One of the concerns I have had and the one
which I hope your Department will address itself to `is the fact that
we always talk about manufacturing in this coimtry as the employer
of America, and your own figures show that maybe one-third is manu-
facturing, and yet so many of our programs and efforts seem to be
addressed to manufacturing. I wonder if I am `being fair in that analy-
sis. And if so, isn't it time that we shifted our emphasis somewhat to
train people for jobs that don't exist, such as we dream up in the
automobile industry.
Secretary SIIULTZ. Yes, I think that is a very good comment. I think
it would be fruitful to orient. the manpower programs toward jobs in
the e~panding areas of the economy. There are a number of ways in
PAGENO="0193"
469
which this can be done, assuming the people involved in this co-
operative effort; namely, the business group, agree. We could redirect
some of the emphasis in the JOBS programs of the National Alliance
of Businessmen toward some of these growing areas and include in
this conception of the program various types of industry.
Representative BROOK. The council mentioned in its testimony-
I believe I have a direct quote-"Excessive and rapid general increase
in minimum wage can hurt lower wage workers by curtailing their
employment opportunities."
I agree with that, but I would like to have your particular comment
to apply to minimum wage impact in terms of minorities and youth.
We have had a good deal of discussion on readiness here, and the re-
quest for significant increases in minimum wage, following the rather
large increases over the last 2 years. I ask you to comment first on the
impact of the general increase in minimum wage at this time, and
secondly, on whether or not we might consider some method-if you do
think there is an impact-of protecting them, particularly from the
adverse impact if it does occur.
Secretary SHrrLTz. The subject of the impact of the minimum wage
on employment has been studied a great deal. At the same time it is
possible to say that more research is needed.
I guess it is always possible to make statements like that.
I don't feel that I have sufficiently mastered the research content
of what is now available. I want to take a strong position on it. It does
seem to me that we have had a fairly rapid increase in recent years,
and that we ought to take a look this year and study what has ha~p-
pened as a result of this. I think one of the areas that is especially
deserving of investigation is the question of the impact of the fiat,
rapidly rising, minimum wage on youth unemployment.
I am not here to say that I have an answer to that question. But I
think it is a question that bears study.
It is true that one of the differences between the European econ-
omies, the Japanese economy, and our economy is that in these other
countries you do have a concept of entry into the labor market at
lower rates of pay for young people as they learn. Our concept is a
fiat minimum wage for everybody. I think it is a question that we all
should be interested in, as to whether or not that difference is in part
responsible for the high youth unemployment rat;es.
Now, I am not taking a position on that. I have heard lots of
people's positions on it, but it is not an area that I have studied
carefully at yet. But I plan to get into it, and try to work it out, at
least in my own mind, and try to answer it.
Representative BRoOK. In my own experience, the problems of young
people are not that different from the problems of minorities in the
sense that, due to son'ie historical factors that we are well aware of,
both groups are entering the labor market or attempting to enter the
labor market with a reduced level of skill, reduced educational op-
portunity, which creates a problem.
Now, it doesn't matter whether black Americans 18 to 38 have not had
the educational background and experience background and are no
different from the 18-year-old white teenagers in the sense that they
cannot compete. Time fact is that the businessman simply wants to
get value received as quickly as possible. I would hope that your
24-833-U9--~pt. 2-13
PAGENO="0194"
470
study would include both groups, because I don't think there is that
much disparity between the problem that faces each.
Secretary SHULTZ. Let me not leave the impression that I think all
of the youth are hard to employ. That is not the case at all. In gen-
eral, the youth coming into the stream of constructive work in this
country are better educated and more strongly motivated and able to
hold their own, more than hold their own.
But nevertheless there are problem areas.
Representative BlOCK. I am not talking in general terms. I am
thinking more of some of the areas I have seen personally-rural
school systems which offer a rurally oriented education when there are
no opportunities for rural jobs. When they go to the city it is an en-
tirely different world. The dropouts that we mentioned earlier are the
type of people that we are talking about., not the average high school
graduate.
I have exhausted my time. And I thank you very much.
Senator PROXMIRE (presiding). Senator Miller?
Senator MILLER. Thank you, Mr. Chairman.
Mr. Secretary, I was interested that my colleague, Congressman
Reuss, was seeking your assistance in furthering the 13-point Reuss
bill. But before you get too far in that thicket I warn you that there
are a few little controversial items in that bill, which is one of the
reasons why he is still trying to lobby in favor of that bill.
Secretary SHULTZ. I had the impression that it was only the labor
area that was controversial, and that those other things-such as
taxes-were all handled by the experts.
Senator MILLER. I think his point, though, is that he is trying to
find money. And I think most of us are. Most of us have tax bills. And
I would like to talk about one.
I am not sure that this fits this structural unemployment problem.
or whether we have a structural unemployment problem as such. I
detect from your testimony that it is more in the matter of social
strata, rather than the structural, as I understand it. But last year
the Secretary of Agriculture testified before this committee that half
the poor live in the rural areas. I am wondering if you wouldn't agree
that it would be a good idea to have more industrial development iim
the rural areas to absorb these people into meaningful employment.
rather than to let them drift away into the big cities and compound
the unemployment problems in the big cities.
Secretary SHtTLTZ. Yes-although people seem to like reasonably
good-sized aggregations somehow, I think general community services
are what is drawing people to cities. It seems to me that the concept
of growth points intermediate-sized cities in the rural areas is a pretty
good concept. We should be pointing ourselves in that direction and
not thinking always of growth in New York, Ohicago, Los Angeles,
and so on which, indeed, are places where the population has been
leveling off.
Senator MILLER. A number of us are sponsors of a bill to provide
tax incentives to industries to locate in the rural areas, following that
concept. I won't ask you to commit yourself, but I hope that we might
have your assistance on that, and at the same time you might see fit
to support Mr, Reuss on one or two of his 13 points.
PAGENO="0195"
471
Secretary SHtJLTZ. Do I detect a spirit of bipartisanship here?
Senator MILLER. You have already, I understand, replied that you
are studying the problem of strikes in the strategic industries, national
emergency strikes, and things like that.
Secretary SHDLTZ. Yes, sir.
Senator MILLER. I hope your studies and any proposal that you may
furnish on that will also include what I call regional problems. What
brought this to my attention was that transportation strike in your
own city of Chicago, which caused great hardship to a region of the
country and perhaps more hardship in total quantity than some na-
tional-type strikes. I hope you will consider the regional impact of
these things in your proposals.
Secretary SIUTLTZ. If I may for just a moment, while I am not pre-
pared to put forth a program, it is pretty apparent, at least to me, the
sort of things that should be examined as a part of the development of
a program.
One is the whole problem of how do you define an emergency dispute;
how you recognize one when you see it.
Second-and this is what gets all the attention, but I think it is only
part *of the problem-_what procedures you would like to see in the
law in the event of an emergency.
Third, is the point that you made that there can be strikes that cause
emergencies within a State, or in a region crossing State lines. These
aren't national emergencies, but nevertheless they are extremely signif-
icant to the segment of the population in that area. That problem
deserves attention.
And fourth, I would say that we need to examine whether or not we
shouldn't include in our purview here the railroad and airline indus-
tries, which typically have been handled as a separate matter. 1~Te
should ask ourselves if they aren't part of the general package.
Senator MILLER. I remember when I looked into this transportation
strike in Chicago, I was advised by the Department of Justice that
under the present law there was nothing the President of the United
States could do, because it wasn't regarded as a national emergency.
But it was certainly a tough one from the regional standpoint.
Now, in your testimony you indicate that upward of 21/2 million
people are in jobs related to the war effort, at least to the acceleration
of the war effort, in the last few years. There are also 1 million more
serving in the Armed Forces.
Secretary SHULTZ. It is actually 2.4 million by our estimates, includ-
ing the people serving in the Armed Forces.
Senator MILLER. Then, could I imply from that that, if it were not
for the war, we could have 21/2 million people unemployed, in addition
to what we have now?
Secretary SHULTZ. It could imply that. But I would hope that our
economy would have been so managed that as these people caine on
the labor market they would have been employed in industries pro-
ducing civilian goods and services rather than military, and that our
economy is perfectly able to provide that kind of employment. And
indeed, one of the things I was trying to point up in bringing this out
was that because we have had this large flow of highly productive
manpower into employment that doesn't produce anything as far as
PAGENO="0196"
472
the civilian economy is concerned, yet adds to demand; that has been
one of the reasons we have had the inflationary problem.
Senator MILLER. The thing that troubles me about that is that we
have been operating under a deficit for a number of years. And if the
money being spent for the war had gone somewhere else, we could have
absorbed that 2.1/2 million-implying that we would perhaps have to
have a deficit anyhow. I trust that the new administration is going
to. seek to absorb these people when and if this war comes to an end
without having to run up deficits all over again and aggravate the
inflation condition. That is your objective; is it not?
Secretary SHULTZ. Certainly our objective is to use the tools of fiscal
and monetary policy in a coordinated way that will yield us high
employment, and we hope without excessive rates of increase in prices.
Senator MILLER. There is a limit to what fiscal and monetary policy
can do. And we certainly have to rely upon private industry for the
absorption of most of these problems; don't we?
Secretary SHULTZ. Yes, sir. What we are aiming at is the creation
of a general environment through fiscal and monetary policy that
brings about employment on private jobs, not just putting People on
public jobs.
Senator MILLER. So your point is that the savings from the. war
costs, when those stop, would not necessarily be translated into hiring
another 600,000 people on the Federal payroll or another 2 million
on the Federal payroll, but to provide an enviroiiment for private
industry to absorb these people?
Secretary SHULTZ. There are all sorts of ways to deal with the so-
called fiscal dividend and the savings that would come if we can get
ourselves into a more peaceful situation in tile world. Among those
ways is a reduction in taxes. Not all the ways involve additional
spending.
Senator MILLER. Now, you testified that there has been a 7l/2-percent
average hourly compensation increase; of that, 3.3 percent represents
increased productivity, so that there is a differential of 4.2 percent.
Now, I am troubled about the increasing amount of imports coming
itno this country. Our exports ha.ve been going up a little bit, but tile
imports have been coining in here at a far faster rate. -
I know that in some of the countries overseas that are trading part-
ners there has been some inflation, in some years higher than our in-
flation. But because of the low-wage base they can better afford to
increase their wage rates to keep pace with the higher rates of in-
flation in their country and be more competitive than we are, than
we can be with increases to a high wage base to keep pace with a low
rate of inflation. I have done a little calculating on this, and it looks
like we have been slipping further a.nd further behind in absolute
increases of wages.
For example, in 1967 our wage rate went up 12 cents an hour to
keep pace with a relatively low rate of inflation. In some of these
European countries, ~n an absolute basis, wages only went up 4 or
6 cents an hour, although they had a. higher rate of inflation than we
did.
Now, does not this inflation have a serious impact on our relative
competitive position, aggravating imports as far as our import situa-
tion is concerned?
PAGENO="0197"
473
Secretary SHULTZ. Yes; it does, especially in the short run, as the
relative prices of goods among countries change against us. In a broad
sense, of course, as trade balances itself off, you don't import more
than you export-I am thinking of it in its broadest sense. But in
shortrun terms the shift in relative prices can cause genuine problems
in service industries, and it deserves attention.
Seiiator MILLER. I wonder, Mr. Chairman, if the Secretary would be
able ot obtain it, if lie could furnish for the record an analysis of the
impact of the increased imports on unemployment over the last 2
years, 1967 and 1968.
Secretary SI-IULTZ. Yes; I certainly can do that.
Senator MILLER. And let's have a balanced picture, and show the
increased jobs resulting from increased exports. But I would like to
see the trade-off, and how we come out on the balance. My guess is that
certainly in the last 2 years because of `the horrible decline in favor-
able balance of `trade, we lost jobs on net. If you have an analysis that
you have prepared `to show what the resulting picture has been, I
think it would be helpful for the record.
Secretary SIIULTZ. All right, sir; I shall see that that is prepared.
Senator MILLER. Thank you very much.
(The following material was later supplied by the Department of
Labor:)
EMPLOYMENT AND FOREIGN TRADE
The Department of Labor now has underway a series of studies examining the
relation between foreign trade, both exports `and imports, and employment
This effort, of course, is extremely complex because of the difficulty of isolating
the effect of foreign trade from the many other factors which affect job oppor-
tunities in the United States. Preliminary results are available which provide
an indication of recent levels, and changes in employment related to foreign trade.
Any examination of the influence of foreign trade on U.S. employment in the
last few years must keep in mind the basic economic conditions prevailing during
this period. Both 1967 and 1968 were years of high and increasing economic
activity accompanied by strong inflationary pressures. Total employment rose
by 3 million from 1966 to 1968, and the une~nployment rate dropped from 3.8
percent to 3.6 percent of the civilian labor force. The strong `inflationary pres-
sures, along with the effect of certain supply shortages induced by existing or
prospective strikes, stimulated the demand for imports, particularly in 1968.
Without the increased imports which helped to meet the rising demand for
goods, it is reasonable to assume that inflationary pressures. on domestic markets
would have been even stronger.
The number of jobs attributable to the export of goods from the U.S. is
estimated by the Bureau of Labor Statistics to have increased from an estimated
2.5 million in 1966 to 2.6 million in 1968. The estimates, of jobs include the direct
employment necessary to produce the item exported and also the indirect labor
necessary for `all supplies, and materials and services incorporated in tIme ex-
ported item. Labor involved in the transportation and handling of the item is
also included. In addition, about 750,000 jobs were involved in 1968 in export-
related services such as those provided to foreign visitors and use by foreign
nationals and companies of U.S. airlines and U.S. shipping firms.
It is far more difficult, both conceptually and statistically, to estimate the
volume of employment related to imports. In relating employment to exports time
task is to measure those jobs. involved in producing and exporting the specific
goods. On the other hand, there are no current jobs involved in producing imports;
the task is rather to estimate employment that might take place, assuming other
factors are constant, in the event that the value of these imports were produced
in the U.S. Of course, since imports into the TJ.S. `are the exports of other coun-
tries, the employment effect in the ewport'ing covntries of a reduction in our
imports could indeed be estimated, provided the proper data were available, in
the same way as we have estimated the employment effect of our own exports.
PAGENO="0198"
474
But the effect of a reduction in imports on employment in the United States is
a different matter.
Another complicating factor is that not all of U.S. imports are of the same
character. First, there is the fact that some of the things we import are not
produced at all in the United States, e.g., coffee, chromite, tea, tin. Conceivably,
with a sufficient expenditure of effort and resources we might be able to pro-
duce some of them, but surely the amount of employment thereby created is
a speculative matter of no practical interest.
Next, there are imports of certain types of goods that are comparable to
domestic materials but are in short supply in the U.S., such as asbestos, bauxite,
newsprint, and sugar. To expand our production of these items sufficiently to
replace our imports would again require a very large investment of capital and
labor. It is not at all clear that the real costs of their production-in terms
of the quantity and quality of labor and other resources-would be anything
like their present real costs. If costs of expanding our production to replace
such imports were higher, their prices would also be higher, and the utiliza-
tion of such more costly materials might be substantially reduced. Hence the
number of jobs which might theoretically be created in the U.S. by the reduc-
tion or elimination of such imports is not easy to estimate. Any estimate that
simply assumes present costs to remain the same is certain to be seriously in
error.
Finally, there are imports that are competitive with domestic goods, some of
which have a minimal impact on U.S. markets, e.g., wood pulp and agricultural
machinery, while others are relatively more significant, e.g., wool cloth, crude
petroleum, and sheet glass. Conceivably the imports of these items could be re-
placed by domestic output. Prices would probably be somewhat higher, and
utilizataion somewhat lower, but an assumption that costs, prices and utiliza-
tion would be the same if such imports were eliminated would not be so un-
realistic as in the two categories discussed above.
For purposes of these estimates, imports have been classified into the three
categories mentioned. In 1966 the group of items not produced in the U.S.
constituted 13 percent of total imports (by value), those produced in the U.S.
but in short supply were another 13 percent, while those that are more nearly
competitive with domestic products constituted 74 percent. This classification,
however, represents only a rough approximation of the competitive characteristic
of the commodities. For example, although most machinery is in the third cate-
gory, a finer breakdown w-ould disclose some items with unique qualities, fea-
tures, etc., which are not made in the U.S.
Preliminary estimates, on the assumptions noted, indicate that about 1.8
million jobs in 1966 would have been required in the U.S. to produce the equiva-
lent value of the items included in the third category. For 1968 the estimate
would be about one-third higher-about 2.4 million. These estimates do not
take into account the jobs which are dependent on imports, such as longshore
activities in unloading imports, movement of imported goods on U.S. cargo vessels
and processing of imports of crude materials. Since the elimination of these im-
ports would eliminate these related jobs, the net effect on employment would be
smaller than is indicated by the figures above. Estimates of the net effect are not
yet available. Nor are estimates available for the number of jobs that would
have been required to furnish the value of import-related services such as
those provided to American visitors abroad or payments by Americans to
foreign transport carriers.
It must be emphasized that these estimates, both on the export side and on the
import side, are highly conjectural, for the reasons given. They do not represent
the number of workers unemployed because of imports nor the number that would
become unemployed if exports ceased. Moreover, the side effects caused by a
reduction in exports or imports should be taken into account in any analysis.
The fact that our imports provide other countries with the wherewithall to
by buy our exports, and vice versa, is an example.
All this is not to say that for particular industries or for particular firms
or groups of workers the impact of imports on the importance of exports may not
be significant. For the most part, employment has increased during the last few
years in industries which produce products similar to those imported. Some
industries, how-ever, have lost employment and in a few of these, according to
preliminary indications, part of this loss may have been due to increased imports.
The Department is now working to identify these industries and, as resources
permit to analyze the effects of increased imports on employemnt in individual
industries.
PAGENO="0199"
475
If a judgment were to be made at this time it would have to be that, on balance,
U.S. foreign trade is a favorable element in our economy as a whole and in our
employment picture.
Senator PR0xMIRE (presiding). Mr. Widnall?
Representative WIDNALL. Thank you, Mr. Chairman.
Mr. Shultz, the minority members of this committee have long
recommended that a series of job vacancy statistics be developed and
published by the Labor Department. We understand that the new ad-
ministration sees this to be an important part of the employment pro-
gram. How soon will the job vacancy statistics become operational?
Senator PRox1~rIRE. Would the Congressman yield at this point?
This has been the position of this Senator, and I think it has been the
position of the whole committee, the very vigorous and forthright po-
sition that the Committee has taken.
Representative WIDNALL. I will enlarge my statement to say the
members of the Joint Economic Committee.
But how soon will the job vacancy statistic's become operational?
Secretary SIIULTZ. I can't give you a precise answer in terms of a
month of this year. But I can say that this is something that we are
actively at work on. It is a matter that it is especially interesting to
bring up, because Geoffrey Moore, the incoming Commissioner of La-
bor Statistics, has long been a leader in the area of developing this
line of statistics, an'd has a great personal interest in it. I am sure
that we will see this pursued vigorously and rapidly.
And we would expect to have onstrearn fairly soon much broader
job vacancy statistics than now exist.
Representative WTIDNALL. I think it has been rather discouraging in
the past, when you are trying to analyze the employment in the United
States, to realize that you have a lump sum given to you of maybe
3% million unemployed, but you don't know at what they are unem-
ployed. You just hazard a guess. And it seems to me that it will be
invaluable for us to have these statistics available just as soon as
possible.
Secretary SHUL'rz. Yes. I think it should be realized that when you
start a new statistical program, and you have the necessarily pro-
fessional attitude that we have in the Bureau of Labor Statistics, and
went to have in the Bureau of Labor Statistics, that they will want to
see that whatever is put out is first tested and stabilized, so that when
they put out a figure they can stand behind it and feel confident that
it is a reliable figure and not just the first crack out of the barrel.
So when one does emerge you can be s~ure that it will be thought
over and worked out carefully.
Representative WIDNALL. Do you believe that increases in the in-
dividual income tax such as the 10-percent surcharge enacted last
year end to stimulate higher wage demands?
Secretary SHULTZ. I am sure that it is an argument presented at
bargaining tables. The Union will use it as an argument for why
there should be increase. My judgment is that people listen to the
argument and then go out and bargain. I would guess that it isn't
a big factor.
Representative WIDNALL. In that question, I had the thought in
mmd that whether or not that does vitiate fiscal policy, you engage
in a game of ring-around-the-rosy in connection with it.
PAGENO="0200"
476
Secretary SHTJLTZ. ~\O. If I am following your line of reasoning,
perhaps I am not-the. argument would be that the union would
come to the bargaining table and say, "We now have a 10-percent
surcharge on income, and in order to maintain real wages we have to
increase the demands that we are making by the equivalent of that.,
and therefore, Mr. Employer, come across with higher wage than
otherwise would be the case."
If that happened I suppose someone would argue that somehow
the effect of the surcharge has been passed through to t.he employer.
And I suppose there would be a presumption that lie would pass it
along in terms of prices, and thereby you would kind of wash the
whole thing out. My response is in terms of saying that I am sure
that demands or arguments of that kind were presented, but my guess
is that they recede into a lot of other things, and it would be difficult
to pick out any special infl~i.ience t.here. I would doubt. that it has a
great deal of influence.
Sena.tor 1u~i~n. Will the Senator yield?
Representative WIDNALL. Yes.
Senator MILLER. On this point., are there escalator clauses in some
of these contracts which not only provide for automatic increases
based upon t.he OPT increases, but also upon an income tax increase?
Secretary SHDLTZ. I don't know enough to state flatly that there
aren't. But it isn't a widespread thing. My guess is that it is practically
nonexistent.
Representative WIDNALL. Mr. Shultz, recently labor has shown a
declining interest in the short-term contracts, 10 months or less, and
an increasing interest in 3-year labor contracts. Whereas 30 percent
of labor contracts involving the Federal mediation 4 years ago were
long-term, now the average is about 60 percent. What are the implica-
tions of this shift as to wage and price stability of the general
economy?
Secretary SHULTZ. IVehl, of course, it depends on what the long-
term contracts contain. In general what seems to have happened is that
you have, let's say, a 3-year contract, and you have so-called front-end
loading, so that the first year cost is higher than the second or third
year cost. That tends to have an impact, a special impact, in the years
when there is a lot of bargaining involving lots of people. It has a
coumiterpart in the subsequent years when the deferred increases are
going into effect.
What that counterpart influence turns out to be cTepencls upon what
is going on in those subsequent years. In 1969, for example, the esti-
mate is that a little over 6 million workers are covered by collective
bargaining agreements that have a deferred wage increase built into
them.
The deferred wage increase that will become due averages on the
order of 4.1 percent, as I recall. I made comments about forecasting
earlier but I believe one can say with some confidence that the average
negotiated increase in 1969 will be higher than 4 percent. So I sup-
pose one can sa.y that in 1969 the deferred wage increases will have a
bit of a dampening effect because of the large. numbers involved. But
it could work the other way around.
I think this happened in the steel industry, as a matter of fact. in
the last da.ys before competition from imports and other materials
cut them down to size, and there were tremendous deferred wage in-
PAGENO="0201"
477
creases built in. These were probably larger than might have been ne-
gotiated under the circumstances.
Representative WIDNALL. You spoke of this practice in the first year
having the heaviest impact, and then subsequent 2- and 3-year con-
tracts having a lesser amount as "front loading." Do you think this
tendency to front load should be encouraged or discouraged?
Secretary SHULTZ. I don't really ~have a view on that, I guess. But
in addition, I suspect the parties are going to do what looks right to
them, whatever we urge. That is, you can see w~hat goes on. If you
want to get an agreement, people properly value immediate income
above future income, and the union and the company may desire, in
order to get an agreement, to take `the cost and put some of it up front.
That tends to dramatize what is available immediately and helps to
secure acceptance of the contract. I think it is that sort of process that
is going on. We can look at this as `steely eyed economists, and that is
one thing. But at the same time, there are a lot of practical labor rela-
tions problems to be considered. I personally tend to have the philoso~
phy that the experts are the people immediately involved. T'hey know
more about what they want and how they want to arrange their affairs
than we do, and we basically should respect their judg'ment.
Representative WThNALL. Mr. Chairman, my time is up. I would
like to ask one more question.
Senator PROXMIRE (presiding). Go ahead.
Representative WIDNALL. At the end of the current war I think, as
we all recognize, that we may face some seriou's unemployment prob-
lems, and also the problems of dislocation where some industries may
have to shut down and cut down material. What planning is now being
done in this area by your department?
Secretary SHTJLTZ. We are participating in an effort led by Dr. Her-
bert Stein, a member of the Council of Economic Advisers, to tackle
just `this issue. And I might say that in having Herb Stein lead this
effort the administration has, I think, undoubtedly t'he country's lead-
ing expert on this kind problem. It goes back to a prize-winning
essay that he wrote about the readjustment from World War II. He
has worked on this subject off and on since then, and has worked on it
in connection with the current hostilities.
In my own view of economists who `have worked in this area, I would
have to put Herb down as the absolute No. 1 person.
So we not only are making an effort, bu't have been fortunate enough
to `have the effort led by a man of great knowledge and insight and
depth of analysis in this area.
Representative WIDNALL. Thank you, Mr. Shultz.
Senator PROXMIRE. Mr. Secretary, it is my understanding that the
President's Committee, or Cabinet committee, on Price Stability has
been killed; is that right?
Secretary SIIULTz. I am not certain as to how the'se things work. I
haven't gone to any `meetings of such a committee, and I notice that
the Secretary of Labor was on the original committee.
Senator PRox1~rIRE. There is quite a difference between the approach
to inflation on the part of the Nixon administration and the preced-
ing administration, in that you are going to concentrate exclusively,
really, on monetary and fiscal policy. And of course we have these
longer range factors of antitrust, which we agree with. And you
recognize that there is some difference now in employment stability,
PAGENO="0202"
478
but really you are going to concentrate on fiscal and monetary policy
very largely as your anti-inflationary tools.
Secretary SHULTZ. I don't think that the relative committee struc-
tures have any particular implication of that kind.
Senator PROXMIRE. You are not going to use presidential jaw
boning, or guidelines, or price controls, or anything of that sort.
That doesn't leave much.
Secretary SHULTZ. I would say that the creation of the Cabinet
Committee on Economic Policy-and certainly economic policy iii-
cludes the problems of inflation, unemployment, and so forth-is a
very positive step by the new administration to deal with these prob-
lems on a broad basis.
Senator PROXMIRE. You certainly have an interest in this commit-
tee in advising on inflation and anti-inflation policy. But you have
many other responsibilities, as does this committee. But it is hard
to say-it is hard to substitute that committee for a committee ex-
pressly and exclusively concerned with inflation, with price stability.
It seems to me it is backing away from the institutional setup. Now,
it may be right to do it. But all I am saying is that that seems to
be a conclusion that I draw.
Secretary SIIULTZ. I can't believe, from all the discussion that has
taken place, in the light of the interest of this committee, and the
people who have testified here, that there is any diminution of in-
terest in this problem.
Senator PRox~rIRE. No, but there is a concentration-and of course
t.his is debatable as to whether this is why-there is a concentration
on using particular policies, and the policies a.re fewer, the methods
are fewer, than the methods before.
Secretary SHULTZ. I haven't tried in my testimony to outline a coin-
plete strategy for the administration, but I have concentrated on
the manpower aspects of the program. I felt that was probably
proper for me.
Senator PRox~nRE. About the manpower program, one definition
of the target for these manpower programs, as I understand it, are
those who have been employed for 15 weeks or more whose incomes
are less than the poverty leve1. Do you have any data on how large
a group this is?
Secretary SHULTZ. There are data. on that, the so-called t.arget
group. And defining the group is a somewhat difficult problem.
Senator Pnox~rm~. And how large a proportion of this group does
the 1970 budget provide that the manpower program will meet?
Secretary SHULTZ. Well, that is something that we are digging
into very hard to try to estimate.
Senator PROXMIRE. It is a small proportion, 15 or 20 percent?
Secretary SHULTZ. It is related to the question that Mr. Reuss asked
me to report on earlier.
Senator PRox~rmE. At any rate, I understand it is a relatively small
proportion. It certainly is not half, it is less than a quarter, it is a small
part of the total problem.
Secretary SHULTZ. Yes.
Senator PROXMIRE. This brings me to the question of why you have,
as I understand it, a flat opposition-if you do not let me know-to
increasing the minimum wage. As I understand it, the minimum wage
is designed to help bring more out of poverty those who have received
PAGENO="0203"
479
the bare minimum wage, the $1.60, who would be on the fringe of
poverty, depending on your definition, or very close to it.
What is your logic behind your taking this position, in view of the
fact that we are not going to be able to help them through manpower
policies, in the near future anyway?
Secretary SHULTZ. I support the general concept of the minimum
wage. I think it has done some good things in our economy. The ques-
tion, however, is whether or not it would be wise to raise the current
minimum wage by some amount-and we talk about various
amounts-this year. I think there is also a question that was raised
about the impact of a fiat minimum wage covering all people.
Senator PRox~rniE. It is always a bad time to raise the minimum
wage, isn't it? When you have an unemployment situation you say
that to raise the minimum wage is going to make the unemployment
situation worse. We have had some very dramatic increase in the
minimum wage, 15 cents up to 50, and 75 cents to a dollar, and then
to $1.20, and now we are up to $1.60. And every time we were warned
that this was going to increase unemployment and was going to be
inflationary. And to the best of my knowledge, there is no data-and
there has been plenty of opportunity to develop data-there has been
no data to show that this is true.
You raise a very understandable question as to how this will affect
teenagers. As I understand it, 20 to 25 percent of the labor force isn't
covered by the minimum wage. And by and large-of course, there
are many exceptions-but by and large teenagers are employed in
areas that are not covered. So I think that without data it is hard to
conclude that this would necessarily be restrictive on teenage employ-
ment.
Secretary SIHILTZ. I do not believe that I made a flat statement of
my view about the teenage employment problem.
Senator PROXMIRE. You did not, that it true. You raised that as a
problem.
Secretary SIIULTz. I raised that as a problem, sir. And I do think
that it is a legitimate problem and the contrast between our experience
and the experience in other countries which handled this differently
is quite striking.
The rise in teenage unemployment is much more of a problem now,
relatively speaking, than it was, say, 10 years or so ago. It makes
you wonder. Maybe it has some connection with the fairly rapid in-
creases that have taken place, aiid the expansion of coverage. I am
not ready to reach a conclusion on that either way. But I am certainly
not going to sit here and say that I agree that the minimum wage
has no impact on employment. I think it does.
But the question is whether or not, despite that, it can be desirable.
Senator PROXMIRE. You see, what this seems to spell out to some
extent is that these policies of putting the whole burden of restraining
inflation on monetary and fiscal policy-if you accept the Phillips con-
cept of a trade-off between unemployment on the one hand and price
stability on the other-and there seems to be a very logical argument
in favor of that-it seems that the whole burden is put on the people
with low income, the people who are likely to be out of work. And in
a year in which Congress has increased its pay by 40 percent, it is
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480
pretty hard for us to go out and exphun the logic of this to people
in my State who have very low incomes.
Secretary ST-IULTZ. I think the question you have to face-
Senator PROXMIRE. How would you explain it? Suppose you were
confronted by a group of people working in a low-income industry,
and they want to know how you explain that our salaries were in-
creased-I voted against it., but that. is not my point-at an rate. our
salaries are increased by a. big margin, and we are telling them that. we
can't give them an increase in the minimum wage so that they can live.
Secretary SimLTz. I think the. question is, does an increase in the
minimum wage produce an increase in income for the people who are
the most disadvantaged insofar as their ability to produce on the job
is concerned? If we were to find and could stipulate t.hat the way to
get all of the unemployed, poverty-stricken people of this country, a
good income was to require emplo~-ers to p~~y a $5 minimum wage, I
would be all for it.
But what concerns me is that by raising the minimum wae to a
level that. is higher than the. value that many people can produce on
the job. we wind up with those people not having a job at. the. mini-
mum wage or any other wage. So that really doesn't get them out of
the problem.
Senator PRox~rIRE. There has always been a question of the minimum
wage. When we had sweatshops that. were so conspicuous, and the
people were paid less than 25 cents an hour, there was always the com-
plaint, they are not worth more than 25 cents an hour. We found that
this was not something that prevented the poor people from getting
a better income, it was helpful. Wouldn't. you conclude that rniniimun
wage in the past has been a useful method of improving the income
of low-income people?
Secretary SHULTZ. For some. I agree. And I agree that it can be a
useful device in the future. The position I took was that. this year,
after the fairly substantial increases that we have seen very recently,
it seemed to me that a pause was called for, and that we shouldn't push
this too hard.
Senator PRox~rIRE (presiding). My time is up. I want to come back.
Senator Miller?
Senator MILLER. On this point, might. it not be that-following
the last round of minimum wage increases-a byproduct of unemploy-
ment., which, while normally resulting, did not ta.ke place because of
the war, because of there being many more in the armed services,
for example?
Secretary SHULTZ. I think it is quite clear from the employment
figures presented that the armed services audI the war-related in-
dustries were responsible for a great increase in male employment.
Senator MILLER. So that if it hadn't been for the war, this recent
round of minimum wage increases might have shown up in the form
of unemployment increases?
Secretary SIIULTZ. It might have.
Senator MILLER. One. other question. Do you have any plans to make
an changes, substantial changes, in the CPI?
Secretary SIrnLTZ. This is a technical question. There is work going
on to increase the usefulness of computer science as applied to the
processing of the data. Andi that is underway. I believe that. the re-
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481
suits of the experience in terms of switching over to that method to
a greater extent will bear fruit probably within the next 6 months.
The CPT is periodically worked over from the standpoint of whether
or not the weighting of particular goods and services is a true reflec-
tion of the market basket for various levels of income.
Preparations for the next comprehensive revision of the CPI are
underway. There has also been continuing work-ancl I am not cer-
tain of the exact status of this now-continuing work and some con-
cern about the problem of reflecting quality increases in the measure-
ment process. For example, we say that medical costs are rising rapidly.
And this is one of the big plus areas in the OPT.
It is certainly true that the daily price of a room in a hospital
has been going up `at a terrific clii). At the same time, one might ask
what has happened to the cost of curing pneumonia, over a period
of time? It may be that the cost of curing pneumonia has declined
because of the advances in medical science. This means that the in-
dividual pneumonia patient does not remain as long in the hospital.
However, the cost of curing pneumonia is a hard end product to get
a handle on in a technical sense.
Now, I know there have been advances in price measurement tech-
niques, and efforts are being made to continue these advances.
This is not a true technical response to your question.
If you would like a detailed one, I will see that you are supplied
one.
Senator MILLER. For this time, that is all right. I am glad to know
that you are very much aware of it, and you are working on it, and
that computers will play a part in it.
On that point, however, is there any thought being given to pos-
sibly changing the area of sampling? As I understand it, the OPT is
based u~pon sampling of wage earners in cities. And I have often
wondered why we didn't take a broader look at this OPT to not only
include wage earners in cities but wage earners in small communities,
even retired people, so that we might have a little broader brush on
what this looks like.
Maybe we might have to have two or three OPT's to reflect dif-
ferent segments of the social stratum. But do you know whether there
is any thought being given to that?
Secretary SHULTZ. This involves sampling the varying market bas-
kets that people in different communities have as distinct from the
problem of pricmg them out. The data come from surveys of individual
consumers, rather than from the people who are selling the products.
I am not prepared to answer that question co1npletely.
Senator MILLER. I hope you will take a look at it and see what the
possibilities are on that point, too.
Thank you, Mr. Secretary.
Senator PROXMIRE (presiding). It is my understanding that we have
always legislated the minimum wage by steps, and we have always
been moderate in doing so, and we have tried to tie it to some index
of productivity, and so forth. And presumably we will do that in the
future. I haven't heard anyone propose $5. I have heard some $2 pro-
posals. And maybe that is too high. But what I am suggesting is
`that this is an instrument that we just shouldn't put aside and say
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482
we are not going to consider this this year, we are going to wait fbr
a few years and see what has happened.
In the past we have had a lot of progressive systems for increasing
the minimum wage. I don't say that we should increase it this year.
We could act this year as we have to provide for step increases. Do
you disagree that this can be another approach, and do you expect a
moderate approach?
Secretary SHULTZ. I think a moderate approach to the subject is
a desirable approach. And I would agree with you on that point.
Senator PROXMIRE. Now, as I understand it, you have stated that you
favor the direct contract method for obtaining adequate public man-
power programs as preferable to the tax-incentive approach, you have
said so, I understand, in an interview. And you are also a member of
the National Manpower Policy Task Force, which has cautioned
against implementation of tax-incentive measures.
Is this a correct interpretation of your position?
Secretary SHULTZ. No, sir. The National Manpower Policy Task
Force did put out a report. It took a very strong position on this
question. I had left that task force before the report was prepared,
and did not participate in the preparation of it, and didn't sign it,
and had nothing to do with it.
I am not in any way derogating the report of that group, which I
consider to be a very good group of people, and an able group of
people, it is just that it isn't proper to infer any views of mine from
this report.
Senator PRoxMn~. What is your position?
Secretary SHULTZ. My position is that the contracting approach as
illustrated, I think, most prominently by the National Alliance of
Businessmen JOBS Program, has worked quite well, and should be
supported, and used aggressively. And we have plans to do so. I have
referred to some of them in my testimony.
I think that the tax-incentive approach also has merit, and that the
way we should conceive of this problem is not in terms of that ap-
proach or this approach, or some other approach. The way to
about this would be to realize that different ways will be useful in
different segments of the economy, and that we need a kind of multi-
dimensional approach to many of these problems.
So that I don't see that we can't have both of these things going
on to some extent at the same time.
Now, so far as the use of tax-incentive is concerned in terms of
specifics, I should think among other things that we ought to be
conducting some efforts to learn by doing, and see if there aren't some
areas where we could set up some experiments and see how well they
work.
Senator PROXMIRE. What concerns me, and I think a lot of Mem-
bers of Congress, is the erosion of the tax structure. Our rates are
already very high, and we have already provided for many incen-
tives such as the investment credit. And there are areas that we could
do it in, in housing, and in so many areas. I am just concerned that
this is going to give us a very awkward and unfortunate tax struc-
ture, even worse than it is now.
Secretary SHULTZ. I share the concern about the erosion of the tax
base. And I think that when you talk about a tax incentive that there is
PAGENO="0207"
483
a. special burden of proof on the advocate because of the importance of
preserving the integrity of the tax base. I agree with that.
Senator PRox~rInE. One other question in this connection. Isn't it
true that every employer has to train the people he hires in most cases?
This is a very big and important cost for an employer. Now, if you
are going to start subsidizing that enormous cost-you have to do
it in a very careful and discriminating way. You have to provide that
he is going to be given a tax credit only for those who otherwise would
not be employable for training programs. You have to limit it to those
with a limited education or with some limited skill.
Isn't t.his going to be very hard to administer? Isn't it going to
involve a degree of bureaucratic interference that would be quite
substantial?
Secretary SHULTZ. I think the points that you make also must be
made with respect to any contracting program. And it is certainly
true enough that a tax incentive program in this field, unless you
wanted to change the concept of it quite drastically, is not a sort of
automatic, self -administering device.
Senator PROXMIRE. That is my point. You put it better. I am not
saying that the contract employment doesn't also have these limita-
tions. I am saying that the notion that you get away from bureaucracy
by simply providing a tax credit `and you take care of it in the private
market is not valid, it will still have a very careful review by the
Internal Revenue Service, and a good deal of governmental judgment.
Secretary SHULTZ. One of the problems with it, I think is that you
might wind up with the Internal Revenue Service administering
human relations problems. And with all due respect to them, I don't
think that is `at all desirable.
Senator PROXMIRE. Your friendly tax collector.
Secretary SHULTZ. Well, we used to train some in our business school.
But it probably is the case that a tax-incentive approach would
lessen the amount of administrative detail that you would have to
engage in. So it is a matter of degree.
Senator PROXMIRE. if it did, you would very likely have a lot of
leakage.
Secretary SHDLTZ. I think probably you would rely on stipulations
of what people are doing, and also on the references from, say, the
Employment Service to an employer of an individual what would
qualify for this tax break. With these kinds of stipulations you could
proceed, and if people violated the trust involved, they would be
prosecuted.
That approach to the administration in this area has grown, and
in general it is a good approach.
I might just say one other word. And it takes this problem back
to the minimum wage discussion that we had. The contracting ap-
proach, the tax-incentive approach, any of these approaches to stimu-
lating greater employment for the disadvantaged, are in the nature
of special subsidies for their employment. The reason they are
needed-and I support them-is that the person that you are talking
about is not able to produce the value of his pay immediately.
So you have a method of, in effect, having the Government make up
the difference. I think that it is a perfectly good method. But I think
what. it suggests is that there is a relationship between the amount
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484
of pay a person is required to get. on a job and the decision about
whether that person is employable at that pay. Tha.t just seems to me
to be a pretty obvious proposition.
Senator PROxMIRE. Isn't one of the problems, too, the attitude of
the supervisory personnel? These are the people who will weed out
those who are inefficient and fire them. And that is one of the reasons
that they are supervisory personnel, tha.t is one of their jobs, they
have to do that. But a.t the same time, unless they understand the prob-
lem here, and have the understanding of the requirement for patience
and for seeing that these people do need particular help for a period
of time, it is going to-the program isn't going to work well. Isn't
it likely that this kind of approach is more sustainable with a. contract
method rather than with a. tax-incentive method?
Secretary SHULTZ. No. I think the problem is the same in either case.
But I agree with you that it is a. central problem.
Senator PROXMIRE. Are you working on t.hat aspect., too?
Secretary SHUTJFZ. It depends on the supervisor. But it is also the
union steward a.nd the work group in the particula.r plac.e where the
man or woman comes in to work tha.t you have to work with. I think
there have been some great and interesting strides t.a.ken by industry
in this rega.rd. And the Department of Labor programs support this
efFort.
But it is interesting that very explicit, specia.l training programs for
supervisors have emerged within industry on just this point. I think
they have learned a. few things of rather general interest to themselves
as a result. They have learned that their hiring standards are not nec-
essarily fit.ted to job requirements.
They have learned that. by giving a. lot of attention to the pro'cess by
which a person comes into employment., they probably can have a. con-
sidera.ble impact on the rate of t.urnover of people a.nd keep them on
the job longer. This is something not only applicable to the so-called
disadvantaged person, but much more broadly.
So I think there is coming to be a little more emphasis on the so-
called vestibule a.spe.cts of employment than there has been before.
Senator PROXMIRE. Just a couple more brief questions. Would you
say that much of the inflationary pressure is ca.used by wage increases
in the defense industry? Wage increases in the defense industry, I
understand, were faster and more substa.ntia.l than elsewhere. We have
received a lot of evidence before this com.mittee that the increase in
expenditures in procurement ha.ve been just enormous, a.nd that part
of this is because of the rapid increa.ses in wa.ges to get labor to do a
job, and do it in a hurry. Do you have any information on this?
Secretary SHULTZ. I don't have any special new information to
contribute on that.
(The following letter was subsequently received from Secretary
Shult.z:)
U.S. DEPARTMENT OF LABOR,
OFFICE OF THE SECRETARY,
TVasli!ngton. .Itarcli 6, 1969.
Hon. WILLIAM PROXMIRE,
Ui~. senate,
TVasltington., D.C.
DEAR SENATOR PROXMIRE: On February 20, in the course of my testimony before
the Joint Economic Committee, you referred to high wage rates in the defense
industry and their relation to high defense procurement costs. Although I corn-
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485
mented only in part at that time, I have since had the opportunity to research
this matter more fully.
Aerospace is predominant in defense procurement and aerospace wage averages
do tend to be somewhere higher than general industry averages. The apparent
explanation is not that the aerospace industry has experienced an escalating
wage spiral but that the industry has a significantly greater percentage ot
higher paid professional workers-mainly engineers and scientists. Today only
59 percent of aerospace employees are blue collar in contrast to 73 percent
for all other manufacturing industries. In the last several years there has
been a shift within the aerospace industry from blue-collar to white-collar
jobs. In 1959, for instance, 64 percent of aerospace employees were blue collar.
The average white-collar professional or technician earns $3,000 more per year
than his blue-collar counterpart, so it is clear that this larger white-collar
segment accounts for much of the differential in gross wages paid. In 1966,
out of about 1 million employees in erdnance and aircraft, 143,000 were scientists
and engineers and 54,000 w-ere classified as technicians. In mnaufacturing as a
whole, only about 3.5 percent were scientists and engineers and 2 percent tecimi-
ciaiis.
The foregoing doesn't fully depict differences between the pattern of job dis-
tribution in aerospace and other industries. Even within the aerospace blue-
collar ranks, for example, an extensive shift of jobs from unskilled to skilled
craft levels has occurred.
As I am sure you know this upward shift in job levels in aerospace has been
caused by the rapidly advancing technological state of its products. Industry
methods, materials, and designs have become increasingly sophisticated and
complex. A heavy component of advanced electroilics and instrumentation adds
to this picture.
For further comparison purposes we examined wage rates of the machinist.
job, a representative job found in several industries, and noted the wages for
that job in aerospace along with machinist's pay scales in three other major
industries-steel, automotive, and shipbuilding. Aerospace machinists earned
approximately $4 per hour as compared with $3.95 per hour average in the other
industries.
Comparisons of this nature are always difficult to make. Variations in pay
provisions, use of piece rates, recency of labor bargaining and region are all
factors which complicate exact comparisons. However, on a job-for-job basis
aerospace does not appear to differ greatly from other major industries.
I hope this information is more fully responsive to your question on this
subject.
Sincerely,
GEORGE P. SIIIJLTZ,
Secretary of Labor.
Senator PROXMIRE. It would be interesting to know this, because
this is something that is to some extent within Government control.
And it seems to me that we have done a poor job of limiting this kind
of inflationary factor. It is a great big thing in the economy, $43
billion a year of Defense procurement.
One final question. And this relates to the very helpful statement
that you make with regard to the need for training people in con-
struction. I am delighted to see you emphasize that. Governor Romney,
when he was before our Senate Banking Committee, pointed out that
this was one of the bottlenecks that we have. I understand that there
is a tough union problem here, and an understandable union problem.
What kind of progress do you anticipate you can make in this area
Secretary SHULTZ. I think that part of the union problem is con-
nected with the fears of job scarcity. So I keep emphasizing in my own
mind and my own thinking the strategic importance for practically
any questions you discuss of high employment.
Senator PRox~IIRE. Especially in the housing industry, where they
have this 10-year goal, that ought to help a. lot.
24-833-69-pt. 2--14
PAGENO="0210"
486
Secretary SHULTZ. The efforts to estimate overall demand for labor
in this industry, getting that known and understood well, are an
important part here. The efforts to work at the seasonality problem
seem to be an important aspect of reassurance to the union group.
And I think that there have been successes, and I hope these will con-
tinue, in the use of various governmental programs, combining contract
agreements with training, bringing in of apprentices, and so on.
So I agree that this is an important area, and there are various
ways of working at it. It is not the easiest thing in the world to do,
I am sure that is true, too.
Senator PRoxMniE (presiding). Senator Miller?
Senator MILLER. On this minimum wage again, at a time when you
are concerned about inflation, would not the bumping effect of an
increase in the minimum wage have a tendency to accelerate that infla-
tionary problem?
Secretary SHULTZ. You mean, if you increase the minimum is there
a pass through on up the line?
Senator MILLER. That. is right.
Secretary SHULTZ. Yes, it would tend to have that impact.
Senator MILLER. But the tax-incentive or contract approach would
not?
Secreta.ry SHULTZ. I think I may have confused matters by bringing
that in. I was trying to come back, I guess, to an analytical point in
my discussion with the Chairman about whether or not there is any
connection between the wage paid and the demand for labor of various
kinds. The use of the contracting approach or tax approach-the dis-
tinction between the two is not important for this point-but the fact
that contracting approach has worked to bring people who weren't
otherwise there onto payrolls suggests that there is this connection.
One of the things that has happened in the contracting approach is
filling this gap by the money that flows from the contract. That is what
the contract is really all about. And this is one piece of evidence, I
submit., on the question we were discussing. I will put it that way.
Senator MILLER. Finally, with this computer technology that is now
becoming available to us, would it be fea.sible to have minimum wages
according to regions around the country? What I am getting at is, a
minimum wage of $1.50 in New York certainly would be very little.
But in the State of Mississippi it would be very great.
I can see where it could cause a loss of industry in the State of Mis-
sissippi because of the economics involved. And what we want to do is,
we want to keep industry and increase industry in some of these rural
areas. And I am just wondering if this would be a feasible way of pos-
sibly modifying tile aggravation of the migration of people by having
a minimum wage on a reasonable basis according to the cost of living
in the region.
Secretary SHULTZ. Well, wage differentials do exist between dif-
ferent regions in the country.
Senator MILLER. Not only minimum wage.
Secretary SHULTZ. And they do have the impact of stimulating the
flow of economic developments. I suppose the concept of the statutory
minimum wage covering all parts of the country at once would be
that that is a minimum, and then States where there are very high
wages can put up a. higher minimum wage if they want. But at the same
PAGENO="0211"
487
time you create some base that avoids competition among regions on
the basis of, let's say, very low-wage labor.
And so I think that to a degree the approach you are suggesting
takes place naturally in the economic workings of the economy.
The fact that we have a minimum wage that covers the country as a
whole means that in thinking about it, one does have to think about
it in terms of the low-wage regions as well as the high-wage regions.
Senator MILLER. That is right. And that is why I am wondering
if it might be feasible to go this route.
In any event, could you have that looked into as a possibility?
Secretary SHULTZ. Yes, sir.
Senator MILLER. Thank you.
Senator PROXMIRE. Thank you very much, Mr. Shultz. You have
been a fine witness. And you talked about taking your orals again.
Certainly, we are not as well qualified as you on any score, but if we
were, we certainly would give you a high distinction in the job you did
here this morning.
The committee will reconvene on Monday, February 24, at 10 a.m.,
to hear four distinguished professors, who will look in their crystal
balls and tell us what is going to happen in the economic outlook.
That hearing will be held in room 318, Old Senate Office Building.
(`Whereupon, at 12:25 p.m., the committee recessed, to reconvene
at 10 a.rn., Monday, February 24, 1969.)
PAGENO="0212"
PAGENO="0213"
THE 1969 ECONOMIC REPORT OF THE PRESIDENT
MONDAY, FEBRUARY 24, 1969
CONGRESS OF THE UNITED STATES,
JOINT EooNoa~nc COMMITrEE,
Washington, D.C.
The Joint Economic Committee met, pursuant to recess, at 10 a.m.,
in room 318, Old Se~nate Office Building, Hon. Wright Patman
(chairman of the joint committee) presiding.
Present: Representatives Patman, Boiling, Brock, and Conable;
and Senators Proxmire, Sparkman, Miller, and Percy.
Also present: John R. Stark, executive director; and Douglas C.
Frechtling, minority economist.
Chairman PATMAN. The committee will please come to order.
This morning the Joint Economic Committee continues its hear-
ings on the state of the economy and the administration's program.
Our leadoff witness last week was the new Chairman of the Coun-
cil of Economic Advisers. He was followed by the Budget Director
of the new administration, and the secretaries of the Treasury and
Labor.
Today we are privileged to have a panel of four outstanding profes-
sors who are experts on the analysis of the economic situation in
our country. We are delighted to welcome you, gentlemen, and we
are grateful to you for your advice.
Our panel today consists of Prof. Lawrence R. Klein of the Uni-
versity of Pennsylvania; Prof. George L. Perry, University of Minne-
sota; Prof. Daniel B. Suits, University of Michigan; and Prof. Rob-
ert M. Williams, University of California at Los Angeles.
We hope that each of you can summarize your individual views
within 10 minutes to permit us ample time for questions. You may
always extend your remarks to include anything that is germane
to your discussion that you would like to have included in the printed
record.
* After you have presented your views the committee will interrogate
the panel under the 10-minute rule.
Professor Klein, we will begin with the discussion of your state-
ment. You may start off in your own way.
STATEMENT OP LAWRENCE R. KLEIN, PROFESSOR OF ECONOMICS,
UNIVERSITY OF PENNSYLVANIA
Mr. KLEIN. Thank you, Mr. Chairman.
Some of the main conclusions in the 1909 Economic Report of
the President and the umended presentation of the new Council of
Economic Advisers about the 1909 prognosis and the effects of recent
(489)
PAGENO="0214"
490
fiscal and monetary policies are generally in line with the predictions
made by the Econometric Forecasting Unit of the Wharton School
of Finance and Commerce, University of Pennsylvania, but there are
differences of detail that I would like to point out for the committee.
First, permit me to explain the method and background of my
calculations on the present and projected state of the economy. The
`Wharton EFTJ predictions are made from a mathematical-statistical
model of the U.S. economy consisting of some 70 simultaneous equa-
tions. This is a dynamic, nonlinear system of equations from which
economic projections are computed every quarter for a period extend-
ing eight quarters into the future. Every quarter, data on the economy
are assembled and updated for new projections. The `Wharton EFU
has been doing this since 1963 in cooperation with economists from
many of the Nation's largest corporations. We meet regularly every
quarter and assess the main assumptions of the projection solutions.
This is not a mechanical, arithmetic process. Late information and
judgment of all the participating members of our group are brought to
bear on the final solutions used. The present calculations reached were
decided upon at our regular quarterly meeting held February 14, 1969,
in Los Angeles, Calif. They are made for a base case which reflects
our best considered judgment on policy variables and unique events.
We also make contingency calculations for policy alternatives or other
events that may occur.
The principal assumptions that underlie our most recent calcula-
tions are:
1. The Federal income tax surcharge will be retained at a full
10-percent level for another year after July 1, 1969.
2. The war in Vietnam will continue at a slower tempo. This will
enable national defense outlays to grow at their recent slow rate.
Other Federal expenditures will grow at a restrained pace, but both
sets of Federal outlays will re-reflect a pay increase in 1969.
3. State and local expenditures will continue to grow approximately
as they have in recent quarters. I will read from my figures. The over-
all totals start out at 206.4 billion in 1969, first quarter, and increase to
210, 215, 219, 223, 227, 230, and 234 as of the eighth quarter the series
gives the annual rate of Government expenditures, GNP account basis.
ANNUAL RATE
tin billions of doliarsj
1968
4
1969
1970
1
2
3
4
1
2
3
4
Defense
Other Federal
Stateand locaL_...
80. 0
21. 7
101.2
80. 4
22. 0
104.0
80. 9
22.4
106.8
82. 4
23. 1
109.7
82. 8
23. 5
112.7
83. 3
23. 9
115.7
83. 7
24. 3
118.7
84. 1
24. 7
121.7
84. 6
25. 1
124.7
Total
203. 0
206. 4
210. 1
215. 2
219. 0
222. 9
226. 7
230. 5
234. 4
The assumption No. 3 is that monetary policy will continue to be
restrictive for the first three quarters of 1969 and will become some-
what easier. We are assuming a discount rate of 5.5 percent for three
quarters and then a rate of 5 percent. We place net free reserves at
minus $500 million for the next two quarters and then raise them
gradually toward zero.
PAGENO="0215"
491
4. Farm prices and income decline slightly during 1969.
5. World trade continues its slow growth of recent months.
6. The dock strike in the first quarter of 1969, the increase in social
security payments, and the payment of the retroactive portion of the
surtax, are all accounted for in our calculations.
The model calculations with these assumptions yields slow growth
in output during the first quarter of 1969. The quarterly increment in
GNP is placed at $1O-$11 billion in the present quarter, rising to about
$12 billion in the next quarter, and slightly more than $12 billion in
the third quarter, these are all annual rates.
For the remainder of the projection, quarterly growth is held to
less than $14 billion.
In this slower economy, unemployment is expected to rise to levels
as high as 4.5 percent and price inflation, measured by the GNP in-
flator, should be reduced by something between one-half and a whole
percentage point. Wage rates are projected at approximately 7 per-
cent per annum. Profits should recede from their present high levels
and recover somewhat after mid-1969.
The slow performance indicated by the Wharton EFU model in
early 1969 is below the rate implied by the Economic Report and the
yearly average growth in total output is smaller. Our estimate of GNP
for all 1969, given the reported value for 1968, is $916 billion. This
is lower than the estimate of the Economic Report and of many other
economic forecasters.
It is our opinion that the American economy changed its rate of ex-
pansion considerably in late 1968, as we had previously forecast, al-
though our projections had been to low for the third quarter, that the
pressures of restrictive measures are being felt more severely now,
and will continue to be felt in the next quarter of 1969. We do not
foresee a recission in this pattern of slowdown, but when the econ-
omy performs this slowly, unemployment should eventually increase
because of normal labor force and productivity growth. A possible
reason why we have not yet seen an effect of the slowdown in the
unemployment rate is that there has been some labor hoarding. Hours
worked per week have been falling for a few months, while the num-
ber of persons laid off has been kept small.
The turn-around of consumers under the pressures of higher taxes
and social security payments is reflected in modest calculations of
increases in consumer outlays of approximately $7 billion per quarter.
This is much smaller than 1968 increments prior to the fourth quarter.
In the first quarter of 1969, we have built the effects of the dock
strike into our solutions to yield a poor showing of net exports that
is partially made up in the second quarter. We probably differ from
the Economic Report in this respect. We also project n'iodest rises in
business fixed investment. The Economic Report is largely guided by
the results of surveys on investment intentions. These have been un-
usually optimistic recently, while our equations for predicting invest-
ment show more modest rates of expansion.
A result of these differences in specific aspects of the economic out-
look, together with our overall slower growth rate for C-NP in 1969,
produces a different budgetary assessment. Our projections of the
deficit-NIA accounting basis; Federal, State, and local-are that it
will be in surplus in the first two quarters of 1969 and then will turn
PAGENO="0216"
492
negative, at increasing rates, again. The lower income base implied
by our projections yields a smaller stream of receipts. Also, payments
must be made for benefits at our projected higher rates of unemploy-
ment, and, of course, the higher interest rates are a big burden on
interest payments by the Federal Government..
I have submitted some very late calculations that I wasn't able to
include in my written statement, which is a table of the GNP account
as it came off our computer output run. These are started in the left
column a.s being the last quarter of 1968, and then projected ahead for
the next 8 quarters. These figures have been slightly revised over
the weekend but they are very close to the numbers that we are releas-
ing for our first quarter forecast you can see in this table in line 17 the
gross national product. estimate in current prices. It starts at about
$897 billion as an estimate for the present quarter and grows in
smaller increments than we have recently seen during the next few
quarters.
To explain the notation in the tabulation, line 4 is total consumer
expenditures. Line 9 is investment in fixed plant and equipment. Line
10 is housing investment. Line 11 is inventory change. Line 15 is the
net foreign balance. Line 16 is Government expenditures. Line 18 is
GNP at constant prices. Line 19 is the GNP price deflator. Line 20
is corporate profits before tax. Line 21 is disposable income at current
prices and line 22 is the unemployment rate.
You can see that we project an almost level pattern of output in
the very near term and then a slight pickup. The unemployment rate
is expected to grow slightly in the first quarter. The January figure
is in but we would be projecting a higher figure for February and
March in order to come out with the quarter's average that we have
here.
Thank you.
(Tables follow:)
PAGENO="0217"
493
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PAGENO="0218"
494
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PAGENO="0219"
495
Chairman PATMAN. Thank you very much, sir.
Professor Perry, we will be very glad to hear from you, sir.
STATEMENT OF GEORGE L. PERRY, PROFESSOR OF ECONOMICS,
UNIVERSITY OF MINNESOTA
Mr. PERRY. Thank you, Mr. Chairman.
In order to be brief, I shall limit this statement to a summary of my
forecast for output, prices, employment, and the budget surplus, plus
a couple of observations on some policy implications of this forecast.
I can fill in some more detail of the forecast if you would like
during the question period.
The forecast assumes the surtax rates are extended and projects
Federal expenditures at very near the levels estimated in the January
budget. Also, in the forecast, interest rates do not rise significantly
from present levels and are expected to ease, but only a little, as the
year progresses. Under these conditions:
I expect the gross national product to increase by 7.2 percent or $62
billion, from $861 billion now indicated for 1968 to $923 billion this
year.
I am not as optimistic as the Government in 1969 President's Eco-
nomic Report about the likelihood of a substantial slowdown in prices
this year. There should be some deceleration of prices as the year
progresses. But more than half of my forecast GNP increase for 1969
is due to the rise of almost 4 percent that I expect in the GNP deflator.
With real output increasing more slowly than the economy's potential,
I expect the unemployment rate to average a little above last year's
3.6 percent and to approach 4 percent before the end of this year.
Consistent with outlook for GNP, I expect a 7l/2-percent growth
in personal incomes arid very little change in corporate profits in
1969.
I expect the Federal budget, on the national income accounts basis,
w-ill show a modest surplus for the year.
While the pattern of GNP advance in the forecast can be charac-
terized as somewhat faster in the second half of the year than in the
first. I do not expect a dramatic shift in the growth rate of real output.
In particular, I would not characterize the year as another 1967 when
a~ big change in the rate of inventory building resulted in a sharply
different rate of advance between the first and second halves. This
year, the modest pickup expected in the second half is due to the
Government pay increase, which contributes to GNP but not directly
to real output; and to other Government policy actions, both budg-
etary and monetary, which could well change from presei~t projections.
Finally, if I had ito project what now seem the most likely places
where this forecast might go wrong, I would list the rno~t policy-
sensitive sectors of demand, particularly-
Residential construction, w~here I now forecast a 1.5 to 1.6 mil-
lion rate of `housing starts for the year, a figure that could prove
too high if determinedly `tighter n'ionetary policy were pursued;
and
Purchases by all levels of Government, where the decidedly
larger increases I expect in the second half of the year compared
to the first could be pared if present budget plans are revised.
PAGENO="0220"
496
I am old-fash.ioiied enough in my economics to believe that fiscal
policy has a large influence on the level of GNP. And, in particular,
the surtax as well as the level of budget expenditures matter in today's
outlook. In contrast to so many remarks we have been hearing, I be-
lieve the evidence since the passage of the surtax shows that it has been
important in slowing the economy. The right place to look for surtax
effects is in consumer spendmg. And over the last 5 or 6 months, retail
sales have not moved up at all.
An early announcement that the surtax will be extended would be
useful, not only through its possible effects on consumer demands, but
through its desirable influence on inflationary expectations. It might
help avoid a substantial clisintermediation in financial markets which
would once again seriously depress the residential construction indus-
try. Generally, I favor flexibility and believe it. is desirable to keep
policy options open. But in this case. the probability that the Govern-
ment will want to extend the surtax next summer seems high enough
and the advantages to an early announcement significant enough,
that a prompt call for full extension is warranted now.
\Vith inflation recently accelerating, our foreign t~-acle surplus vir-
tually gone, and the average unemployment rate at 3.3 percent, econ-
omists today are as nearly unanimous as they will ever be in calling for
some slowdown from recent ra.tes of GNP growth. When it comes to
how much of a slowdown will be needed to achieve an given improve-
ment in the inflation record and how extended a slowdown policy
should aim for, differences begin to appe.ar.
The policy of trying to slow inflation gradually and over an extended
period that was outlined in their testimony by the President's Council
of Economic Advisers seems easily the best. approach to take at this
time. I am not an optimist on the inflation problem. I do not think it
will slow down quickly, so I hope the Government is patient in pursuing
its policy of gradual adjustment.. And while we can improve on the
most recent record, we may, in the end, still have to tolerate a noticeable
degree of inflation if we are to maintain high employment in the longer
run. This outcome is made more likely to the extent. that the potential
evils of something like the old guidepost policy are thought to out-
weigh its possible benefits-a conclusion that is hard either to verify
or to refute-so that we take no new initiatives on these lines. Other
Policies that can help, particularly those directed at manpower training
andl labor market problems, have become less controversial. They seem
to be limited mainly by our ability to agree on the details of imple-
menting andl administering them and, more fundamentally. by our
willingness to pay for them on a large enough scale.. Desirable as they
may be, I dloubt that they can full reconcile low unemployment with
price stabilit , and especially doubt that. they can be counted on for
much help in the near-term transition from present inflation rates.
While stabilization policy thus may have to take hia~her unemplov-
ment as the cure for todays inflation, steps can be taken to minimize
the costs of taking the cure. Even a modest. rise in unemployment has
substantial costs for many individuals. As the Council showed in its
testimony, when the average unemployment rate fell 14 percent diuring
the past year, from a (seasonally unadjustedi) rate of 3.7 to 3.~ per-
cent between the fourth quarters of 1967 and 1968, the unemployment
PAGENO="0221"
497
rate in urban poverty areas fell by 25 percent and the rate for blacks in
these areas fell by nearly 30 percent.
By the fourth quarter of 1969, these changes may have been reversed,
indeed will have been according to the kind of forecasts that are being
made today. And before inflation is slowed much, unemployment is
likely to be considerably higher in these groups. While this may be an
inevitable result of a necessary slowdown, the amount of individual
cost that has typically been involved in rising unemployment, espe-
cially to those in the high unemployment groups, is neither inevitable
nor necessary. Anything that can be done to minimize this cost will
make the anti-inflation program far more acceptable. This certainly
justifies adequate access to programs with additional, longer run pay-
offs, such as education and training programs, for those unemployed
who could benefit from them. In my opinion, it also calls for strength-
ening programs that openly transfer income to those who lose jobs and
who do not get sufficient assistance in other ways-either because exist-
ing training or employment programs are inadequate, because they do
not qualify for them, or because the existing system of unemployment
compensation does not cover them or provides inadequtae coverage.
Chairman PATMAN. Thank you, Professor Perry.
Professor Suits, we should be very glad to hear from you, sir. You
may proceed in your own way.
STATEMENT OF DANIEL B. SUITS, PROFESSOR OF ECONOMICS,
UNIVERSITY OF MICHIGAN
Mr. SUITs. Mr. Chairman, the economic outlook that I shall present
today was compiled by the research seminar in quantitative economics
at the University of Michigan as part of a research project supported
by the National Science Foundation. I wish, in particular, to thank my
able colleague Prof. Saul H. Hymans for his contribution to its prep-
aration.
BAsIC FACTORS IN THE OUTLooK
The outlook is predicated on the projections of several basic ele-
ments.
1. The 10-percent surcharge on personal and corpora.te income taxes
is projected to be renewed and continued in effect.
2. Total Federal Government purchases of goods and services are
projected to hold at the level of the last quarter 1968 until the begin-
ning of the fiscal year 1970, when they will rise modestly in response
to prospective pay increases.
3. State and local purchases of goods and services are projected to
rise at a trend rate of $2.8 billion per quarter.
4. Monetary policy is projected at about the present level of tight-
ness.
5. Projections of business fixed investment during the first two quar-
ters are made consistent with investment intentions reported ill recent
surveys, and only small increases have been allowed for the last two
quarters of the year.
6. Exports are projected to rise at a trend rate of $.8 billion per
quarter.
PAGENO="0222"
498
EcoNo~rr To SLOW DowN
The resulting economic outlook is presented in the accompanying
table. Gross national project is forecast to rise from the $88~.4 billion
level of the fourth quarter of 1968, to reach $932.2 billion by the end
of 1969. This would represent an average of $914.9 billion for the year
as a whole compared to $860.7 billion for 1968.
ECONOMIC OUTLOOK FOR 1969
1968,
IV
1969
L
II
III
IV
Year
Gross national product
Consumption expenditure
Gross private domestic investment
Business fixed investment
887. 4
546. 8
136. 5
94. 3
897. 4
552. 8
137. 3
96. 2
906. 1
558. 2
137. 3
97. 6
924. 0
568. 5
138. 9
98. 6
932. 2
573. 0
139. 1
99. 6
914. 9
563. 1
138. 2
98. 0
Residential
31. 6
32. 2
32. 4
32. 4
32. 8
32. 5
Inventory accumulation
Net exports
Exports
Imports
Government purchases of goods and services
Federal
10. 6
1. 0
50. 1
49. 1
203. 1
101. 6
8. 9
1. 4
50. 9
49. 5
205.9
101. 6
7. 3
1. 8
51. 7
49. 9
208.7
101. 6
7.9
1. 8
52. 5
50. 7
214.8
104. 9
6. 7
2. 2
53. 3
51. 1
217. 9
105. 2
7. 7
1. 8
52. 1
50.3
211. 8
103. 3
Defense
80. 0
80. 0
80. 0
82. 2
82. 2
81. 1
Other
21. 6
21. 6
21. 6
22. 7
23. 0
22. 2
State and local
101.5
104.3
107.1
109.9
112.7
108.6
Addenda:
Unemployment rate (percent of civilian labor
force)
Implicit deflator for GNP (1958=100)
Gross national product in 1958 prices
3.4
123. 5
718. 5
3.4
124. 5
720. 8
4.0
125. 5
722. 0
4.1
126. 9
728. 1
4.5
127. 8
729. 4
4.0
126. 2
725. 1
The quarterly pattern of the forecast reveals a very flat first half
of the year followed by more rapid growth during the second half.
This follows partly from the pattern of taxes. The forecast first half
of the year is held down by the increase in social security taxes al-
ready in effect., and by the addition to final income tax settlements
associated with the tax surcharge, but coupled with the $10 billion
inventory accumulation during the last quarter of 1968. The greater
buoyancy of the second half is partly the result of the termination of
these final settlements, and the addition of the pay increase to Govern-
ment purchases.
The components of total output do not grow uniformly. Consumer
spending is forecast to rise almost 5 percent, but the growth in gross
private domestic investment is only 2 percent, partly because of the
slower rate of inventory accumulation a.t the end of the year. Net
exports, on the other hand, are forecast to double as imports grow
more slowly than the projected rise in exports. Government purchases
of goods and services rise 9 percent.
Overall, the forecast represents a substantial reduction in the growth
rate of the U.S. economy. In contrast to the gain of almost 10 per-
cent registered during the year just pa.st, the GNP forecast for the
end of 1969 is onhy 5 percent above the fourth quarter of 1968. When
adjusted for an expected 3.5-percent increase in prices, this amounts
to a gain of less than 2 percent in physical volume of output, com-
pared to 5.5 percent. for the corresponding period last year.
PAGENO="0223"
499~
RISING UNEMPLOYMENT BUT PRICE INCREASES To CONTINUE
The forecast growth in gross national product is too slow to absorb
the expected new entrants into the labor force and still compensate
for rising productivity, and will be accompanied by rising unemploy-
ment that we expect to reach 4.5 percent of the labor force by the
end of the year.
Despite slower growth and rising unemployment, however, price~
will continue to rise at almost the same pace as during 1968. The reason
for this is the backlog of undigested costs now in the economy.
Producers cannot respond instantly to changed conditions, and there
is necessarily a delay `between the time a firm finds its costs rising and
the time it can make appropriate price adjustments. Moreover, higher
output prices of material producing firms represent higher inj~ut costs
to their customers, and there is further delay before prices rise at the
next stage of production. Our calculations indicate that it takes an
average of 3 years before an initial increase in unit cost fully emerges
in prices of final output, and for this reason any slowdown in the rate
of economic growth has its first impact on jobs rather than on non-
farm prices.
UNDERLYING COST PRESSURES REDUCED
Although the rate of price increase will be largely maintained
through the year, underlymg cost pressures will diminish and less in-
flationary steam will be generated beneath the surface than has been
true in the recent past. Employee compensation per man-hour is fore-
cast to rise only 5.5 percent this year, in contrast to recent rates of
increase of almost 7 percent. With normal productivity increases, this
implies a rise in unit labor cost of only 3.5 percent, a decline from
rates of increase of 4 and 5 percent recently experienced. In other
words, although rapid price increases can be expected to continue
through this year, we are slowing the buildup of costs on which
prices during 1970 and 1971 are going to depend. If slow growth in
total output is maintained, the rate of inflation will be substantially
abated by that time.
DIRECT MEASURES ARE NEEDED To CHANGE THE TRADEOFF BETWEEN
INFLATION AND UNEMPLOYMENT
Although maintaining slow growth through 1970 can bring the rate
of price increase back to something like 2 percent per year, our an-
alysis indicates that this slow growth will be accompanied by rising
unemployment which will take us back to the rates of joblessness in
excess of 5 percent that characteristized the years from 1958 to 1964.
During that period, prices as measured by the implicit deflator for the
gross national product rose from their 1958 base of 100 to only 108.8,
an `average annual growth of only 1.4 percent. But this price stability
was purchased at the cost of unemployment that never involved fewer
than 5 percent of the labor force, and during 2 years averaged over 6
percent.
To put the matter another way, the present rate of price inflation is
not the result of special economic "distortions" that can somehow he
untangled to yield stable prices without loss of jobs. Rapid price infla-
PAGENO="0224"
500
tion and low unemployment are ultimately tied together in our econ-
oniy. WTe cannot eliminate one without ultimately losing the other.
This poses a serious policy dilemma that we have so far failed to face
up to. Purely global policy measures-whether fiscal or monetary, and
in whatever combination-merely buy price stability with high unem-
ployment, or pay for more jobs with higher inflation rates. Either
way, somebody gets hurt for the protection of somebody else. Either
way the divisive social forces evident today are further irritated. The
real policy question is not how to choose among the alternatives offered
by the existing trade-off between unemployment and inflation, but
how to change the terms of the tradeoff itself. This cannot be done by
global action, but only by specific programs designed to increase the
education, skill mobility, employment potential, and employment op-
portunity of the unemployed worker.
Chairman PAmIAX. Thank you, Professor Suits.
Professor Williams, we are glad to have you, sir, and you may pro-
ceed in your own way.
STATEMENT OF ROBERT M. WILLIAMS, PROFESSOR, GRADUATE
SCHOOL OF BUSINESS ADMINISTRATION, UNIVERSITY OF CALI-
FORNIA AT LOS ANGELES
Mr. WTILLIAMs. Thank you, ~MIr. Chairman.
It is indeed an honor and a pleasure to appear before this committee.
I have been asked to focus my testimony on the economic outlook. In
carrying out this suggestion I shall present the UCLA business fore-
cast for the Nation in 1969, which was the first presented on Decem-
ber 3, 1968, and recently was revised on the basis of more recent
information, particularly data for the fourth quarter of 1968.1
Since 1952, a. panel of economists at UCLA Graduate School of Busi-
ness Administration has PrePared an annual forecast of GNP and its
components and other national economic series. More recently, when
national forecasts became more common, we began to make addi-
tional forecasts for California and subregions of the State.
Our forecast presented today does not differ materially from our
preliminary forecast for 1969 made last September, which in turn
was much like that made in early December. I mention this to point
out that we have believed for some time that time American economy
would continue to expandi through 1969. although at a slower rate than
prevailed in 1968. We never subscribed to the. concept of "fiscal over-
kill" feared by some following adoption last June of time Revenue and
Expenditure Control Act of 1968.
Before discussing time details of our 1969 forecast, let me state two
basic assumptions. First, we expect that war in Vietnam will gradually
dimimsh in intensity. lYe believe, however, that total manpower com-
mitments in Southeast Asia. will not decline significantly this year, andi
that total defense expenditures will increase somewhat. The second
assumption is that time 10-percent tax surcharge on personal and corpo-
rate income will be extended at least through 1969. Moreover, speaking
1 See the UCLA Business Forecast for the Nation and California in 1969, Robert M. Wil-
hams, editor; contributors include: T. A. Andersen, F. B. Case, D. Eitemnn, C. Ervin, W. A.
Fogel, M. Granfield, C. Huizenga, E. C. Miller, F. G. Mittelbach, R. E. Moor, F. B. Norton,
S. L. Rabin, D. Ratajczak, J. y. Schmidt, J. P. Shelton, P. L. Smith, J. F. Weston, and F. M.
Williams.
PAGENO="0225"
501
for myself, I believe that the surtax should be extended to rednce
upward pressures on demand and prices and to reduce or eliminate
the Federal budget deficit, thereby making it possible for the Federal
Reserve System to conduct a more flexible monetary policy.
A FORECAST OF 13 SELECTED ECONOMIC SERIES
Turning now to the details of our forecast, table 1 shows annual data
for the last 5 years and the 1969 forecast for 13 selected economic series.
TABLE 1.-SELECTED ECONOMIC SERIES, 1964-1968 AND THE UCLA FORECAST FOR 1969
1967
1968
Forecast
1969
1964
1965
1. Gross national product (billion current dollars) -
2. Federal Reserve Board Index of Industrial Prod-
632
685
748
790
158
860. 7
165.3
921. 0
170
ucts(1957-59==100)
3. Private housing starts (million)
4. Automobile production (million)
5. Wholesale Price Index (Bureau of Labor Statistics
1957-59=100)
6. Consumer Price Index (Bureau of Labor Statis-
tics, 1957-59=100)
7. Civilian employment (million)
8. Unemployment as percent of civilian labor force
9. Average hourly earnings, manufacturing indus-
tries (dollars)
10. Inturest rate on 3-month Treasury bills, percenL
11. Corporate bond yield (Moody's Aaa) percent....
12. Corporate profits before taxes (billion dollars) 1
13. Dow-Jones average of 30 industrial stuck prices:
High
Low
132
1. 53
7.8
100.5
108.1
69. 3
5. 2
2.53
3. 55
4.40
66. 3
892
766
143
1.47
9.3
102.5
109.9
71. 1
4. 5
2.61
3.95
4.49
76. 1
969
841
156
1. 16
8.6
105.9
113.1
72. 9
3. 8
2.72
4.88
5.13
83. 9
995
744
1. 29
7.4
106.1
116.3
74. 4
3. 8
2.83
4. 32
5.51
80. 4
943
786
1. 50
8.8
108.7
120.9
75. 9
3. 6
3.01
5.34
6.18
89. 2
985
825
1. 60
8.5
111.0
125.0
76. 9
3. 9
3.15
5. 15
6.15
92. 0
1,060
900
1 With inventory valuation adjustment.
The first is "Gross National Product," which is discussed in some
detail later. Suffice to say here that, although our forecast of GNP
of $921 billion is higher than that of some other private forecasts, it is
the same as that presented in the 1969 Economic Report of the Presi-
dent and adopted by Dr. Paul McCracken, Chairman of the present
Council of Economic Advisers, in his statement to this committee last
week.
"Industrial Production," which includes output of manufacturing,
mining, and utilities industries, is expected to increase by 4.7 points
in the Federal Reserve Board Index in contrast to 7.2 points in 1968.
This reduced rate of growth is about in proportion to that expected
in "real" GNP.
"Residential Construction" is expected to continue the expansion
which began in 1967, with the number of new private housing starts
advancing to 1,600,000 in 1969 from 1,500,000 in 1968. In support of
this optimistic forecast, the basic demand for housing in terms of
existing vacancies is extremely strong, and we believe that the supply
of mortgage credit, building materials, and skilled labor will be ade-
quate to do the job.
"Automobile Production" is forecast to decline somewhat from the
high level of 8.8 million reached in 1968 to 8.5 million in 1969.
"Wholesale Prices" are expected to increase by 2.3 index points or
2.1 percent in 1969, or slightly less than the 2.4-percent rise in 1968.
"Consumer Prices" are predicted to increase by 4.1 index points or 3.4
percent in 1969, or slightly less than the nearly 4.0-percent rise in 1968.
24-833-69-pt. 2-15
PAGENO="0226"
502
"Civilian Employment" is forecast to increase by 1 million in 1969
compared with 1,500,000 in 1968.
"Unemployment," as `a percent of the civilian labor force, is expected
to increase from the low level of 3.6 percent in 1968 to an average level
of 3.9 percent in 1969.
"Average Hourly Earnings in Manufacturing Industries" are pre-
dicted to increase by 14 cents per hour in 1969 compared with 18 cents
in 1968. This reduced rate of increase in wages in 1969 results from two
factors. First, several important wage contracts made in 1968 provide
for smaller increases this year than last. Second, premium payments
for overtime worked will be lower in 1969 because of the shorter
average work week expected.
"Short-term Interest Hates," as measured by the yield on 3-month
Treasury bills, are expected to decline slightly from the high `average
level of 5.34 percent in 1968 to 5.15 in 1969. These rates are high now but
are expected to decline in the second half of the year.
"Long-term Interest Rates," as measured by the yield on Moody's
Aaa corporate bonds, are forecast to decline very slightly from 6.18
percent in 1968 to 6.15 percent in 1969.
"Corporate Profits," before taxes and adjusted for inventory valua-
tion, increased by nearly $9 billion to a record level of $89.2 `billion
in 1968 and are expected to increase to $92 billion in 1969.
"Stock prices," as measured by the Dow-Jones Average of 30 indus-
trial stocks, are expected to break 1,000 before the end of 1969. This
barrier was approached early in 1.966, when the DJIA reached 995, and
again in November 1968, when the average reached 985. Early last
week the stock market declined, allegedly in reaction to some of the
testimony and discussions in this committee. At present, the DJIA
is near the lower end of the range between 900 and 1,060 which we
expect in 1969.
THE FORECAST OF C-NP ix 1969
Table 2 shows the forecast of C-NP and its major components for
1969. C-NP stated in current dollars is expected to increase 60.3 billion
or 7 percent in 1969, compared with an increase of $71 billion or 9 per-
cent in 1968. In real terms, the expected increase is 3.4 percent in 1969
compared with 5 percent in 1968. The price increase in 1969, as re-
flected in the implicit price deflator for total C-NP, is expected to be
3.5 percent, slightly less than the 3.8-percent increase recorded in 1968.
All components of C-NP shown in table 2 are expected to increase
except two, change in inventories-line 10-and net exports of goods
and services-line 11-which are expected to decline slightly. Personal
consumption expenditures are expected to increase $36.1 billion or 6.8
percent, gross private domestic investment by $8.5 billion or 6.1 per-
cent, a-nd total government purchases of goods and services by $16.1
billion or 8.2 percent.
PAGENO="0227"
503
TABLE 2.-GROSS NATIONAL PRODUCT 1965-68 AND THE UCLA FORECAST FOR 1969
[In billions of current dollarsj
Actual
Forecast,
1969
Line 1965
1966
1967 1968
1 Personal consumption expenditures 432. 8
465. 5
492. 2 533. 7
569. 8
2 Autos and parts 30. 3
3 Other durable goods 36. 0
4 Nondurable goods 191. 1
5 Services 175.5
30.4
40. 1
206. 7
188.3
30. 4 36. 5
42. 2 46. 0
215. 8 230. 2
203.8 221.0
37. 0
49. 5
245. 0
238.3
6 Gross private domestic investment 108. 1
120.8
114.3 127.5
136.0
7 Residential construction 27. 2
8 Other construction 25.5
9 Producers' durable equipment 45. 8
10 Change in inventories 9. 6
24. 8
28.5
52. 8
14. 7
24. 6 30. 0
27.9 29.2
55. 7 60. 8
6. 1 7. 6
34. 0
31.0
65. 0
6. 0
11 Net exports of goods and services 6.9
12 Government purchase of goods and services 137. 0
5.1
156. 2
4.8 2.4
178. 4 197. 1
2.0
213. 2
13 Federal 66.9
14 (National defense) (50. 1)
15 (Other, including NASA) (16.8)
16 State and local 70. 1
77.4
(60. 6)
(16.8)
78. 8
90.6 100.0
(72. 4) (78. 9)
(18.2) (21.1)
87. 8 97. 1
106.8
(82. 8)
(24.0)
106. 4
17 Gross national product 684. 9
747. 6
789.7 860. 7
921. 0
18 Amount of increase 52.5
19 Percent increase 8.3
20 Percent "real" increase 6.3
21 Percent price increase 1.9
62.7
9.2
6.4
2.6
42. 1 71. 0
5.6 9.0
2.4 5.0
3. 1 3.8
60.3
7.0
3.4
3.5
[Dollar amounts in billions[
1968
1969
Percent
increase
Personal income
Disposable personal income
Personal saving
Personal saving as a percent of disposable personal income
$685.8
589. 0
40.8
$730.0
626. 0
41.2
6.4
6. 3
1.0
6. 9
6. 6
Included in our forecast are the following changes in personal in-
come and related variables.
As stated above, we expect a growth in real G-NP of 3.4 percent in
1969. On the supply side, this assumes the following changes from
1968:
Percent
change
ProductivFLy per man hour 12.2
Average hours worked per year -0.45
Employment rate -0. 3
Labor force participation rate 0.05
Population 16 years of age and over 1.9
1 This is down from 2.9 percent in 1968.
Table 3 shows the quarterly profile of GNP and its components for
1968 and 1969. Data through 1968, of course, are from published data
now available. We forecast that QNP will increase by $11.2 billion in
the first quarter of 1969, substantially less than in any quarter in 1968.
GNP is expected. to increase by $12.5 billion in the second quarter and
by $17.5 billion and $15.5 billion in the third and fourth quarters,
respectively.
PAGENO="0228"
504
TABLE 3.-TUE QUARTERLY PROFILE IN GNP IN 1968 AND 1969
[In billions of current dollars at seasonally adjusted annual rates[
1968
Line Item 1 2 3 4
1969
1 2 3 4
1 Personal consumption expenditures_ - 519. 4 527.9 541. 1 546. 3 555. 5 564. 5 574. 5 584. 5
2 Autos and parts 34. 6 35.4 38. 1 38. 0 37. 0 37. 5 36. 5 37. 0
3 Other durable goods 44. 4 45. 6 47. 0 46. 8 48. 0 49. 0 50. 0 51. 0
4 Nondurable goods 226. 5 228. 2 232. 7 233. 5 238. 0 242. 0 247. 5 252. 5
5 Services 213. 9 218. 7 223. 4 228. 0 232. 5 236. 0 240. 5 244. 0
6 Gross private domestic investment_ - - 119. 7 127.3 127. 1 136. 1 136. 5 135. 0 136. 0 136. 5
7 Residential construction 28. 5 28.9 28.9 31.2 33. 0 33. 5 34. 5 35. 0
8 Other construction 29.6 28.5 28.8 29.8 30.5 30.5 31.0 32.0
9 Producers' durable equipmenL - - 59. 0 58. 5 61. 3 64. 4 65. 5 65. 0 65. 0 64. 5
10 Change in inventories 2. 1 10.8 7. 5 10. 0 7. 5 6. 0 5. 5 5. 0
11 Net exports of gosds and oervices_ 1. 5 2. 0 3. 3 3. 0 1. 5 2. 5 2. 0 2. 0
19 Government purchases of gosds end
services 19. 50 195.7 199.6 202. 5 205. 5 209. 5 216. 5 221. 5
13 Federal 97.1 100.0 101.2 101.6 102.5 104.5 109.0 111.5
14 (National defense) (76.8) (790) (79.6) (80.0) (80. 0) (81. 5) (84.0) (85. 5)
15 (Other, including NASA) (20. 3) (21. 0) (21. 6) (21.6) (22. 5) (23. 0) (25. 0) (26. 0)
16 State and local 93.4 95.6 98.4 100.8 103.0 105.0 107.5 110.0
17 Grass National product 832. 1 852.9 871.0 887.8 899.0 911.5 929.0 944.5
18 Amount of increase 20.2 21.7 18.1 16.8 11.2 12.5 17.5 15.5
19 Implicit price deflator, 1958=100_ - - - 120. 0 121.2 122. 3 123. 5 124. 5 125. 5 126. 7 127. 6
Source: Survey of Curreat Business, January 1969, for data through 4th quarter, 1968
It should be pointed out that the accurate distribution of annual
national output by quarters is difficult. We believe, however, that our
forecast of G-NP for the year is reasonable and that the second half
of the year will see more rapid growth than the first half. If this
prediction is accurate, then it is very important that the tax surcharge
be returned through 1969. If the tax surcharge is not continued past
June 30, 1969, we believe that prices and interest rates will be higher
than we have predicted. Also, if the. surcharge is not extended, total
production, employment, and corporate profits will be somewhat
higher but residential construction will be lower.
In conclusion, assuming that the tax surcharge is extended through
1969, we believe that the economy will grow at the respectable rate of
3.4 percent in real terms and that a start will be made towa.rd reducing
the rate of inflation. It is not possible in this brief stateinen~ to defend
all the numbers presented in the three tables, so at the proper time I
shall be glad to attempt to answer any questions you may have.
Thank you.
Chairman PATMAN. Thank you, Professor Williams. Senator
Sparkman?
Senator SPARKMAN. Doctor, in your statement, just before you start
on your conclusion, you inserted something there.
Mr. WILLIAMS. Yes, I did.
Senator SPARKMAN. Would you read it, please?
Mr. WILLIAMS. The sentence inserted was as follows:
Also if the surcharge is not extended total production, employment and cor-
porate profits will be somewhat higher, but residential construction will be lower.
Senator SPARKMAN. Thank you.
Chairman PATMAN. I notice you said that "if the tax surcharge is
not continued past June 30, 1969, we believe that interest rates will he.
higher than we have predicted."
PAGENO="0229"
505
Now, it has been amazing to a lot of people why housing starts have
gone up in the recent past when interest rates and cost of closing loans
generally have been very, very high.
The information I get from over the country is that it is based upon
one argument to buyers or prospective homebuyers that if they don't
buy now although interest rates are excessive you will have to pay
more later.
Do you agree. with that, Professor Klein?
Mr. KLEIN. I think the inflationary psychology has been with us,
certainly, and very much of an issue in the last 6 months.
We have found, however, in the case of home buyers that when
credit is available, even though rates are high, house purchasing still
goes on.
The one instance in which we found high interest rates and a marked
reaction downward in the housing market was in 1966 when the tight
money conditions were associated with lack of funds for mortgage
lending.
I think if we are in a situation where interest rates are high and
construction costs are high but funds are still available for mortgage
lending then we won't see such a strong reaction in the housing market
as we did in 1966.
Chairman PATMAN. I believe the argument that if you don't buy
now, it will cost you a lot more later is a very persuasive one, and I
suspect it is the main argument that leads them into signing contracts
to buy at such high rates of interest and such other real extortionate
charges in addition to the high interest rates.
I would like to ask each of you gentlemen to respond to a question
that concerns me.
Last week representatives of the administration told this committee
that they favored continuation of the surtax plus a tight money policy,
in order to achieve less inflationary pressure in the economy. They also
conceded under questioning that this would increase unemployment.
Will you gentlemen please comment on this policy. Do you agree?
Professor Williams, suppose we start with you first on that.
Mr. WILLIAMS. I think I can agree with that in general. However,
it should be pointed out that if the surtax were not extended, and this
was the point that I would like to make quite `strong, the monetary
policy would have to be tighter than otherwise. So it is a question of
combining the surtax with a tight money policy or the lack of a surtax
with a much tighter monetary policy, which I would not like to see.
I think there is a point at which housing might be affected adversely
by tight money. I think that unlike 1966 housing will expand with the
present high interest rates. As you indicated, money is available now,
but I think the ceiling on the amount the savings and loan associations
can pay, for example, at the present time would possibly lead to dis-
intermediation with very high interest rates.
Chairman PATMAN. Professor Perry, do you believe you can stop
inflation just by increasing interest rates?
Mr. PERRY. That would be only one indirect, initial result of a
monetary policy aimed at slowing inflation. Certainly, too, today's
higher interest rates partly reflect the existence of inflation and infla-
tionary expectations.
Chairman PATMAN. I believe that the higher you put the interest the
higher you put prices. Therefore, the higher the price is the more infla-
24-S33-69-pt. 2-16
PAGENO="0230"
506
tion, and I personally don't agree. I don't see where you can stop
inflation that way.
Now, of course, there are ways of stopping inflation, and I will ask
you gentlemen if you agree that these two ways of stopping inflation,
No. 1, is to increase the reserve requirements of banks, in other words.
to dry up to some extent the sources, the volume of funds. If it gets
really ruinous and it looks like prices are going up through the roof,
the next step is to siphon off the purchasing power, the excess pur-
chasing power through taxes, siphon it off and pay it on the national
debt.
In that way you would serve two purposes. You would stop the
inflation and at the same time you would help the Government by
reducing the cost of servicing the national debt, because cost of the
national debt now is approximately about $16 billion, and if you will
go back 14 years to the time we kept the interest rates low, and com-
pare it with that, you will find we are paying $8 billion a year too
much.
Do you believe we can stop inflation like I suggested, Mr. Suits?
Mr. SUITS. I think that there are a number of combinations of
monetary policy and tax policy which could slow down the economy
and stop inflation. If we are to operate on the global level without
specific controls or specific programs, then one way or another we must
reduce the aggregate amount of expenditure. We can do this by
reducing the availability of loan funds, or we can reduce the availabil-
ity of spendable income by removing income from individuals by taxa-
tion. Either way we operate on this global level, we are simply going
to slow down the economy and buy reduced inflation with more
unemployment.
Chairman PATMAN. Why do you say that is more effective than
raising the reserve requirements of banks?
Mr. SUITS. Well, the raising the reserve requirements of banks is a
mechanism wher~by one~
Chairman PATMAN. Or reducing the reserve requirements of banks.
Mr. SUITS. Reducing the reserve requirements of banks would, of
course, make the funds available, and would increase the rate of
inflation.
Chairman PAmIAN. I am talking about expanding 10 to 1 and have
8tolor6tolor4tol.
Mr. SUITS. Yes.
Chairman PATMAN. That is bound to reduce the volume of the
money; isn't it?
Mr. SUITS. Yes, indeed.
Chairman PATMAN. And that would be an effective way, wouldn't
it?
Mr. SUITS. Indeed it would.
Chairman PATMAN. The Federal Reserve Board has never seen fit
to use that method. Probably the one time was in 1936, when we were
paying out four and a half billion dollars to three and a half million
veterans. They wanted to do something about what they considered
to be run away inflation. They made it so difficult and hard that the
country didn't get as much benefit from the payment of that money
to every section of our Nation that I felt our country should have.
But I have never known them to use it generally, have you?
PAGENO="0231"
507
Mr. Surrs. I am not an authority on the existence of Federal Re-
serve controls, Mr. Patman, as you no doubt are.
Chairman PATMAN. Well, I have been disappointed because, of
course, that would take a little profit away from the banks if they
did that. But why shouldn't the banks come in this and sacrifice to
help stop inflation. That certainly would be an effective way.
Mr. SUITs. Indeed.
Chairman PATMAN. Don't you agree?
Mr. SUITS. Indeed.
Chairman PATMAN. Don't you agree, Dr. Klein?
Mr. RLEIN. I would say, Mr. Chairman, that we are called here this
morning to talk about the economic outlook and we have put our
assessments-
Chairman PATMAN. That is all right, I apologize for getting you off
the track.
Mr. KLEIN. Well, we put our assessments in terms of the policies
that are usually followed, and I think the discussion is very circum-
scribed. We think of interest policy and we think of tax policy, and
I would say that the thinking is a bit unimaginative. Surely there are
other ways to stop inflation than having a rise in the unemployment
rate, and I think there is a good deal of merit in your suggestion about
considering reserve requirements as well as traditional discount and
open market policies.
And I would like to say, in addition, that there has been very little
thinking about ways of stimulating private savings. If we can drive
the economy at a high rate of production and simultaneously induce
people to save a higher portion of their income I think we could have
a chance of reducing the pressure on prices and, at the same time, keep
employment at a high level.
Chairman PATMAN. Thank you, sir.
Mr. Brock?
Representative BROOK. Thank you very much, Mr. Chairman.
I am intrigued by your last comment, Professor Klein, and I would
like to pursue it a bit.
What would be the impact on interest rates if you raised the reserve
requirements?
Mr. KLEIN. Well, I think we could equate things like changes in
the discount rate of a point, and an open market operation of a billion
dollars and a change in reserve requirements probably of 1 or 2 per-
centage points, as equivalent impacts on supply of money. I think
if we would consider changing the reserve requirements behind either
time or demand deposits, by a full point from the present levels, that
would be a step in the direction that we would want to consider. We
are now considering discount rate moves of a half point or so and
this would be in the same order of magnitude.
Representative BROOK. What you are saying is that you have to have
a balanced program and, in effect, the balance would reallocate the
monetary resources to some degree particularly in the area of resi-
dential construction. For example, if you did this you would make
more money available to savings `and loans and less available to banks.
Let's just take the first question I asked you. If, taken by itself,
you raised the reserve requirements of banks would it not have an
effect of increasing interest rates?
PAGENO="0232"
508
Mr. KLEIN. This would have an effect through the private money
market. The traditional methods that we see. through open market
operations and discount operations have a. direct effect on the Gov-
ermnent bill markets and bond markets, but what is being suggested
through a change in reserve requirements would percolate through the
money market, through private transactions as well as through the
Government transactions.
Representative BlOCK. But the net effect would be higher interest
rates.
Mr. KLEIN. I think this wouhi be one effect..
Representative BROCK. lYhen you reduce the supply of money in a
tight money situation you have a higher price for money, isn't that
a fa.ir statement.
Mr. KLEIN. Yes, I would agree with that.
Representative BROOK. Let's pursue another area that. I think virtu-
ally all of you have raised that is most intriguing to me. I think I
gathered from the gist of your testimony ahi~ost unanimously that
you feel that there has to be some alternative to this current trade-off
between employment and inflation, and that there can be a policy
change at this level which would allow us t.o change the terms of the
trade-off.
Professor Suits, you direct.ed yourself specifically to this que.stion
and Professor Perry raised it also.
But I am delighted that you brought our attention to this. I think
there is a method of reducing the impact. of less inflation or gradual
increase in inflation, reducing that effect on employment.. You men-
tioned specifically and particularly some more training in give.n areas.
I would like to put this question to you. We had t.esti1nony from
Secretary Shultz last week to the effect that some two-thirds of our
jobs now a.re service related as opposed to manufacturing, and this
has an impact on unemployment because this tends t.o be the more
stable kinds of employment. Would it. not be a matter of concern to
you if this Government should direct itself to expanding our training
j~rograms in this particular area, for example?
Mr. Smi~s. Yes, I think so.
Representative BlOCK. Is this what you a.re t.alking about, and
~w-ould you elaborate?
Mr. Snrrs. Well, let's ask ourselves why we have so much price in-
flation when we still have well over 3 percent of the labor force
unemployed.
In some European countries the unemployment rate can go as low
as 1 percent of the labor force before this kind of price increase is
observed.
It seems to me that the reason for the difference is that so large
a proportion of our unemployed 3 or so percent, consists of employees
who are extremely expensive to hire. They are untrained, uneducated,
immobile. They are not located where the jobs are. In effect, in other
words, our unemployment rate, measured in terms of what is really
available to the employer, is much below 3.3 percent.
I suggest, therefore, that we try to convert this unemployable or
expensively employable component of the labor force into higher
grade workers.
Now this is not a.n easy program. It is a long-term program to
train even one man. I feel that if we start now realizing that this is
PAGENO="0233"
509
the real problem, not whether to have a little more or a little less
tax, then in 10 or 15 years we may have mo'ved to a position where
we can have, let's say, 2 percent unemployment, or whatever the rock-
bottom rate is, and still have reasonably stable prices.
Representative BROOK. I appreciate you all bringing this up as a
policy question related to our economy. It is very critical and I am
very much delighted that you have said something about it.
Do you want to add something, Professor Perry?
Mr. PERRY. In response to your question, I am not very optimistic
that you do a great deal through such measures to change this trade-
off in any short period of time. What I tried to suggest in my remarks,
is that the way the world is-and here 1 mean both the institutional
structure of the labor market and what we are likely to do politically-
you are faced with something like the present trade-off right. If you
have to live with this and if you must pursue a policy of increased
unemployment in the near future, it is useful to think separately
about the need to pursue such a policy-the tradeoff we face-and
the costs that go with such a policy. Costs which go with such a policy
can be softened. You can pass bills which would simply make it much
easier on those who are going to suffer the most in the process of
increasing unemployment. I think that is a short-run question of great
practical and immediate importance, as opposed to the long-run
question of what we can do so that 5 or 10 years from now we can
have less inflation with a low unemployment rate.
Representative BROOK. Thank you.
Let me just shift the subject briefly for a quick question. Professor
WTilliams mentioned it, that he specifically endorsed continuation of
the surcharge. You all included it in your projections. Is there any
disagreement with the desirability of continuation of the surcharge?
Mr. PERRY. We are all in agreement.
Representative BROOK. If we continue the surcharge and accept that
as our premise, I think the point was made, and I would concur and
ask your concurrence, too, that we can have a considerably less restric-
tive monetary policy than we would have otherwise.
Now, the point I am getting at is this. I think Professor Klein
mentioned the trade-off in terms of raising reserve requirements ançl,
in turn, open market operations to put, say, another billion dohia~s
into the economy. Can we assume that if this economy meets your
projections which rank from a one and a half to a three and a. half
percent growth factor, which is not a terribly significant growth, if we
assume these porjections, it is not conceivable that the Federal Reserve
could have not just a tight money possibility-considerably eased
monetary policy over what it is today within the next 6 months, could
we not see a greater inflow of money into the economy through the
open market operations, for example. Is it feasible, and if so, would
it incur too high a rate of inflation or are you talking about increasing
unemployment?
Mr. KLEIN. In the projections that I made, it was assumed that
after midyear the degree of monetary restraint would ease, and we
introduced this into our calculations through the traditional steps
that have been taken recently, that is through open market operations
and through discount policy.
PAGENO="0234"
510
But, of course, there is no reason why alternative methods could not
be used. But I think that this easing of monetary policy later in 1969
concurrent with retaining the surcharge is quite a reasonable step
and is not a strongly inflationary step, provided we get the slowdown
that we are expecting in the next 6 months.
One other point in this connection is relevant, and that is that in
all these considerations of economic policy I think it is much more
sensible to consider a balanced policy and not pin everything on a
surcharge, everything on tax policy or everything on monetary policy
or everything on expenditure policy because when you have extreme
moves of policy in one area there tend to be loopholes and distortions
in the economy. It is much better to spread it around, and I think this
is the reason why more instruments of policy should be sought after
than are being considered at the moment.
Representative BROCK. Is there any other comment? My time has
expired.
Chairman PATMAN. Senator Proxmire?
Senator PROXMIRE. I don't want to ask you questions on this but,
first, I want to say I am surprised that none of you gentlemen seem
to assume there is going to be any change in expenditure policy. You
seem to make the assumption the surtax is based on a fixed given level
of spending and that, therefore, whether we should have it or not de-
pends on what happens in the economy and not what happens in ex-
penditure policy. But it may be you can't cover everything.
I think these are helpful papers. It is so good to get the specification
of precisely what you expect in various areas, and to have you pin-
point it by giving us the quantitative numbers. This is most useful be-
cause these general predictions-of course, it is easy to hedge and to
make a prediction that can mean anything.
But having said that, I would like to say, I just wonder if this mod-
ern version of looking at the entrails of birds is really worth very
iiiuch?
I don't see any crystal balls on your table but I just wonder if we
have advanced very much in that kind of thing.
I say that because what I am referring to is a publication by Fels
and Henshaw with which you may be familiar, put out by the National
Bureau of Economic Research, it is part of a larger paper which ques-
tions the validity of short-term business forecasting, and this is pretty
much what you are doing here.
Mr. Fels takes a series of publications and he says this:
In my study-the eight principal publications in my study-one month before
troughs and three months after peaks on the average was what they were able
to determine.
In other words, they are able to tell the turndown 3 months after it
occurred on the average. They weren't able to forecast it but 3 months
after it occurred.
I wonder-if we were sitting here in 1929-and you gentlemen were
asked to predict, if you would be likely to do what I suppose so many
economists did then; that is, to state that the GNP is going to go up.
Actually, it went down 30 years ago; by $20 billion, 10 percent.
In 1933 the tendency, I suppose, was to say it would go down. It
went up. And in 1937 the temptation would be to say it was going to go
up. It went down.
PAGENO="0235"
511
To predict in 1953 that it was going to go up, and in reality it went
down, and so on.
My point is that it is easy, it is relatively easy and to be expected, to
predict that a train moving in a certain direction is going to move in
that direction, all things being equal; but really, the cutting edge is
to tell when you are going to get the train to slow down or to maybe
go in the reverse direction. And this study incidentally shows the Fed-
eral Open Market Committee had just about the same kind of feeble
forecasting record.
The conclusion here is that out of 73 forecasts made on National
Bureau of Economic Research reference peaks, there were 49 scores of
zero for accuracy, that is 67 percent, and 40 scores of less than 50 per-
cent for a degree of certainty. That is 55 percent.
That refers to the business publications. Then the Federal Open
Market Committee-their comments on the business outlook in the
vicinity of cyclical terms exhibits the same general pattern as found
by Fels in the business publications, as time goes by becoming in-
creasingly aware, first, of the possibility, then the probability, and
then the certainty of a turning point, but it seems to come after the
event has occurred, so that if we continue to have this 8-year prosper-
ity, next year you gentlemen will be found to have been rather
accurate.
But we don't know, and I don't know, if we know much more after
listening to you about whether this is going to continue, or even the
probabilities that it is likely to continue. Would any of you like to
comment on that? Yes, sir; Mr. Perry?
Mr. PERRY. I am always appalled by how badly forecasts seem to
have done when someone does a historical study of this sort. But then
I am even more appalled as to why someone bothered to do that par-
ticular study. There aren't 73-
Senator PROXMIRE. I can understand why you would be.
Mr. PERRY. There aren't 73-or however many forecasts were sur-
veyed-serious forecasts done at any one time. When you do some-
thing like this you have to evaluate particular forecasting models.
Senator PRoxMu~E. These were 73 scores. I take it there are more
than 73 scores you have given us today. You score not only on the
GNP prediction, but what happens to prices, what happens to em-
ployment, and so forth.
Mr. PEnnY. I took that to mean 73 forecasts that were somehow col-
lected and sampled.
Senator PROXMIRE. No, these were scores of various kinds of fore-
casting by these eight publications.
Mr. PERRY. So that just eight were involved?
Senator PROxMIRE. Correct.
Mr. PERRY. The question is still whose forecasts are being evaluated
and what period was involved.
Senator PROXMIRE. These are very able-this is the National Bureau
of Economic Research. This is a responsible group, probably as fine
a private organization as we have.
Mr. PERRY. NBER did the study, but it is still a question of what
they had to sample.
Senator PROxMIRE. They selected the eight best publications they
could find, and they picked the Open Market Committee. The Open
PAGENO="0236"
512
Market Committee, after all, is an agency that has to forecast and
we presume they are able and competent economists who are making
the forecasts.
Mr. PERRY. The other point I wanted to make is I think our ability
to do this is a lot better than it was some years ago, certainly 1929 to
1933 that you cited, and quite a bit better than 10 or 15 years ago.
Senator PROXMIHE. These were within the last 15 years.
WTe don't know. We just had this upturn and everybody who got on
the train has been right because they have been right in predicting the
train is moving in the same direction.
Mr. PERRY. In this recent period, 1967 is the nearest thing to a down-
turn you had to worry about.
Senator PROXMIRE. We didn't even have a mini-recession, we: didn't
have two quarters in wl~ich the growth declinecT, so we didn't have a
recession.
Mr. PERRY. You can be~right in two directions. My point is, the good
forecasts avoided calling a recession in 1967.
(In line with the foregoing colloquy, Professor Suits subsequently
filed the following:)
Exr~~siox OF REMARKS OF DAxIEL B. SuiTs
Senator Proxmire raised an interesting and important question about how
accurately forecasters can, in fact, forecast. Each November for the past sixteen
years the Research Seminar in Quantitative Economics has compiled and pub-
lished an annual forecast for the coming calendar year. The complete record
appears in the accompanying table.
During the entire period, the direction of economic movement was forecast
correctly each year. The recessions of 1954 and 1958 were accurately forecast as
well as the slowdowns of 1960-61 and 1963. Although the record shows substan-
tial underestimation of the recoveries of 1955 and 1959, most of the forecasts
show remarkable accuracy. In fact many of the forecasts appear to be more ac-
curate than the measurement of the GNP itself.
TABLE 4.-REVIEW OF PAST GNP FORECASTS 1 (FIGURES REPRESENT CHANGES IN GNP OVER THE PRECEDING
YEAR MEASURED IN BILLIONS OF 1954 DOLLARS, EXCEPT AS NOTED)
Outlook for year November
Forecast
April
Observed
1953
13.0
15.5
1954
-4.5
-5.9
1955
4.4
29.6
1956
9.0
8.2
1957
9.1
7.7
1958
-2.9
-7.3
1959
9.0
27.3
1960
8.5
11.3
1961
7.4
7.8
1962
27.5
27.1
1963
14.1
15.9
1964
23.9
24.1
1965
15.8
30.8
19662 23.9
29.2
35.9
19672 28.0
24.5
16.0
19682 29.0
~31.9
1 Except the April modifications, each of these forecasts was presented before the conference on the economic outlook
held in November of the year preceding the year forecast.
2 1958 prices.
2 Preliminary as of November 1968.
Senator PROXMIRE. Let me ask you Dr. Klein, if you assume there
will be an easing of credit tightness in the last quarter of 1969. I take
it that you seem to be almost alone in that assumption. You base part
of your estimates on GNP, and I assume other ingredients in it, putting
PAGENO="0237"
513
housing starts in that. Last week the Secret'ary of the Treasury and
Chairman of the Council of Economic Advisers testified they thought
credit tightness would have to be pursued throughout the year. In
fact, Secretary Kennedy specifically called the relaxation in tightness
in 1967 a mistake.
Recently, in an interview in U.S. News & World Report, Governor
Mitchell of the Fed said this, and I quote:
We mean business-
Speaking of the Federal Reserve Board-
in braking the inflationary psychology that has developed. It will probably take
a reduction in real growth about two percent to get the kind of environment
in which the present inflationary psychology will be halted. Economic growth
will be retarded for a year or more before the needed change in climate takes
place.
How then can you justify an assumption that the discount rate
would be in the first quarter at 5 percent and the net free reserves
would be continued at $500 million and then be allowed to raise to
zero.
Mr. KLEIN. Let me comment on that. The public statement that
the credit conditions will remain tight is just the kind of loose state-
ment that you said we don't make. They are still fairly tight even at
a 5-percent-discount rate. I am simply assuming there will be a change
in the level but still at a very high level of tightness.
Now, as you also remarked in the previous commentary, that we
hadn't considered expenditure policy, may I point out that due to the
brevity in our presentation I didn't go into all the calculations that
we have made. We `have actually made alternative calculations.
Assuming, for example, that military expenditures, especially on
sophisticated hardware systems, are somewhat higher and that the
surcharge is continued not only through June 30, 1970, but even in-
definitely, and `that credit policy is kept severe for a longer period
than through the first three quarters of 1969, then in those calculations
we would find that the economy will perform at a somewhat better
level on an overall basis. The unemployment rate will rise less, it will
stay, according to my calculations, under 4 percent for almost all
of 1970, but there is a considerable lag in the effects of monetary
policy, and to maintain these very high rates of interest, and `these
very low levels of net free reserves at negative values, then we will find
that by the end of 1970 there should `be repressive-or there should be
restrictive-signs in the economy, particularly in the areas of capital
formation.
Senator PROXMIIiE. Does this mean to you, first, that we will have
a slowdown to perhaps a 2 percent level of real growth, 5 percent
overall? You see, when `Governor Mitchell-what he seemed to' want
was a 2 percent real growth and no more than a 3 percent deflator,
in other words 3 percent rise in prices, so that together you wouldn't
get a combination of more than a dollar increase of 5 percent at an
amnial rate in the GNP. Have you concluded a slowdown to that
level by the end of this year? `
Mr. KLEIN. Are you talking `about the case in which interest rates
are kept high, ~noneta.ry policy is kept more restrictive, and expendi-
tures i e higher ~ilor a w ith it, is th'it the c'tse ~ on w `nit to 1)1 esent ~
Senator PROXMIRE. Well",' I ath talking about what your assumptions
PAGENO="0238"
514
are as to what is going to happen this year. I say that the Federal
Reserve Board seems to be telling us that they are going to keep
the brakes on the economy and try to make credit tight, keep reserves
at a minus figure, and so forth, discount rate high until we slow down
to a dollar increase GNP at an annual rate of 5 percent, real 2 percent.
Mr. KLEIN. I would say that we won't find that big a drop in
the price level to three percent inflationary rate as a result of these
more severe monetary policies. I would agree~
Senator PROXMIRE. But you think they are going to change their
minds and let up a little bit on monetary policy anyway?
Mr. kLEIN. Well, I think they will be forced to, not by the move-
ment of the price level but by the movement of overall income per-
formance. There are many more indicators.
Senator PROX3IIRE. Including employment.
Mr. KLEIN. Employment, yes.
I would agree very much with Professor Suits' notion that we are
locked in for much of the price inflation in terms of the costs that
we have incurred and the wage increases that we have had in the
last 12 months. The techniques of slowing down the rate of economic
expansion are going to show very modest results in terms of slowing
down the inflationary pressure.
Senator PROXMIRE. My time is up, I will be back.
Chairman PATMAN. Senator Percy?
Senator PERCY. I would like to join our chairman and vice chair-
man in saying how valuable this testimony has been this morning.
Dr. Klein, you seem to be the most pessimistic in forecasting the
lowest GNP increase, the highest unemployment level, and the highest
wage increase estimates.
Dr. Shultz seems to be in general agreement with the AFL-CIO
on the effect of an increase of the minimum wage. Do you agree that
if the minimum wage were extended this year that we may have
further unemployment problems? What effect would it have on the
economy?
Mr. KLEIN. Well, the problem of the wage effect enters in more
than one way. The minimum wage has its special effect, I think, on
one of the problem areas of the economy: namely, teenage unem-
ployment, especially in urban areas, and I think we should reconsider
the whole question of minimum wage legislation until we have made
much more headway in eliminating this big problem of unemployment
of teenagers and especially of nonwhite teenagers.
As for the overall wage picture, I would say that the change in the
minimum wage won't have a very big effect on the average hourly
earnings or the average wage rate because that really is going to be
dominated by the kinds of overall trade union agreements that have
been negotiated in the last 2 or 3 years, especially those that have
long-term contracts.
I think the most favorable thing we can say for the wage picture
at the moment is that many of these 2- and 3-year contracts are now
negotiated so that we can expect not as much pressure on the wage
front in 1969 as we had in 1968 and toward the end of 1967.
Senator PERCY. Dr. Perry, Dr. Shultz testified that about 85 percent
of all the gain in male employment since 1965 has been attributable.
to the war in Vietnam, that is two and a half million people in the
PAGENO="0239"
515
Armed Forces and defense-related activities. He attributes a good
part of this current inflation to the growing demand on their part
with no compensating civilian production. Do you think that is
accurate?
Mr. PERRY. I wouldn't think very much of our inflation stems from
the specific source of the increased demand. You could reach the
same situation by increasing demands elsewhere. The fact that these
demands came from war-related industries is of secondary importance.
Senator PERCY. Dr. Suits, last week Dr. McCracken laid out his
plan for combating inflation-a gradual and persistent reduction of
inflation with hopefully little impact on unemployment. Is this how
you would approach the problem and do you assess it the same way?
It would seem to be that from your testimony you see a much closer
correlation between stopping inflation and resulting unemployment.
Mr. SuiTs. I believe, Senator, that if we are to operate on the level
of merely slowing the economy down by global controls whether by
monetary policy, tighter money, or by tax policy, but on some overall
level, then, as one businessman put it to me, you can't slow it down
without slowing it down, and this means not only slower prices but
it also means slower employment.
In my view, if we take a gradua.l approach to slowing the economy
down, it will gradually slow down. We will gradually get less inflation,
and we will gradually get more unemployment. This is a serious, and
can be a tragic situation for us particularly at the present time. and
I think it would behoove us to think very carefully about applying
direct countermeasures to meet the problem of the people who are
going to be affected sooner or later.
Now you mentioned the minimum wage. One step we might take-
I am not necessarily advocating this as a policy measure but merely
while we are discussing these questions, to suggest something that
might be done-we could retain or even perhaps increase the mini-
mum wage, and then counterbalance this effect by some kind of pay-
ment, recoupment, tax recovery or other device to firms in exchange
for hiring and training these people.
Senator PERCY. In other words, give them a subsidy.
Mr. StTITS. Indeed.
Senator PERCY. And the subsidy would represent the difference
between the actual productivity of the person and the minimum wage.
Mr. StilTS. Indeed.
Senator PERCY. And maybe the subsidy would be scaled down over
a period of months as the worker's productivity increases?
Mr. SuiTs. Indeed, exactly.
Senator PERCY. I couldn't agree with you more. It just so happens
I put in a bill last year to do just that.
Dr. Williams, do you feel a steadier growth in the money supply
over the past several years would have been a major contribution to
eco11onii~ stabilization?
Mr. WILLIAMS. Well, I think, with hindsight one might-if he had
it to do over-not increase the money supply as fast as it was~ perhaps
at two stages, in 1967 and again in the summer and fall of 1968, when
the fear of fiscal overkill wa.s widely held. esnecially at the Fed, where
recently they changed their minds completely.
PAGENO="0240"
516
But really, I would rather not focus on the money supply. I think
that credit availability and interest rates are the important factors
and I certainly would not advocate any rule for regularly increasing
the money supply at a given percentage rate.
Senator PERCY. Would you care to comment however, on what. the
growth of money supply in 169 should be taking into account your
own forecasts?
Mr. WILLIA~Is. I have not made any calculations on the increase of
money supply. I just don't know what it would be.
Senator PERCY. You wouldn't want to comment on what you feel
would be best for this year?
Mr. WTILLIAMS. I think what. would be best for this year would
be the fiscal and monetary policies that I have outlined. Continuing the
surtax so that a more flexible monetary policy could be contmuecl, so
that interest rates would not be any higher than they are now hope-
fully, and hopefully a little less. I think this is of particular importance
in the housing industry. Again just what that means as to the level of
money supply, I don't know.
Senator PERCY. Dr. Klein, I am sorry that I do not recall whether
you forecast a surplus or a deficit in the budget with the figures that you
are usmg.
Mr. KLEIN. On the national income accounts definition.
Senator PERCY. A deficit?
Mr. KLEIN. Yes.
Senator PERCY. Could I ask this question and then you can comment
any way you want?
Mr. KLEIN. Yes.
Senator PERCY. 1-low important do you think it would be psychologi-
cally, for us to have a small surplus as against a small deficit or a large
deficit, of course, in combating the problem of inflation? In other
words, based on your predictions would you say to the Director of the
Budget "Do something to reduce the budget." Is that correct? How
important. would it. be that we take action and cut some expenses or
bring some new revenue in to give us the surplus that we are hopefully
looking forward to?
Mr. KLEIN. Well, first, on just the passive prediction aspect, my cal-
culation is for the national income accounts definition of the deficit, or
surplus. After midyear the figures that are to be in the national income
accounts, that are seasonally adjusted at annual rates, will show a swing
over to a deficit from the surplus that will conie in the first 6 months
and, as I stated in my opening remarks, the reasons for this are a some-
what slower income base and growth rate in my projectiolls generating
less revenue, the higher benefits that would have to be paidl out of
transfers in a slower economy, and the higher interest payments that
will have to be madle under the high interest, rates.
Kow, I think I would agree that you can never do harm by showing
surplus in terms of combating inflationary psychology.
I think this would have a good effect.. Here I think that we have a
curious problem that. we economists always face of having a trade-off.
The question is whether you want t. ohave good news from a surplus or
whether you want to have the consequences on th~ economy that. a sur-
plus would entail.
PAGENO="0241"
517
In order to achieve the surplus with the current set of policies that we
are considering this morning, we would have to change the structure of
the economy considerably. We would have to have much higher reve-
nues or if we had such low expenditures that we got to that level we
would give up many more government services than most people are
wanting to give up and we would slow down the economy through
lower expenditure.
It seems to me that it is much better to take the surplus or deficit
as it comes out and achieve-use it as a tool for achieving our objec-
tives which are not to have a particular number on the budget account
but to have a particular employment situation or to have a particular
price level movement.
Senator PERCY. Thank you very much, Mr. Chairman.
Chairman PATMAN. Senator Sparkman?
Senator SPARKMAN. Thank you, Mr. Chairman.
I want to say that I think that has been a very fine discussion this
morning. We are indebted to you gentlemen, all of you, for making
this presentation.
There are several things that I want to ask you about, but not at any
great length. By the way, I notice in the GNP something rather inter-
esting, the highest prediction is $923 billion, the lowest predictioi~ is
$914.9 billion. If you average up the four of them it gives $918.7 bil-
lion. Who is going to be nearest right? I don't ask for ai~y answer.
Now let me say something about the interest rates. I gather from
you gentlemen that you rather expect interest rates to remain about
the same as they are now throughout 1969.
Mr. SuITs. I think, Senator Sparkman, this depends on what the
Federal Reserve Board does, and all we can do is look at the currents
that are in the wind now. This is the posture which the Federal Re-
serve has taken, and I think that explains our belief that there will
be a continued tight money policy.
Senator SPARKMAN. I have some rather interesting figures here on
the mortgage debt. I would like to read them off for the. last 5 years:
1963-64 it was $25.8 billion; 1964-65, $25.7 billion; 1965-66, $21.2 bil-
lion; 1966-67, $22.8 billion; and 1967-68, $26.8 billion.
It has been estimated that the rise in mortgage interest rates ac-
counted for 10 percent of the increase in the mortgage debt.
Now, if the interest rate, if we assume that the present interest rate,
continues and doesn't rise further that within itself will be somewhat
of a brake no inflation, will it not, so far as the mortgage market is
concerned?
Mr. SuITs. Yes, sir.
Senator SPARKMAN. In other words, it would be the increase that
would have the inflationary pressure.
Mr. SuITs. That is right.
Senator SPARKMAN. I notice, Mr. Perry, that you estimate an in-
crease in housing starts, an increase of a hundred thousand. Mr. Wil-
liams has the same projection. Mr. Klein, I believe yours is given in
money rather than in units. I don't find where you mention the units.
Mr. KLEIN. It is on the calculation I handed out. It is somewhat
higher in the fourth quarter.
Senator SPARKMAN. Somewhat higher than a hundred thousand?
Mr. KLEIN. It is $31 billion in the nonf arm sector. In the fourth
PAGENO="0242"
518
quarter of 1968 and our average for the four quarters of 1969 are very
close to $32 billion.
Senator SPARKMAN. What I am trying to get is a measurement as
to these new starts. Would that be approximately the same?
Mr. KLEIN. About one and a half.
Senator SPARKMAN. Oh, yes, one and a half million.
Mr. KLEIN. Yes.
Senator SPARKMAN. It would be the same then in 1968-1968 had
a million and a half didn't it?
Mr. KLEIN. Yes.
Senator SPARKMAN. Now, Mr. Suits, I don't believe I saw in your
paper any estimate. Do you make an estimate?
Mr. Surrs. No, I only gave the money figure but this implies about
the same rate of starts with somewhat higher prices.
Senator SPARKMAN. The same as 1968?
Mr. Surrs. Yes.
Senator SPARKMAN. So among the four of you, you say it would
not be lower than the 1968, it might go as much as a hundred thousand
above.
Mr. SUITS. Right, sir.
Senator SPARKMAN. I notice that recently, contrary to the thinking
of most people, the number of starts has gone up, and I noticed in
yesterday's Washington papers a rather interesting article about the
sales of housing around here that sales are booming. Of course that
may he explained by something the chairman has said, I believe it
was the chairman, trying to buy before the rates go higher, before
the costs go higher.
I just wonder if that might be taken as an indication of a greater
interest in housing during 1969 than perhaps you have contemplated.
Mr. SUITs. Well, certainly if the January figure, which-I don't
recall the starts figure but I remember it is very, very high-
Senator SPARKMAN. I don't remember them either.
Mr. SUITs. But it was very, very high.
Senator SPARKMAN. Yes.
Mr. SUITS. And certainly if this development continues our esti-
mates on housing is far too low, if that unquestionably is so. The only
question is whether it is a t.emporary phenomenon, as I am inclined to
believe at the present time, or whether this is an indication of some
further developments, later on.
Mr. PERRY. May I say one thing on that.
Senator SPARKMAN. Yes.
Mr. PERRY. I think we all probably feel the underlying demand for
housing as shown by family formation and vacancy rates is very strong
and probabTy consistent with the numbers we see this winter in hous-
ing starts. I suspect all of us who feel we are going to get a lower
number do so entirely because of the restricted supply of mortgage
funds that we foresee.
Senator SPARKMAN. Of course. the rather moderate weather we have
had this winter has helped certainly in this area, has helped the hous-
ing program, at least it hasn't slowed it down as has been the case in
the past.
We have housing goals for this year. Have you given any thought
as to those goals, as to your idea as to whether or not we had the re-
PAGENO="0243"
519
sources available in order to attain those goals. For instance, we have
300,000, I believe, is the number of-233,000, and we have a program
of attaining a total of 26 million units over the next 10 years of all
residential property.
Have you given thought to the question as to whether or not we have
the resources to attain those goals?
Mr. WILLIAMS. I think I would like to comment on that in another
connection, too.
Senator SPARKMAN. Please do.
Mr. WILLIAMS. I think we don't have the resources, and I think we
would have trouble producing more than the 1.6 million houses I am
talking about for 1969.
Senator SPARKMAN. You are measuring it by what, manpower?
Mr. WILLIAMS. Yes. I think skilled manpower is tight in housing,
and I think that it is important to open up the construction trades to
new entrants. I think it is very important to make these employment
opportunities available to minority groups. This will help solve their
unemployment problem and also will provide the human resources to
construct these large numbers of housing units that you are talking
about.
Senator SPARKMAN. I heard Secretary of Housing Romney on one of
the national programs yesterday, in which he said that the thing we
needed was organizing, organizing our resources in order that we
could meet the goals that have been set. In the past he has made some
rather pessimistic statements about not being able to reach those goals.
It seemed there was some modification in what he had to say yes-
terday, to the effect that we needed to-we had to organize quite effi-
ciently in order to meet these goals.
Would you think that could be done with reference, for instance, to
the manpower problem?
Mr. WILLIAMS. Referring to the manpower situation in housing, if
you look at the data in my table 1, line 3, showing the number of pri-
vate housing starts going back to 1964, you see that this is a very vola-
tile industry. In 1966 housing starts declined to 1.16 million, and to
some degree the supply of skilled labor-
Senator PRoxMini~. What line is that?
Mr. WILLIAMS. Line 3, table 1.
Senator SPARKMAN. Line 3, "private housing starts"?
Mr. WILLIAMS. Yes.
Senator SPARKMAN. Yes.
Mr. WILLIAMS. This is a very volatile series, and the supply of
skilled labor, I think, has not increased very much. Construction
workers tended to drift away into other pursuits, so that we do not
have the resources of skilled labor to produce many more than the 1.5
to 1.6 million units that we are talking about, and to increase that
number by another million would require development of many more
skilled workers.
Senator SPARKMAN. My time is up but I just want to throw out this
thought that maybe we can't do it, but we are going to have to do it if
we are to provide homes for the new family formations and replace
those that are destroyed, torn down, worn out in this country. So we
have a job on our hands.
Mr. WILLIAMS. Yes.
PAGENO="0244"
520
Senator SPARKMAN. Thank you, Mr. Chairman.
Chairman PATMAX. On what Mr. Romney said, of course, organiza-
tion is all right but don't you think allocation of credit is more
important?
Senator SPARKMAN. I think we have a lot of things to do but my
thought is we set the goal and we ought to aim for the attainment of it.
Chairman PATMAN. 26 million in 10 years.
Senator SPARKMAN. Yes, and whatever was set for this year;
Chairman PATMAN. All right.
Mr. Conable?
Representative. CONABLE. Thank you, Mr. Chairman.
Gentlemen, I think it is generally conceded that the capital invest-
ment is going to be possibly as much as double this year what it was
last year; isn't that right? Something like 4.7 percent last year, and
close to 8 percent this year.
Mr. SUITS. Those were the early figures. In making my projection I
have tempered that somewhat.
Representative CONABLE. It still is going to be substantially higher.
Mr. SUITs. Oh, yes.
Representative CONABLE. Is this largely the result of a banana-
republic psychology? Really, this is not an auspicious time to increase
our productive capacity, is it, generally?
Mr. SUITS. Oh, yes; I think it is.
Representative CONABLE. It is?
Mr. SUITS. This is one of the internally self-generating components
of high prosperity, that when we get utilization rates on existing equip-
ment very tight we simultaneously generate the need for additional
facilities and, at the same time, provide a flow of funds in retained
earnings.
Representative CONABLE. But doesn't a certain amount of this re-
flect the assumption that it is going to cost more to have capital expan-
sion later?
Mr. SUITS. I am sure that some of it does, but how much I am not
sure. One can point to the fact that. when you have low rate of unem-
ployment such as we have now, additional calls on industry for output
have to be made through higher labor productivity, and this means
capital investments. So while it would doubtless pay a firm to do it
now rather than sometime later, I don't think that is the primary
consideration.
Representative CONABLE. Have you considered at all whether any-
thing should be clone with the 7-percent increase in investment tax
credit?
Mr. SUITS. No.
Representative CONABLE. Certainly the capital goods area. is one of
the so-called superheated areas in the economy generally. You don't
consi~[er this abnormally high and, therefore, you wouldn't consider
any remeclia.l action on the part of the Government in this respect?
Mr. SUITS. Not specifically, at this moment.
Representative CONABLE. I think you have something to add?
Mr. PERRY. I do have a somewhat different opinion. It seems to me
that as you look at where we might restrict demands, the capital goods
area is a good candidate for taking some of the burden this year. I
don't know whether removing the investment tax credit is a. feasible
proposal a.t this time. But this is the kind of year, in my opinion,
PAGENO="0245"
521
where restricting a surge in investment demands would make good
ecoilomic sense.
Mr. KLEIN. May I say something?
Representative CONABLE. Yes, sir.
Mr. KLEIN. I think the investment tax credit definitely supports the
high level of capital formation that we are having, but I have detected
among business executives of this country a dissatisfaction with the
idea of using something like that as a shortrun policy instrument.
Representative CONABLE. It certainly affects their plans rather ad-
versely to have it frequently changed.
Mr. KLEIN. Yes.
Representative CONABLE. Businessmen's plans have to be made over
a longer period of time.
Mr. KLEIN. That is precisely it.
Representtative CONABLE. Too short a period of time was involved
in manipulating it over the past few years. I understood there was a
great deal of business dissatisfaction.
Mr. KLEIN. It is a longrun capital expansion.
Representative CONABLE. We were considering it a manipulative de-
vice in having taken it off and putting it back on immediately, and it
is not desirable from a business point of view certainly. You think
it is not desirable from an economic point of view also?
Mr. KLEIN. I think it didn't work in late 1966 because it was a
shortrun measure designed to deal with a longrun issue, and it was
ineffectual. Also it really represented at the time a kind of flip-flop
in Government policy, something that was wanted in September was
not wanted 3 or 4 months laterd It isn't like an open market operation,
and it isn't like a changing of current expenditure policy, current
fiscal policy of the Government. It is a basic longrun consideration.
Representative CONABLE. Certainly quite apart from the effective-
ness of such a device an on-again-off-again use of it does create very
serious inequities in the business community.
Mr. PERRY. May I just say one thing. I don't see that you can both
argue that it is ineffective in the sense that was just suggested and also
that it is highly undesirable because it is so upsetting of plans. Also,
if you are going to affect the capital goods area, however you do it
will affect plans. If you did it by some very severe credit rationing
and it had the same effect on capital goods producers I don't see that
it would be more or less objectionable than if you did it via the tax
credit.
Representative CONABLE. I realize you have to make a lot of as-
sumptions in answering such a question but does an inflating economy
have a greater impact on the reliability of information about interest
rates, or capital investment, or inventory levels? In what areas are
the variables the greatest here in the course of an inflating economy?
Mr. KLEIN. Well, let me say something about the present state of
our national income account. We now carry along a figure in these
numbers, which we all rely on so heavily, a statistical discrepancy
between the income side and the expenditure side which is now as
big as over $5 billion.
When we are dealing with these large numbers, inflated numbers,
and making very strong corrections for inventory valuation adjust-
ments and similar kinds of manipulations. We are having difficulty,
and this is a very disturbing aspect to see that the range of disparity
24-833-69-pt. 2-17
PAGENO="0246"
522
in our C-NP forecasts at this table are about the same order of magni-
tude as the statistical discrepancy in the account, and it makes a lot
of difference.
Of course, it is a question of the residual items in the account, and
one of the things like inventory and inventory evaluation, and sav-
ings and profits, those numbers are very weak in this kind of situation.
Representative CONABLE. One last question. What do you think has
li~d the greatest impact on housing starts lately, variations in the
interest rate or variations in the cost of construction? I think we tend
to overemphasize interest rates as a factor here, and to ignore the
tremendous increases that have been occurring in the cost of construc-
tion services and materials. Isn't it true that these have had a sub-
stantial impact on housing starts? Which would be of the greater
order of magnitude, in your view?
Mr. KLEIN. I would say that construction costs are a less flexible
item in the house-purchase decisions because in the ca.se of interest-
rate variations there are other dimensions such as the length of the
amortization period and the amount of the down payment; and the
thing that many homeowners look at is the average payment they
are going to have to make on the mortgage every month, and this is
easy to move around in the case of financing by stretching out the
amortization period or changing the down payment to compensate
for movements in the interest rates.
It is less easy to do this in the case of the overall price of a house.
Therefore, I would attach a good deal more importance to the
construction costs.
Representative CONABLE. The same psychological factors apply to
car sales, of course.
Mr. KLEIN. Right.
Representative CONABLE. Psychology plays a very large element in
the study you gentlemen made, I am sure, and this is one of the great
problems. One doesn't know what the psychological climate is going
to be regardless of what the long-term trend may be.
Thank you, that is all, Mr. Chairman.
Senator PROXMIRE (now presiding). Mr. Boiling?
Representative BOLLING. Thank you, Mr. Chairman.
I would like to comment very briefly on the colloquy-or not
cofloq~uy-between the chairman and the panel on forecasting. My own
experience has been rather more satisfactory than apparently the
chairman's has.
I have found that in the years that I have been on this committee
that the forecasting by certain groups has become really very excel-
lent. My own experience is that the independent economists, be they
academic or members of the staff of the ,Joint Economic Committee,
or other independent economists, tend to be a great deal more accurate
than those who represent a particular interest. For some reason un-
known to me the interest economists seem to project policy and the
independent economists seem to project predictions based on economic
facts, and I have had a very satisfactory experience in the last 18
years on forecasting. I think it has improved substantially and I think
the performance of the economy of the last 8 or 9 years has indicated
that the improvement is very substantial.
One thing that interests me about the study which I only had an
opportunity to examine very quickly, is I can't find out what publica-
PAGENO="0247"
523
tions they researched. I should think that would be very pertinent.
I have a couple of questions.
All of you gentlemen have assumed that the surtax will be ex-
tended. What would you suggest would happen to interest rates if
it weren't?
Mr. WILLIAMs. I think I addressed myself to that in some degree
saying they would be higher.
Representative BOLLING. Would there be any disagreement with
that?
Mr. KLEIN. I would say that would be true. We are trying to out-
guess what the Federal Reserve is trying to do, and we probably do
agree that the Federal Reserve would have to be more restrictive on
monetary policy if there was a weakening on the fiscal front.
Representative BOLLING. Right. So that, in other words, you would
have a very substantial impact on interest and with so substantial an
impact on interest at least in theory you could have the same kind of
thing happen this year, despite the surprising experience with hous-
ing, that happened in 1966 on housing. You could have a crunch.
Mr. WILLIAMS. That is right.
Representative BOLLING. If you didn't have an extension of the
surtax.
Mr. SUITS. There is one qualification that Professor Klein men-
tioned earlier, however, and that is the shift in the institutional ar-
rangement. To the extent that that is different, the credit crunch has
different implications.
Representative BOLLING. Right, right.
Now this is a question that I don't really expect anybody to give a
definitive answer to, and I have a prejudice which I will make clear
in the question. Who is hurt most by inflation? Is it not the old, the
blacks, the poor, that being a redundant phrase, that last one, at least
in part. Who is hurt most by inflation?
Mr. SUITS. Well, surely the old who are substantially supported by
social security, which does not respond very rapidly. For the blacks
and the poor one has to make a very careful study because, on the
one hand, aid to dependent children allowances do not respond very
rajidly and such children are, of course, punished badly by rising
prices. On the other hand, as was pointed out earlier, employment
rises most rapidly in precisely this same area, so it is very difficult to
determine who is being hurt or how much. On the one hand we provide
the breadwinner with a job. On the other hand we take purchasing
power away from the family without a breadwinner.
Representative BOLLING. The point I was getting at was that it
would seem to me there is a fair probability that the "least able to
defend themselves" segments of the society face a year in which they
can't win. If we have a significant increase in unemployment in order
to stop inflation they are going to be hurt, and if we don't stop inflation
they are going to be hurt. So they have got a no-win year except for the
addition that I think you in your statement brought in and that is the
direct aid to them in specialized kind of employment, if that is the
way to put it. In other words, it is very clear there has to be some
method to reach them beyond the classic methods we have been mostly
talking about today or they are going to suffer or continue to suffer
PAGENO="0248"
524
which, in turn has implications for the society as a whole that are too
obvious to go into.
Mr. SUITs. That is correct.
Representative BOLLIXG. Now, isn't it possible, given the peculiar-
ity-and I think it is a peculiarity-of the society today, that you
have this, the easy way is to talk about affluence, you have this
fabulous affluence with tremendous poverty, which we as a society are
just beginning to realize the extent, the depth, and the degradation of.
It is sort of interesting to find people catching on to the fact people
are starving in the South. They have been doing it ever since I grew
up there in the 1930's, as well as in other parts of the country, too.
But isn't it possible in this particular year, given the conditions of
great affluence with pockets of poverty, wouldn't it be possible for
demands to remain so high, despite a significant increase of, say. a half
or a whole percent in unemployment, that inflation would continue
at about the present rate, despite the substantial-
Mr. SUITS. I certainly think it will, at least through this year.
I think this is reflected in all the forecasts that have been presented
this morning.
Representative BOLLING. I thought it was, too, and I want to make
it explicit because what we may be facing is getting inflation under
control sometime next year, if we are lucky, and in the meantime
everything that is going in the economy, regardless of which way you
mix the policy is going to be, I don't want to use an inflammatory
word, but more and more irritating to the social unrest that exists.
Mr. SUITS. I think that is correct.
Representative BOLLING. Thank you.
Senator PR0x3IIRE. Senator Miller?
Senator MILLER. Thank you, Mr. Chairman.
Gentlemen, the Employment Act of 1946, as you well know, set
forth two basic goals-namely, full employment a.nd a stable dollar-
and repeatedly administrations have clung to those two objectives
down through the years.
The act was overwhelmingly Passed. I wasn't here at the time, but
I am advised it was completely a bipartisan measure. Now I find ac-
cording to the statements of Dr. Suits and Mr. Perry that they ap-
parently don't think we can achieve those goals, and I am wondering
why. And if von think we can't then why don't you recommend that
we revise the Employment Act of 1946?
Mr. SUITs. I think we can. I think the problem is that we cannot
easily. It is not an eay job.
Senator MILLER. I am aware of that.
Mr. SUITS. In those days-
Senator MILLER. Here is your statement wherein you say, "Rapid
price inflation and low unemployment are ultimately tied together in
our economy."
Mr. SUITS. Yes, and if I may just. amend that statement, as it oc-
curred to me when I was reading it. this should read in terms of using
global controlled policy. In other words, we have to have a wider spec-
trum of things that we can do. If all we do is speed the economy up
to make more jobs, or slow it down to hold prices in check, then we
are always going to play this business of seesaw. One man is up and
another ~nan is down and that is the only game we are really playing.
PAGENO="0249"
525
We can indeed maintain both high employment and stable prices, but
we cannot do it with global controls.
We must get very specific, as, for example, the question of subsidiz-
ing employment or training programs and so on.
Senator MILLER. I am glad to hear your explanation because you
cover yourself by saying "if we do this"-and that is a very big "if."
To me it would be a false assumption to assume that what is contained
in the "if" is going to be there. Certainly it shouldn't be there.
I assume you want those objectives, and if you are not going to at-
tain those objectives because of the "if," then you don't want the "if."
I am glad that you state that you do think those objectives are attain-
able. If they are not attainable, then that would be a confession of de-
feat for the capitalistic economic system. Agreed?
Mr. Suirs. Agreed.
Senator MILLER. I would like to ask Dr. Klein why he takes such
a dim view of my farmers' situation for 1969 when he says "farm prices
and income will decline slightly in 1969." What is that assumption
based on?
Mr. KLETN. I will read you the numbers and you can-net farm in-
come was $15.5 billion in the fourth quarter of 1968 at an annual rate.
We have it hovering just under $15 billion during 1969 for the different
quarters and farm prices on an index base of 100, well, 105, will go
down to 104, 103.
Carryover stocks are in reasonably plentiful supply, livestock pro-
duction is expanding, and the members of our forecasting group from
the farm equipment sectors of the economy who conduct a very close
watch over the farm economy have suggested that just a passive fore-
cast of what they see happening, without doing anything about it, is
that farm prices are going to ease somewhat over the next few months,
and farm incomes will consequently be slightly lower.
Senator MILLER. Well now, as an offset against the easing of prices
couldn't we have an easing of costs of production because of a slowing
down in the rate of inflation?
Mr. KLEIN. Well, we could potentially but I think we are pretty well
agreed that the things the farmers buy, the farm costs, are not coming
down particularly because costs in the whole economy are not coming
down very much.
Now, I think at this table we are talking about a national economy
with something like a 4~-percent rate of inflation now, and some of
us see it coming down to 31/2 percent. Some of us seeing it coming down
to 4 percent in the near term.
Hardly anyone here is going to predict stable prices or even a 2-per-
cent rate of inflation.
Senator MILLER. I agree that Dr. McCracken stated as a goal of his
Council having it come down to 3 percent for this calendar year.
Mr. KLEIN. I should say it is very optimistic.
*Senator MILLER. Now if it did come down from 41~ this last year to
3 percent this year, in other words, if it dropped down 11/2 percent,
would that make enough difference in the costs of production to farmers
so that you might change your assumptions?
Mr. KLEIN. That would be helpful to farm costs but I am very doubt-
ful that that would be the crux of the matter for maintaining farm
income.
PAGENO="0250"
526
Mr. SUITS. I think I would go so far as to say that the only feasible
way that that result could be attained would be precisely by lower farm
prices. That is where the flexibility in the price system lies in the very
short term.
There is not much that can be done about manufacturing prices.
Senator MILLER. You mean the only way of cutting this down to 3
percent would be a reduction in farm prices?
Mr. SUITS. That is correct.
Senator MILLER. I am wondering if there was a reduction in farm
prices, on the one hand, if that wouldn't be counterbalanced, on the
other hand, by a reduction in costs of production, which would enable
us to forecast at least a~ stable farm income in 1969 relative to 1968
rather than forecasting a drop.
Mr. SUITS. I think that the production costs in terms of fertilizer,
equipment, and other prices of materials that farmers have to buy are
not likely to come down; that is, there are undigested costs still pushing
on the prices of those products.
Senator MILLER. Well, suppose you have an easing of interest rates.
Farmers out here are borrowing for their cattle loans and paying 7 to
71/2 percent. Suppose they end up paying 6. It would make a lot of
difference in a livestock operator's income. So I wonder why you don't
think that this would ease costs of production?
Mr. SUITS. Well to that extent, of course, it would. But if we look at
the price side rather than the interest, side, interest rates, of course, can
be varied; but again, there is the question whether, given the posture
of Federal Reserve, they will in fact be brought down.
Senator MILLER. Well, if we did have a reduction in the rate of infla-
tion from 41/2 to 4, don't you think there would be a correlative easing
in interest rates?
Mr. SUITS. No, because I think that. tight money is pa.rt of the force
that is going to hold the expansion in place. We can't have it both
ways.
Senator MILLER. Well, it seems to me that it is a correlative of infla-
tion that you have high-interest rates. That just makes sense. If I
borrow some money from you for a couple of years, and you forecast
that the dollar is going to be less when I pay you back 2 years from now
automatically you are going to charge me an intrest to make up for
the difference regardless of the tightness of the market, and the tight-
ness of t.he market is an added factor to that.
Mr. KLEIN. I think the timing is to be considered here, because we
are talking about a year's income and even if interest rates are going
to come down they are not going to come down for a few months.
They are not going to come down very much if they do come down.
They are not going to come down until well after midyear, a.nd it is
going to be very difficult for farm income in 1969 to benefit from these
low-interest costs in our economy.
Senator MILLER. I have no further questions. I apologize for not
being here for your statement.
Thank you, Mr. Chairman.
Senator PROXMIRE (presiding). Thank you, Senator Miller.
Gentlemen, I get the impression from you, and I am sure that indi-
vidually you don't feel this way and I would like you to have a chance
on the record to correct it, that we are kind of helpless in a sense; that
PAGENO="0251"
527
is, that we can expect during the next year for unemployment to in-
crease, No. 1. We can expect during the next year for the rise in the cost
of living to go on at an unacceptable rate. We can expect also to have
high-interest rates maybe not quite as high as at present but high, but
maybe just as high as they are now, and I get it from you that, as
Mr. Suits put it, there is nothing we can do about it in terms of global
action.
Now, having said that, however, we look around the world, and we
see Germany, quite a different economy, of course, but with better price
performance in the last couple of years, far lower unemployment than
we have, and there are a few other small countries that perhaps have-~
Sweden-that perhaps have a similar performance.
What is it that we can do to help solve this problem? Mr. Suits, you
were the one who indicated that you can't do it globally. How can we
do it?
Mr. SUITS. Well, first of all, when we look at the German case, there
are some very special factors, as you know. They export part of their
unemployment so their rate really isn't quite comparable to ours, but
many of the other countries are-
Senator PRoxMnu~. You might put it the other way, too, they are
importing workers.
Mr. SUITS. That is right. So when they no longer have the total de-
mand, they export them and their unemployment never shows up in the
records. That is a very special problem with respect to Germany, but
it wouldn't be the same thing, let's say, for the Netherlands or for
Sweden.
What they have their is `a much more `homogeneous, much more high-
]y trained, much more mobile labor force than we have.
Senator PRoxMniE. We have to make our labor force better trained,
we have to make them more mobile, we have to break down the terrible
racial barriers we have had, we are making progress in those direc-
tions, but I take it as we do this we can begin to have greater price
stability with a lower level of unemployment; is that right?
Mr. SUITS. Exactly, exactly.
Senator PROXMIRE. Now, how about the wage guidelines, they have
been battered and beaten and kicked out by this administration. They
don't seem to feel they want `it yet. We have a statement by Arthur
Okun, just a couple of days ago, saying if the `administration i's going
to dismiss the guidelines, that they had better find some way of bring-
ing some consideration in the private area, in unions and `in manage-
ment, of the policy effects of their price decision. Do you share Mr.
Okun's position? Is there another way, are guidelines this ineffective
under present circumstances?
Mr. SUITS. I see no real mechanism for making wage-price guide-
lines effective other than some form of legal price-wage control.
Senator PROXMIRE. Well now, `how about the `administration's pro-
posals before they went out `of office that you compromise them? In
other words, you provide for a guideline of around 5 percent which
would be somewhat more than the expected increase in the cost of
living, and take into account some of the productivity increase, I
should say all the productivity increase and some of the increase in the
cost of living. In addition to that they would ask the management, in
the administered price areas, to absorb the first 1-percent increase in
costs. Is this a practical formula?
PAGENO="0252"
528
Mr. SuITs. I question its practicality merely on the grounds that, in
our economy, we have found ourselves unsuccessful in depending on
good will for economic motivation. Good guys always lose. If I de-
dde, in the interests of preserving the price level, to apply my own
wage-price guideposts and not to ask for higher wages next year, or
not to get higher prices for my services, this doesn't guarantee that
everybody else will go along.
Senator PR0xMIRE. Well maybe.
Mr. Perry, you, as I understand it, made some study of this, and
von found, as I recall, that the wage-price guidelines perhaps reduced
inflation by eight-tenths of a. percent, which is a very significant con-
tribution if we can verify it, and I have the feeling that the good
guys, at least those who abide by it, were big steel companies. big
automobile companies, big steel unions, and big automobile unions,
and none of them were exactly hurt. They aren't certainly at the bot-
tom in any case of the economic spectrum. How about it?
Mr. PERRY. That is correct, as you described it. But I think someone
would point out~, if he wanted to argue the other side, that the real
spendable income of workers in these areas hasn't gone anywhere for
a few years now. I don't know where you come out. I believe guide-
lines were working: a lot of my colleagues aren't quite so sure.
Senator PROXMIRE. Are they beyond revival? Would you say that
the Johnson administration's proposals in this area cannot be prac-
tically enforced or go into effect?
Mr. PERRY. I see no reason why, if the administration wanted to
get into this business, they couldn't go back to approximately the
same kind of applications as were being made in 1965. They would
have to use cliff erent numbers.
Senator PROXMIRE. You think it might have some effect, at least,
a significant effect, in keeping clown the rise in prices and perhaps
move the Phillips curve over a little bit so the trade-off between infla-
tion and unemployment wouldn't be quite so bad?
Mr. PERRY. I think it would have such an effect. There are people
who would point out that it. would have effects they don't like and
you have to weigh the two. But it could have an effect, yes, sir.
Senator PROXMIRE. How about the policies tha.t have been followed
ever since Franklin Roosevelt-and I guess, more or less by Presi-
dents of the TJnitecl States-of speaking out publicly and emphatically
when a big industry with pricing power, 1)rice leadership power,
increases its prices, or a union has demands which seem unreasonable?
Is this a. useful action? Shouldi the new President fOllow this policy,
in your view?
Mr. PERRY. Yes, I certainly think it is useful and something that
a. President is right in doing. It. becomes hard to know when you have
a clear case when you have quite a. generalized inflation as we do today,
as compared to taking that sort of position when you don't have
generalized inflation.
Senator PROXMIRE. Well, of course, President Nixon hasn't, to my
knowledge, indicated that he is rejecting that but certainly admims-
tration spokesmen before this committee have made it pretty emphatic
they don't think it very wise. For example, Mr. Shultz, the Secretary
of Labor, said he would counsel the President in effect not to do it.
He feels that the President's prestige shouldn't be put on this line
that way. You disagree with that.?
PAGENO="0253"
529
Mr. PERRY. Yes, I see ilo reason why the President shouldn't do
that if he has a good case.
Senator PR0XMIRE. I-low about you other gentlemen, would you agree
with Perry or with Shultz?
Mr. KLEIN. I think while we can agree on a lot of things, like aca-
demic economists we have our disagreements, and we probably get
different votes. I am dead set against the guidelines and I think I
would agree with Professor Suits that they-
Senator PROXMIRE. I didn't say "Suits," I said "Shultz."
Mr. KLEIN. Well, they are both against.
Senator PROXMIRE. Yes.
Mr. KLEIN. And they are for a theoretical economy and not for the
real facts of life.
I think I would agree with Professor Perry's calculations for 1961,
1962, and 1963, but I think you can attribute much of the present infla-
tionary pressure to a great effort on the part of companies to make
up for all the ground they lose in that period. There was restraint,
and now they have boiled over. I would say overall, to take a long
view, that it didn't do any good.
Senator PROXMIRE. Mr. Williams, what would be your position?
Mr. WILLIAMS. I think I am closer to Dr. Okun in his position.
Senator PROXMIRE. To Okun and Perry?
Mr. WILLIAMS. Yes, Okun and Perry. I think the guidelines ap-
proach might be useful again in particular situations; maybe not very
useful, but I certainly wouldn't throw them away. I think the admin-
istration and the President have great moral power to bring to certain
wage and price situations, and use of this power certainly has to be
selective; but I think they may return to some such system in the
future.
I might say while I am speaking that other things might be done
to help with the inflation problei~n. I mentioned reducing restrictions
on entry into certain trades. In addition I think Dr. McCracken men-
tioned that antitrust policy could be useful and should be enforced
vigorously to the end of maintaining more stable prices.
Senator PROXMIRE. Houthakker, McCracken, and Stein, the three
members of the Council of Economic Advisers, appeared before our
Senate Banking Committee for confirmation. Houthakker said he
thought antitrust policy would help in the long run, but he was talk-
ing about 10 years, he felt the antitrust action instituted this year,
you have to win a court case or two or three to set a pattern and that
takes a long time in their view.
Mr. IVILLIAMS. In any case I think it is in~ortant to the long run.
Senator PROXMIRE. And it may well be in its psychological effect.
If business knows that there is a stern, meaningful antitrust policy
they are more likely perhaps to make their decisions within the public
interest in stabilizing prices.
Mr. WILLIAMS. Right.
That is absolutely correct.
Finally, I would say that tariff policy gives us some opportunity to
get more competition into industries which are in a position to control
their prices. I would consider lowering tariff rates where this would
have a beneficial effect, and I would certainly look very closely at de-
mands for import quotas in* industries where `they might have an
favorable effect on domestic prices.
PAGENO="0254"
530
Senator PROXMrRE. Along this same line, Dr. Perry, as I understand
it, you advance the thesis that profits are one of the variables in prices,
in the price-unemployment setoff, I should say. In other words, if I
understand it correctly, we can have lower unemployment and a lower
rate of inflation if profits aren't as high. We have had a tremendous
increase in profits between 1960 and 1968. One of the most dramatic
changes, I suppose, of all of the economic indicators has been the very
sharp increase in profits, both corrected for inflation and after taxes
and so forth. How about tha.t?
Mr. PERRY. As to the effect of profits on this whole situation, I think
that it probably in relevant only in the highly concentrated, highly
unionized industries, where very high profits rates can serve as a target
for large wage demands. I don't know that, economywide, it has a
great deal of relevance.
Today, profit rates are probably at not unexpected levels. But if we
measure them from 1961, we are measuring from a recession period
when, of course, you expect profits to be low.
Senator PROXMIRE. That is a big part of the explanation, I would
agree.
Mr. PERRY. Today, if one looks at rate of return on equity, I think it
is probably about where you expect it to be, not extraordinarily high
by historical standards for a period of high economic activity. Profits
are, of course, highly volatile, and as you move to low unemployment
rates, rates of return typically rise and if you have a slowdown profits
will suffer disproportionately.
May I just make one last statement on your earlier question? Whether
the administration, the President, is prepared to make a public state-
ment, it seems to me, must depend on whether that statement is very
well founded. Even today, a year when in manufacturing there were
many large settlements, you couldn't single out manufacturing as being
ahead of the rest of the parade.
If you have a situation such as a very large wage increase when
wages elsewhere are not increasing rapidly, or a price increase war-
ranted by shortages or by a former wage increase, then it is easier to
advocate guidepost actions and Executive pressures may be justified.
If you couldn't on the basis of recent facts, single out prominent
manufacturing industries and say that they are leading the parade,
that they are causing the inflation. And this is what makes guideposts
quite a different matter today and this is why the guideposts were
abandoned in the first place.
Senator PRox3rntE. You said, Mr. Perry, that the surtax was effec-
tive and the best evidence of it is what has happened to retail sales.
Mr. PERRY. Yes.
Senator PROXMIRE. But you know we adopted the surtax for several
purposes, No. 1, to hold down the increase in the cost of living, No. 2,
to try to do something about the high interest rates and, No. 3, to help
us on imports so that our balance of payments would be corrected.
We failed dismally in every single one of them. As you know, since
the surtax went into effect the rise in the cost of living has been sharper
than before; the rise in interest rates has been much sharner than
before; and, also, since it went into effect, we have converted a trade
surplus into a trade deficit, a big trade deficit in the last quarter. How
long do we have to wait on this? After all, part of economic policy
is the timing effect.
PAGENO="0255"
531
It would seem to me that you could make a good argument that the
surtax to date has been a real failure.
Mr. PERRY. Well, Senator, I guess I don't have to tell you that we
don't forecast perfectly. You have to make a statement about whether
these things that you have listed would be worse if we hadn't had
the surtax, and the only statement I can make is that they would have
been worse.
Senator PROxMIRE. Yes.
Let me reply to that again to get back to the argument that-you
fellows zeroed in on the tax angle rather than the spending angle.
In my view, we would be a lot better off if we cut $10 to $12 to $15
billion out of the budget, especially out of the military budget, but also
out of space and public works. Public works are now over $10 billion,
10 times as high as they were in the depression when we had to have
them for a work force 20 percent or so out of work. Of course, the
value of the dollar has dropped a lot but not that much.
- Under the circumstances, it seems to me we should take a good
healthy look at spending policy and we can make a strong case for
doing some of these things much more effectively especially in con-
trolling inflation and also interest rates by a policy of reducing spend-
ing instead of reliance on higher taxes.
Mr. SUITS. Senator, in our calculations, dollar for dollar, a tax dol-
lar in terms of ability to hold the economy in check is only worth
about 75 cents compared to an expenditure dollar. That is to say, the
checking power of a dollar increase on my taxes is only three-fourths
of the checking power of a dollar decrease in military.
Senator PROXMIRE. That is a fascinating statistic. I have not heard
that before. Can you also say something about the timing of this? In
other words, if you reduce spending, Federal spending, does that have
a quicker or a slower effect on the economy than an increase in taxes
would have in most cases?
Mr. SUITS. I doubt that there is very much material difference.
Senator PROxMIRE. Why wouldn't there .be a lag since people tend
to adjust their spending patterns over time?
Mr. SUITs. That might be very true, I hadn't thought about it, yes.
Senator PROXMIRE. Certainly you have the experience lately. It took
them a while to reduce their spending proportionately to the tax
increase.
Mr. SUITS. Yes, that is very true.
Senator PR0xMIRE. So in both cases in the first place you would have
a bigger impact and, in the second place, you might have a swifter
effect.
Mr. SUITS. Yes, true.
Let me add this is, of course, a policy question on an entirely differ~
ent level. I would be very happy to see $10 or $15 billion come out of
our military budget purely as a policy measure even if we transferred
that expenditure to some other programs that I consider to be much
more essential.
Senator PROXMIRE. I think this is a very real prospect. After all you
have the majority leader of the U.S. Senate, Mike Mansfield saying
we should cut the budget, and cut it very sharply. We cut it before; we
cut it last year by several billion dollars. I think this year there is far
more sentiment in favor of that and certainly we can make a very
strong case in terms of waste.
PAGENO="0256"
532
The Congressional Quarterly, as you may know, had a very interest-
ing study in which they indicated they thought we could cut it. by $10.8
billion and have a. stronger combat force after than before because of
the fact that we have a guest excess of service and support troops, and
then in cutting expenditures in space, but in terms of its economic im-
pact you feel it would be at least as good and perhaps better.
Mr. Suits. I think a. $10 billion cut in military spending would have
a definite and immediate impact on the economy, so much so that I
would certainly recommend that a cut in military spending not be
taken out of the Federal budget, but be transferred to a numbe.r of
other programs that desperately need funding.
Senator PRox~rIRE. \Vell, I certainly would disagree with that at
the present time. I think it is very hard to transfer any of that kind of
money efficiently to some of our other programs. Maybe you can, but
I wonder. For example, inthe housing area Senator Sparkman and I
talked about-he is chairman of the housing subcommittee and I am
ranking member-here is an area. in which we can have a great deal
more activity than we have but I doubt if it would take billions of
Federal expenditures to achieve this. It would some in the private sec-
tor, and that is why I was so startled that you gentlemen are. so pes-
simistic about housing; you are being realistic, of course, and I am not
criticizing your judgment of what is going to happen. I just say it. iS
appalling we can't do better. In 1950 we spent 5.3 percent of our GNP
in housing; this year the goals provide if we meet the goals we put 3.4
percent of our resources for housing, about 60 percent as much. Obvi-
ously, we can do better. It may very well take some kind of a crash pro-
gram in training people, it may take a better effort in terms of
financing.
~\Te have a. housing act now that provides for a subsidy to 1 percent
of effective interest rate for low- and medium-income housing. I can't
see why we can't do a better job.
I woul~i like to ask Mr. Perry one other question, and I have a couple
of other questions for you other gentlemen. Doesn't the transfer of
income to ameliorate unemployment result in more inflation? This is
one Senator Sparkman is interested in, too. In other words, you indi-
cate tha.t transfer payments of some kind, maybe a guaranteed income
or something of that kind would help to ease the burden of unemploy-
ment for these people.
\T\That I am saying is if they have an income without producing any-
thing you increase demandi because they have more to spend, you dion't
increase supply because they don't produce anything.
Mr. PERRY. The reason I introduced the thought was that we talk
a.bout the need to dlecide between unemployment audi inflation andi how
much we are going to have. There is the other side of the picture which
ought to be considleredl-whether you can dlo something about the
amount of hurt that is involved in whatever policy choice you make.
If you make a policy choice for a lot of inflation you can certainly do
something to compensate some of the people affected there. If you
make a policy choice for more unemployment it seems to me you ought
to concern yourself in that dlirection; whether you worsen the inflation
in the process would depend on whether you reduce someone else's
income in the process.
PAGENO="0257"
533
If you were to make these transfers, they should be legitimate trans-
fers, transfers from others to those who are becoming unemployed. If
you increase total income-that is, make it an addition rather than
just a shifting around-then your point is very well taken. You will
generate more demand. So I think you do have to think of it as a real
transfer, you have to consider simply whether the people you are
going to unemploy are going to bear all of that burden whether
you are going to shift some of it around.
Senator PROXMIRE. So you would have a trade-off ? It would be a
washout as far as the effect on the economy is concerned; you said you
would have to increase taxes in order to compensate for it?
Mr. PERRY. Increase taxes or spend less money in some other area.
If you wanted to increase transfer programs to these people, and
say $2 billion are involved, if you take $2 billion out of some other
area you accomplish this. I am not suggesting that this is the best
way to do it. But if you are faced with a policy that is gradually
going to increase unemployment, one should at least consider taking
such steps.
Now, I think there are better steps. The Government, as an employer
of last resort, in whatever fashion such a scheme were implemented,
would be far more desirable. I am not suggesting that you do away
with the wrongs of unemployment simply by some transfer device.
Only that it is a minimum you should do if you plan to pursue this
kind of policy. But I would prefer a policy which was much more
active, which in fact found employment, found training programs,
found something constructive to do. These transfers are not construc-
tive in this sense. They are just a way of easing the pain.
Senator PROXMIRE. Now, Mr. Suits, I would like to ask you to tell
me what effect this would have on housing and the economy? As you
know we have regulation Q, which limits the amount that savings
banks can pay so we don't have the disintermediation that we had in
1966, and I am for it. I think we have to have it although any kind of
control like that is not desirable.
Now, a different kind of credit control for the same purpose would
be to recognize the enorn-ious amount that we are pouring into this
credit economy of ours into consumer credit. It has expanded from $5
billion in 1946 to $110 billion today, 22 times in 22 years, just phe-
nomenal, and it is a big element in our spending and in the move-
ment of our economy.
Supposing we had another regulation WT, which would have an ef-
fect of limiting or rather requiring a certain size down payment, say
for an automobile one-third, one-fourth, or one-fifth, whatever seemed
desirable, an amortization period of 18 months or 24 months or some-
thing of that kind. Wouldn't this have the effect in the first place of
limiting the requirement for borrowed money and tend to slow down
the rise in interest rates and make funds more available, perhaps, for
housing?
Mr. SUITs. I think it certainly would, Senator.
The consumer stands at the head of the line when they are passing out
credit. He is the least sensitive of all the borrowers in the economy. The
typical automobile borrower, for example, hasn't the faintest idea
really of how much interest he is paying, and the way the interest
PAGENO="0258"
534
rate is commonly stated to him, even is not ordinarily of much help,
that is if he is paying-
Senator PROXMIRE. My bill on "Truth in Lending," which will begin
to take effect on July 1, is going to have some effect on it.
Mr. SUITs. It will indeed. It will an effect on what he sees. It is a
question of whether it will have any effect on wha.t he does. As some-
body else pointed out earlier, what he usually looks at is the size of the
downpayment and how many months to pay, and those are the things
that will affect whether he can buy a car or not, or a television set or
a new refrigerator or whatever it may be.
So surely if we want to ration credit in such fashion as to leave
more of its available for houses or for business purposes. it must be
directly diverted from the consumer. It cannot be restricted by merely
letting interest rates rise because the consumer is not sensitive to those.
Senator PROXMIRE. Thank you very much.
I just have a couple of questions, I think, for Mr. Williams.
Mr. Williams, in your statement about housing you said nothing in
your optimistic estimate-you call it optimistic-of 1,600,000 housing
starts; would you give a figure or a money amount?
Mr. WILLIAMS. I gave both. I gave a figure of 1.6 million housing
starts, up 100,000 from 1968. The dollar figures for residential con-
struction are shown in table 2, line 7.
Senator PROXMIRE. You don't come down hard at all or didn't seem
~o give any allowance for the level of interest rates or availability of
credit. Did you think this was because it was established policy by the
Federal Reserve and we couldn't do much about it?
Mr. ~WILLIA~Is. Well, I said that we believe there ~vill be ample mort-
gage credit available. You might recall that I had the most optimistic
forecast in terms of the number of units of any of the four members
of this panel. I think one other has a range of 1.5 to 1.6 in his forecast.
Senator PR0xMIRE. Don't you think it makes a big difference in
housing that credit will be available at a particular interest price?
Mr. WILLIAMS. Well, I have a feeling that today people are more
concerned about the availability than they are the price.
Senator PROXMIRE. That may well he but the market. would broaden
a lot, wouldn't it, if you could get that cost, that rate down. It is
there for low- and moderate-income housing. lYe have the 1968 hous-
ing bill and we can peg the interest rate down but that is a relatively
small segment. of the 1,600,000 or 2 million.
Mr. WILLIAMS. Other constraints may come into play which would
limit it to 1.6 million, perhaps the availability of skilled labor.
Senator PRox3nnE. But doesn't the actual payment by somebody who
has to pay 8 percent for his mortgage, the actual monthly payment as
compared to one who has to pay 6 or 6˝ percent. isn't there a sub-
stantial difference when you are buying a $25,000 or $30,000 home?
Mr. WILLIAMS. Yes, it is substantial, but I would say that today the
vacancy rate is so low and the basic demand for housing space is such
that I think this price will be paid.
Now there may be-
Senator PROXMIRE. It. is an interesting position. I don't recall any-
body else stating that. It may be the proportion and it may be per-
fectly correct. But your feeling is as far as this yeai1 is coi~cerned, thttt
it doesn't matter a lot if we have interest rates at 8 percent on mort-
PAGENO="0259"
535
gages or 7 percent or even a little bit lower, the important thing
is the availability of houses, that is the vacancy, family formations
and things like that or people are going to have to economize else-
where but they are going to get that house.
Mr. WILLIAMs. I think that is basic.
Senator PROXMIRE. You don't think the market is elastic enough to
make that much difference?
Mr. WILLIAMS. Well, I feel if we do have the extension of the sur-
tax that interest rates in the housing area will not be much higher
than they are today, and I see them today as no limiting factor.
Senator PROXMIRE. Right now they are
Mr. WILLIAMS. That is right.
Senator PROXMIRE. Do you gentlemen share this, that the credit cost
is not very important compared to these other elements in terms of
what is going to happen to housing this year?
Mr. KLEIN. As long as the supply of funds doesn't dry up.
Senator PROXMIRE. Mr. Perry?
Mr. PERRY. Well, very roughly, it seems to me that the statement
that we are making is that present credit costs are consistent with the
rate of housing starts in the neighborhood of last year's. I don't feel
that the credit costs are unimportant. I think that they make a sub-
stantial difference in the amount of homebuilding activity you have
in a particular year. And I don't know that you can get very far in
trying to hold down some rates so long as the total funds available
in the mortgage market are limited. For instance the need to raise
the VA, and FHA-
Senator PROXMIRE. I would agree with that. You can't put a ceiling
on that makes any sense where the market is so far above it you just
have point payments or rationing of money. I am t~ing about the
prospects of trying to achieve this perhaps by fiscal poL~y, by spend-
ing policy as well as tax policy and so on. There you think if the
interest rates did come down you would perhaps have a better market.
Mr. PERRY. Yes, I think housing is responsive to the changes.
Senator PROXMIRE. Mr. Suits?
Mr. SUITS. I think this is an open question. Certainly the primary
element is how much is really available to the housing market, and
this has to do with what mortgage rates are compared to other alterna-
tive investments, and with the distribution of loanable funds among
institutions.
Senator PROXMIRE. I have one more question. Mr. Williams, you
have a startling divergence in your predictions of GNP. In the first
quarter of the year you expect a $9.2 billion increase in GNP; second
quarter $14 billion; and the third quarter $19 billion; and the fourth
quarter it will tail off to $15 billion. Why the big increase, sudden
increase, of economic activity in the third quarter of the year, and
then a cooling off?
Mr. WILLIAMS. Unfortunately, Senator, you have an old copy.
Senator PROXMIRE. Is that a typographical error?
Mr. WILLIAMS. No, it has been revised. Would it be possible to
get a-
Senator PROXMIRE. What I have is $897, $911, $930, and $945
billion.
Mr. WILLIAMS. The revised-
PAGENO="0260"
536
Senator Pnox~rIRE. Four quarters of 1969.
Mr. WTILLIA~1s. My revised statement which I brought in at 10
o'clock this morning reduces variations in quarterly growth rate over
the year. Annual total GNP hasn't been changed, but the quarterly
increases in 1969 are: $11.2, $12.5, $17.5 and $15.5 billion.
Senator PRox~IIRE. You still have the big increase in the fourth
quarter, not quite as much but it is still a big one. \\Thy is the third
quarter expected to be so bullish?
Mr. WILI~IA~xs. I think most of us had this greater increase in the
second half. In the third quarter you have a pay increase in the Fed-
eral sector.
Senator PRox~rIRE. The pay increase is an element but you know
everything we have heard from everybody who has testified here in the
last week was that they are determined to slow the economy down,
and it should be cumulative and we shouldn't have a period 6 months
from now, after applying restraint over a period of time, which goes
up higher.
Mr. WILLIAMS. Well, this overall increase that I have called for of
3.4 percent in real terms is a substantial slowing down in the economy.
Senator PHOXMIRE. Well, except there is no slowing down between
the second and third quarters.
Mr. WILLIAMS. That is true.
Senator PROXMIRE. There is a. speedup.
Mr. WILLIAMS. Yes.
And that is due to a steady increase in Government spending, aug-
inented by the pay increase in the third quarter. I don't sec~
Senator PRox~nRE. That is when the credit is likely t.o get tight,
the Federal Reserve is likely to have the brakes pretty firm during
that period I would think.
Mr. WILLIAMS. If they wish to prevent this, that is what they will
do, yes.
Senator PROXMIRE. Well, gentlemen, I have detained you and im-
posed on you long after other members have gone., but you were so
interesting and so responsive and competent that I just couldn't
resist. I very much appreciate a splendid job. Thank you very much.
The committee will have its next hearing tomorrow morning in
room 1202, New Senate Office Building, when we will hear four ex-
perts on fiscal and monetary policy. The meeting stands in recess until
then.
(l,\Thereupon at 12 :40 p.m.~ the hearing was recessed, to reconvene,
Tuesday, February 25, 1969, at 10 a.m.)