PAGENO="0001" THE 1969 EthNOMIC REPORT OF THE PRESIDENT HEARINGS BEFORE THE JOINT ECONOMIC COMMITTEE CONGRESS OF THE UNITED STATES NINETY-FIRST CONGRESS FIRST SESSION INVITED COM1\IENTS PART 4 Printed for the use of the Joint Economic Committee GOVERNMENT DEPOSITORY PROPERTY OF RUTGERS, THE STATE UNIVERSITY COLLEGE OF SOUTH JERSEY LIBRAI~Y CAMDEN, N. J. 08102 ~j\f~ 13.5. GOVERNMENT PRINTING OFFICE 24-833 WASHINGTON: 1969 For sale by the Superintendent of Documents, U.S. Government Printing Office Washington, D.C. 20402 - Price$1.00 /J/~ (, 7/2 : 9~ 1~ V PAGENO="0002" 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 ROBERT H. HAVEMAN FRAZIER KELLOGG JOHN R. KARLIR DOUGLAS C. FRECHTLING (Minority) JOINT ECONOMIC COMMITTEE [Created pursuant to sec. 5(a) of Public Law 304, 79th Cong.} WRIGHT PATMAN, Texas, Cli airman WILLIAM PROXMIRE, Wisconsin, Vice Chairman JOHN R. STARK, Executive Director JAMEs W. KNOWLES, Director of Research ECONOMISTS (II) PAGENO="0003" CONTENTS Page Letter of Representative Wright Patman, chairman of the Joint Economic Committee, inviting comments on the 1969 Economic Report of the President; preceded by a listing of organizations from whom statements or comments were solicited 965 ORGANIZATIONS RESPONDING American Bankers Association 967 American Farm Bureau Federation 974 American Life Convention and the Life Insurance Association of America~ - 977 Committee for Economic Development: Emilio G. Collado, chairman, research and policy committee 983 Communications Workers of America 993 Conference on Economic Progress: Leon H. Keyserling, president 999 Cuna International, Inc.: J. Orrin Shipe, managing director 1057 Federal Statistics Users' Conference 1059 Machinery and Allied Products Institute: Charles W. Stewart, president. - 1064 The Inflation Dilemma, by George Terborgh, research director 1066 National Farmers Union: Angus McDonald director of research 1140 National Federation of Independent Business: John W. Harder, president. 1151 National Federation of Independent Unions: Don Mahon, executive secretary 1154 United Automobile, Aerospace and Agricultural Implement Workers of America (UAW): Walter P. Reuther, president 1156 United Mine Workers of America: W. A. Boyle, president 1185 Jerry Voorhis, past executive director, Cooperative League of the U.S.A__ 1189 (III) PAGENO="0004" PAGENO="0005" THE 1969 ECONOMIC REPORT OF THE PRESIDENT The letter appearing below was sent to the following organizations: American Bankers Association, American Farm Bureau Federation, American Life Convention, Committee for Economic Development, Communications Workers of America, Conference on Economic Progress, Consumers Union of the U.S., Inc., Cooperative League of the U.S.A., CUNA International, Inc., Federal Statistical Users' Conference, Independent Bankers Association, Life Insurance Association of America~, Machinery and Allied Products Institute, National Association of Mutual Savings Banks, National Consumers' League, National Farmers Organization, the National Farmers Union, National Federation of Independent Business, Inc., National Federa- tion of Independent Unions, the National Grange, National League of Insured Savings Associations, National Planning Association, Rail- way Labor Executive Association, United Automobile, Aerospace and Agricultural Implement Workers of America (UAW), United Mine Workers of America, United States Savings and Loan League. These organizations were invited to submit their views or comments on the text and recommendations contained in the 1969 Economic Report of the President. Fourteen organizations submitted statements and their views were considered by the Joint Economic Committee in the preparation of its report on the President's Economic Report. FEBRUARY -, 1069. DEAR Under the Employment Act of 1946 the Joint Economic Committee has the responsibility of filing each year a report containing its find- ings and conclusions with respect to the recommendations made by the President in his Economic Report. Because of the limited number of days available for hearings, the committee is requesting a number of leaders of banking, business, labor, agriculture, and consumer organizations to submit statements on the economic problems facing the Nation. These statements will be made a part of our hearings on the Economic Report in a printed volume containing such invited statements. We invite your comments on the economic issues which concern the Nation and your own organization. Under separate cover we are sending you a copy of the 1969 Economic Report of the President, filed January 16 by President Johnson. Also, we will send you the testimony of the Chairman of the Council of Economic Advisers under the new Administration when the Council appears before the Committee later this month. \~\Te would like to distribute copies of your statement to the members of the Committee and the staff, and would therefore appreciate your sending 30 copies, by March 1, 1969, to Mr. Hamilton D. Gewehr, Administrative Clerk, Room G-133, New Senate Office Building, Washington, D.C. 20510. With kindest regards and best wishes, I am Sincerely yours, WRIGHT PATMAN, Uhaiuinan.. (965) PAGENO="0006" PAGENO="0007" AMERICAN BANKERS ASSOCIATION The American Bankers Association is pleased to submit a statement in connection with the annual hearings of the Joint Economic Com- mittee on the state of the economy. The committee request asked for "comments on the economic issues which concern the Nation and your own organization." We have, therefore, selected for comment a num- ber of specific issues upon which we feel the banking industry has special competence to express itself. Largely these concern either credit matters themselves or public policy that will ultimately affect the de- mand and supply of credit. The issues raised, however, are of such importance they transcend concern by the banking industry alone. I Periods of high employment such prevailed in 1968 and presumably will prevail in 1969 put major strains on all financial institutions. While the real growth of the economy from the previous year as meas- ured by gross national product was only 5 percent in 1968 and price increases added 4 percent to the growth in total GNP, the aggregate volume of credit increased some 20 percent last year. The growth in credit demand is the result of a combination of circumstances; high aggregate demand as a result of strong business and consumer incomes, the fact that rising prices makes future investment and production appear abnormally profitable and attempts by businesses and consumer to anticipate future price and interest rate increases and shortages. That these conditions are occurring is, of course, the consequence of unduly expansionary monetary and fiscal policy in 1967 and 1968. The strain on financial institutions may take several forms. While the traditional channels utilizing financial institutions under ordinary circumstances are adequate to move a sufficient volume of savings into investment, in periods of high employment demands for credit fre- quently exceed the amount that can be provided by these institutions. For example, the volume of mortgages or corporate bonds in particu- lar years may substantially exceed the amount normally purchased by institutions buying assets of this type. The increased supply of these instruments pushes their interest rates higher. Some leading in- stitutions may then shift their purchases from types of obligation that *they customarily find attractive to the particular asset that happens to be in strong supply, or the borrower, because of the increased cost of funds and the inability to attract sufficient buyers for these particu- lar assets, may switch to other types of instruments. Businesses which would ordinarily finance in the bond market, for instance, may move to bank loans or commercial paper as a source of funds. The role of commercial banks is complex. In addition to servicing their customers' normal short-term needs, banks tend to be the major residual supplier of funds for the economy in periods when credit (967) PAGENO="0008" 968 demands and interest rates rise sharply. Such periods of high demand for bank funds, however, are not without concern to commercial banks. Under these circumstances banks frequently must sell securities from their portfolios at substantial losses in order to meet their formal and informal commitments to valued customers. If there are heavy Treas- ury demands for credit a.t such times the problem of financial institu- tions is further compounded. When banks respond within the free market mechanism by rationing credit on the basis of price (interest rate) rather than by arbitrary decisions, they frequently incur unjusti- fied criticism for raising rates charge.d to customers.' Yet when the banks, whose ability to meet expanded borrowing demands of their cus- tomers requires them to be able to attract funds, succeed in increasing their time and savings accounts, they are sometimes said to be "obtain- ing more tha.n their fair share of the savings market.." It should be recognized that the disruptive strams upon our financial system are not caused by commercial banks nor by specialized financial institutions. Rather, they arise from the fact the economy can generate more uses of credit under an outlook for relatively full employment than it is possible to suppiv at current interest rate levels. The problem is compounded by inflation which both increases the demand for funds and reduces the motives to save. To the extent that monetary policy is successful in holding clown price increases, the measure of it.s success may be the shortage of credit itself. To the extent that price increases occur, credit demands that are satisfied compound inflation. The ad- ministration and Congress have often been sympathetic but at times they have added to public misunderstanding of the role commercial banks play in supplying credit by viewing dimly either interest rate increases made necessary by market pressures or by suggesting that banks are obtaining greater than their arbitrarily assumed share of t.he "market for savings." The American Bankers Association recommends that the adminis- tration and Congress bear in mind the strains placed upon financial institutions in times of excess demand. To this end au active policy should be pursued to cut back Treasury and Federal agency demands for funds when the economy achieves rapid growth of demand and high employment as a result of a strong private sector. Furthermore, recognition is essential that monetary policy should appropriately be concerned with both interest rates and the volume of bank credit. Finally, attention may well be directed toward determining whether the present structure of financial institutions is appropriate to provide the optimal flow of credit needed for a high employment economy in the long run. II The statement. of the incoming Council of Economic Advisers pre- sented to the Joint Economic Committee on February 17, indicates the priority given to the problem of inflation by the present aciminis- tration. The statement rejected the economic projection of the retired Council and instead indicated that a greater attempt would be made 1 In 1966 the American Bankers Association published and distributed to all of its mem- bers a brochure entitled Tue Banker's Role in Reinforcing Monetary Policy which pointed out procedures the bankers could use in determining loan priorities. This publication pointed out the beneficial effects that could be produced by responsible bank management decisions which would obviate both the need for Government guidelines and ever higher interest rates. Consideration is now being given to reissuing this publication. PAGENO="0009" 969 to bring inflation to a halt than merely relying upon an assumed slow- down in the first half of 1969 as a result of the surcharge instituted last year. At the same time the Council indicated the administration is well aware of the consequences of increased unemployment that could re- sult from too severe use of fiscal and monetary policy in order to break inflationary expectations. Wisely, the Council has suggested the use of appropriate monetary and fiscal policy to bring about expectations of diminishing rates of inflation in the future. We regard as positive the Council's apparent realization that the relation between price increases and unemployment is sufficiently flexi- ble to permit many things to be done to decrease the degree of inflation without raising unemployment. The Council's emphasis on moderating rather than crushing the growth of aggregate demand will permit steady progress toward improved price performance without sacri- ficing low levels of unemployment. Our particular concern is that the damping of inflationary expecta- tions may not be as smooth as the Council implies. At some point as the rate of growth of prices decelerates, there may be cumulative abandon- ment of investment plans, restrictive inventory policy and consumer postponement of purchases. At such times, those who guide both fiscal and monetary policy may feel that they face a dilemma between imme- diate reaction to the new conditions and a "steady hand on the tiller" approach. It should be the intention of the administration with the help of Con- gress to pursue many policies-consistent with maintenance of the free market mechanism-aimed at decreasing inflation in addition to the principal ones using monetary and fiscal measures. While the aim of Federal action against inflation is nearly always thought to be the con- centration on the reduction of excess demand, possible action to im- prove si~pply can also be in order. The Federal Government can well occupy itself in the elimination of any conditions that limit the work- ing of the price and free market mechanism and thus tend to raise both prices and wages. Both labor and management should be made aware of the beneficial effect of measures to increase productivity and steps should be taken to see that practices that conflict with maximum pro- ductivity growth are eliminated or reduced whether they originate with Government, labor, or business. Finally, a thorough review is required of all those areas of public policy aimed at pegging prices and wages. It is appropriate to question whether the minimum wage law plays a useful role at the present time; it may only lead to greater un- employment of marginally productive workers. In any case, while wage and price supports may be appropriate in periods of underutili- zation of resources, in periods of high employment of fully productive workers, there is little excuse for them, and they add significantly to inflationary pressures. In the end, however, the fight against inflation will be largely won or lost by monetary and fiscal policy. If the past decade is any indication, the greatest single determinant will be the volume of Government spending. Indeed, Korea, the space and missile race, and Vietnam essentially determined Government spending. But Federal revenues were adjusted only slowly, and monetary policy did not fully compen- sate. Thus lressure was placed upon scarce resources in the name of national policies endorsed by a sizable percentage of the American PAGENO="0010" 970 public. The American Bankers Association believes that in recent years the Federa.l Government has been the major perpetrator of inflation, because it did not give adequate consideration to the overall impac.t of major policies. At some point, the judgment must be made as to whether to err on the side of a more or less restrictive policy despite all the good wishes of the current administration in avoiding that problem. In the recent past, this decision has generally been against that of sufficient restric- tion and instead policy has fostered more inflation. WTe feel strongly that undesirable as even a. small rise in unemployment would be, the administration must be prepared to accept some rise in the number of jobless and must not weaken its actions against inflation for fear of such consequences. The association is firmly convinced, moreover, that inflation has seriously intensified the problems faced by large segments of our population who have low incomes, whose incomes are fixed, or who are on some form of public assistance. While we are mindful of the beneficial effect of a highly expansionary policy in employing mar-. ginal and submarginal workers, we feel the Federal Government has, in pursing a "Guns and Butter" policy, achieved a high rate of employ- ment through over-st.inmlative policies at a. cost of lowered purchasing power for families who are only one short step up the economic ladder from low-skilled workers who are also a prime object of Federal con- cern. A realistic cost benefits analysis might well dictate other ways of solving the problem of putting the least employable workers into jobs. III The commercial banking industry is obviously concerned tha.t the pursuit of monetary policy be practiced with maximum efficiency. In the last year despite three separate and distinct Federal Reserve policy phases, monetary growth overall was much too high for a. year of rapid inflation. The money supply defined as demand deposits and currency grew at a nearly stea.dy rate while the money supply plus time deposits actually accelerated in its growth rate as the year progressed. Viewed in this light the basic decisions of monetary policy seem clearly to have been in error. Monetary policy, on the other hand, becomes more under- standable if its goal was conceived as largely that of trying to affect interest rates. During the moderately restrictive policy period up to late spring interest rates particularly in short-term securities rose. Following passage of the surta.x and agreement on the spending slow- down when policy shifted because of fear of "overkill," rates fell only to turn up again barely 2 months later when the economic expansion proved stronger than anticipated. Of course, Treasury requirements in 1968 unduly limited the hands of the monetary authorities. Neverthe- less, whether interest rates or the growth in the money supply was the guiding policy principle, the total effect of last year's actions was obviously inappropriate for a period of inflation. During the past year the Joint Economic Committee suggested the Federal Reserve Board specify regularly its goal in terms of growth of the money supply and explain reasons for policy changes that produced divergences from a stea.dy rate of growth. While viewed as a victory for tlrose who advocate fairly steady growth in the money supply, in a laroer sense its chief contribution probably was that of putting the Fe~eral Reserve on notice that fewer, rather than more, frequent shifts PAGENO="0011" 971 in policy would be desirable and that interest rates are less important than previously thought in creating an effective monetary policy. In contrast to the apparent willingness of those who hold this view- point to focus greater, if not complete, attention upon money supply growth, the annual report of the retiring Council of Economic Ad- visers went out of its way to point out the undesirable effects of a sim- ple rigid rule related to the growth of the money supply by pointing out the undesirable effects upon the interest rates that could be. pro- duced under certain situations. The American Bankers Association has no wish to endorse a par- ticular viewpoint in monetary theory. We do see definite advantages to the cause of economic stabilization in a less volatile monetary policy and therefore less precise concern over interest rates levels per Se. Such a course, however, requires reducing the institutional rigidities imposed by various interest rate ceilings incoroprated by law and regulation in many parts of the financial system. Ceilings on interest rates paid to savers at various institutions, rate ceilings on Treasury bonds, maxi- mum lending rates on insured and guaranteed mortgages, student loans and small business loans, and imposed ceiling rates on consumer loans as well as mere tradition or convention all tend to make interest rates unusually important in the present financial system. Since a high em- p~ oymeut economy is likely to produce interest rates near or even above legally imposed ceilings or ceilings fixed by lack of timely administra- tion, it is likely that until many of these restrictions are removed mone- tary policy will have to be cognizant of sharp and irregular effects set off by slight changes in interest rates. Therefore, it would seem en- tirely appropriate for the committee to bear in mind the inconsistency of advocating policies favoring relatively stable monetary growth but continuing to favor the institutional rigidities imposed by legal inter- est rate ceiling on various types of instruments. As a case in point, the banking industry should point out that the hoped-for gentle attack against inflation may be turned into a. serious credit crunch by failure to take appropriate, action to increase the. ceil- ing rate on large certificates of deposit issued by commercial banks. Certainly the current course of interest rat.es suggests that instruments other than bank certificates are more attractive to sophisticated large investors and wholesale "disintermediation" could well spread as it did in 1966. Immediate action should be devoted to removing, placing on a standby basis, or raising this sensitive rate ceiling. Such a move would not lessen the anti-inflationary stance but would reduce the threat of another serious credit crunch emanating from serious "disin- termecliation." Iv Recent years have seen a considerable atmosphere of innovation in banking practices, questioning of existing operating and regulating procedure, and the invention of new methods of organization. In such areas as savings instruments, underwriting of revenue bonds, capital instruments, credit cards, provision of Federal Reserve discount facili- ties. Loan production offices, provision of noncredit services by banks, and limits on loans of particular types such as mortgages, the coin- mercial banking industry has become restive with previous arrange- ments. In the past year the diversification movement in the commercial banking industry, generally taking the form of financial congenerics, PAGENO="0012" 972 has garnered considera~ble attention from the public, the administra- tion, and Congress. There is often a temptation to regard these developments in. isola- tion and see them a.s the mere result of oversight in drafting previous legislation or regulation, the discovery of ingenious legal arrange- ment, or nefarious intent on the part of bank managements. Yet, all of these developments and many more that could be mentioned are undoubtedly only the external manifestation of major changes that are taking place in the American economy and the financial system's attempt to adapt to them. Without attempting to exhaust the list of fundamental changes in the economy leading to changed financial practices it is possible to point out a few obvious ones. First, the rising scale of industry has meant demands for financing and other financial services are much larger than before. Technical developments have increased capital requirements of customers; they have also changed the practice of banking. Sharp shifts have occurred in the cost curves of the com- mercial banking industry in particular operations and as the payments system rapidly becomes automated, as now appears likely in the next decade, the economics of the industry will be changing rapidly. Bank managements have incerased their professional character and highly skilled personnel are required to service customers. On the consumer level, demands for deposit and credit services have changed ap- preciably. Indeed, the very output of the economy ha.s changed appreciably from material things to services of various types and this development affects the functions of financial institutions. The American Bankers Association is, of course, seeking to represent the commercial banking industry in dealing with the Congress and the banking agencies as legislation and regulations are developed to take account of necessary changes. We urge that the Joint Economic Com- mittee as well as other congressional committees dealing with banks attempt to view the financial structure as a whole ra.ther than on a piecemeal basis as it reviews the need for specific changes. Generally, the American banking system over the years has been able to adapt prudently and efficiently to broad economic and social changes and the nation has benefited from this flexibility. To continue this favor- able record requires a depth of vision and willingness to innovate on the part of legislators and regulatory agencies unwilling to be satis- fied with the status quo. In their future dealings with the banking industry we hope the flexibility of approach contained in the principle of dual regulatory authority will be preserved. The announced intention of the new administration to contain in- flation by a policy of gradual reduction of expenditures growth will have a wholesome effect on the U.S. balance of payments. It is fairly obvious that only inflow of capital from Western Europe and a will- inguess by U.S. firms to go beyond what was asked of them in limiting capital outflows abroad enabled the U.S. payments balance to show up as well as it did in 1968. The poor showing of the Un1ted States on trade account last year is a foreboding sign that the threat of a large-scale deterioration in the balance of payments still hangs over the Nation. PAGENO="0013" 973 For 1969 we urge that major efforts be made to expand U.S. exports. Such efforts should include a thorough examination of the types of incentives that could be used to encourage American industry to ex- pand exports. Joint efforts with our trading partners should be aimed at a thorough review of unilateral changes of indirect taxes which tend to distort trade patterns among nations. Negotiations to remove nontariff barriers should also be pressed, so that the advantages of free international markets can be made more fully available by all nations. The Joint Economic Committee in its deliberations on the U.S. balance of payments may well benefit from examination of The Cost of World Leadership, an analysis of the problems and solutions of the problem recently completed as a staff study of the American Bankers Association. PAGENO="0014" AMERICAN FARM BUREAU FEDERATION We appreciate the opportunity to comment on the Economic Report of the President for 1969. Farm Bureau members are interested in the Economic Report be- cause it deals with matters which determine the economic climate in which farmers must try to make a living. Our members also have an interest, as taxpayers, in the many sec- tions of the Economic Report which call for continued, or increased, Government expenditures. At the present time the economic climate is dominated by strong inflationary pressures. This is recognized at several places in the Eco- nomic Report. For example, on page 33 1 the Council of Economic Ad- visers notes that "The pressures of excessive demand pushed up the price level at the unacceptable rate of nearly 4 percent" (in 1968). This apparently refers to the Consumer Price Index. As an industry that suffers from overproduction-some of which has been induced by Government programs-agriculture is seriously hurt by inflation because farm costs rise faster than farm prices. This is well illustrated by the chart on page 48 which shows that farm prices have consistently lagged behind other wholesale prices since 1963 ex- cept for a brief period in 1966 when farm prices were boosted by an unwarranted hysteria over the world food situation. From December 1962 to December 1968 the Wholesale Price Index for all commodities, including farm products, rose 9.4 percent, but the wholesale price of farm products rose only 6.2 percent. We certainly agree with former President Johnson's statement (p. 9) that, "The immediate task in 1969 is to make a decisive step toward price stability." We strongly urge the Congress to pursue inflation control with greater vigor in 1969. In achieving this, major emphasis should be on cutting Federal expenditures in order to obtain a balanced budget for fiscal 1970. Reductions in expenditures should have priority over continuation of the surtax for an additional year. We are well aware of the argument that reducing Government ex- penditures might increase unemployment. We do not, however, believe that inflationary policies are a sound approach to the desirable objec- tive of maintaining a high level of employment. The unemployment problem is concentrated in groups that have very little to offer the job market. The major impact of inflation on employment is to increase the demand for-and consequently the money income of-the better qualified workers who already find it relatively easy to obtain employment. The problem of finding employment for the disadvantaged can best be approached through efforts to upgrade their skills in order to 1 Economic Report of the President, transmitted to the Congress, 3anuary 1969, together with the Annual Report of the Council of Economic Advisers: U.S. Government Printing Office, Washington~ D.C. (974) PAGENO="0015" 975 qualify them for the type of work that is available in a technologically advanced society. In some cases such efforts could be materially assisted by exemptions from the minimum wage law for handicapped and be- ginning workers. While the Council of Economic Advisers indicates that a price level rise of 4 percent per year is "unacceptable," we do not think the Council has placed sufficient emphasis on the long-run dangers of inflationary policies. There is real danger that efforts to increase em- ployment by inflating the economy may lead to an economic bust which would increase rather than reduce unemployment. It has often been argued in the past that an easy money policy is necessary to hold down interest rates in order to stimulate the housing industry. Recent experience suggests that an inflationary expansion of the money supply leads to high, not low, interest rates. If lenders are convinced that they will be repaid in `cheapei' dollars it is only natural that they should demand higher interest rates to offset the potential loss in the purchasing power of loan funds. If prices are advancing at a rate of 4 percent per year, interest rates must exceed 4 percent if lenders are to receive any real return for the use of their money. We agree with former President Johnson's statement (page 10) that, "the vital guiding mechanism of a free economy is lost when the Government fixes prices and wages." We do not, however, agree with the Council of Economic Adviser's statement (page 59) that, "business and labor should undertake a pattern of voluntary restraint" based on Government-suggested guidelines. Government guidelines are an interference with the operation of the market system that is only a step removed from price and wage con- trols. The proper role of the Government in inflation control is to create an economic climate that is conducive to a stable price level- not to inflate the economy and then ask business and labor to refrain from responding to inflationary pressures. We do not agree with former President Johnson's suggestion that Congress "give the President discretionary authority to initiate limited changes in tax rates, subject to congressional veto" (page 13). The record indicates that the Congress can act quickly on tax changes when a majority of its Members are convinced that proposed changes are required by the national interest. Enactment of the present surtax was delayed because many Mem- bers of Congress-reflecting the views of their constituents-felt that an increase in taxes should be accompanied by a reduction in Govern- ment expenditures. We do not think it would be wise for the Congress to surrender its right to originate changes in tax rates, to decide the amount of such changes, and to decide whether increases should be accompanied by cuts in expenditures. AGRICULTURE We agree with former President Johnson's statement (page 16) that, "Agriculture has been the `stepchild of trade negotiations, and deserves prompt and proper attention." The most notable agricultural result of the Kennedy round was an International Grains Arrangement which has resulted in an inverse subsidy, or export tax, on U.S. wheat exports. We do not see how any- one could expect to expand wheat exports by taxing them. It is not surprising that wheat exports have declined since the International PAGENO="0016" 976 Grains, Arrangement went into effect, although we recognize that other factors may have contributed to this decline. The United States should seek to have the wheat provisions of the International Grains Arrangement suspended or materially modified at the earliest possible date. The new administration should give a high priority to efforts to increase farm exports. Our immediate goal should be to increase farm exports from $6.3 billion in fiscal 1968 to $10 billion per year. This would improve our balance of payments as well as strengthen our farm economy. In order to achieve this goal, it will be necessary to resist the current pressures for new restrictions on imports. It will also be necessary to eliminate the direct payment features of domestic farm programs. Direct payments to farmers on commodities which are produced for export are a disguised form of export subsidy, and are recognized as such by other countries. We cannot expect to persuade other countries to reduce trade barriers such as the Common Market's variable fees as long as we are subsidizing exports through direct payments. We appreciate the Economic Council's recognition (page 116) of the need for "a restructuring of farm programs"; however, we do not agree with the Council's inference that direct payments should be continued. New farm legislation should be enacted during 1969 so that farmers will have time to prepare for the changes that should be made in existing farm programs. Further delay in coming to a decision on this issue would only make the problem of adjustment more difficult for farmers. In developing new farm legislation it should be recognized that the problems of agriculture can be divided generally into two categories: First, the problems of commercial farmers and second, the problems of other farmers. Farm Bureau supports a transitional program to deal with the problems of noncommercial farmers. This could take the form of whole farm cropland retirement, permanent retirement of allotments, adjustment and retraining assistance, or other means. For the commercial farmer we recommend a program which would move as rapidly as possible to the market system by phasing out acreage ba.ses, acreage allotments, marketing quotas, and compensatory payments with no limitations on payments to individuals during the phaseout. The objective should be to create conditions which will make it pos- sible for farmers to get their income in the marketplace rather than being dependent on congressional appropriations. A few farmers should not be penalized because they are larger than others. The phaseout of acreage controls should be accompanied by an ex- pansion of the voluntary cropland adjustment program (authorized by the Food and Agriculture Act of 1965) with emphasis on whole farms. We are pleased to note that the Economic Report favors an expansion of this program (page 116). As a first step toward getting agriculture on to a sounder footing, ftmds for new cropland adjust- ment contracts should be included in the Agricultural Appropriation Act for 1970. This would enable the Secretary of Agriculture to begin to move in the direction of the adjustments that are needed by offering farmers new cropland adjustment contracts in the fall of 1969, a year before the act of 1965 is scheduled to expire. PAGENO="0017" AMERICAN LIFE CONVENTION and the LIFE INSURANCE ASSOCIATION OF AMERICA This statement is submitted on behalf of the American Life Con- vention and the Life Insurance Association of America, two trade associations with a combined membership of 360 life insurance com- panies which account for 92 percent of the legal reserve life insurance in force in the United States. The total assets of the life insurance business today aggregate more than $187 billion, which represents the savings that have been entrusted to us by millions of policyholders. The protection of the economic value of these savings is of vital con- cern to our business. We appreciate the invitation of the Joint Eco- nomic Committee to express our views on the materials and recom- mendations contained in the "Economic Report of the President Together with the Annual Report of the Council of Economic Ad- visers" and we hope that these comments will prove helpful to the committee. PROSPECTS FOR THE ECONOMY IN 1969 In our view, the No. 1 problem facing our domestic economy in 1969 is the threat of continuing strong inflation and the deepening of the inflationary psychology that has spread widely through the economy in recent months. During 1968, the inflationary forces that were per- initted to develop led to a 4.8-percent increase in the consumer price level and a 3.9-percent rise in the GNP price deflator for the entire economy. Inflation was no longer merely a threat-it became a reality. The inflationary trends of 1968 have already exacted a toll from the American public in terms of higher prices for everyday living expenses, rising costs of housing, and decreased value of their savings and fixed incomes. But another difficulty with a major inflationary surge is the change in public attitudes that it carries with it. Once the public be- comes convinced that prices are going up further, there is a natural urge to anticipate price increases by purchasing in advance of needs, even if it means borrowing to do so. In such circumstances, rising inter- est costs become a minor deterrent to borrowing when compared with the rising prices that are projected in an inflationary climate. Thus an inflationary psychology can seriously distort the spending and borrow- ing decisions of consumers and businesses alike. As living costs ad- vance, pressures for higher wages also build up and persist in later labor negotiations. Moreover, inflation carries with it a forward mo- mentum that can be checked only by appropriate economic policies applied with determination and persistence. It is our opinion that the primary objective of economic policy measures in 1969 must be the reduction of the rate of inflation. In its Annual Report, the Council of Economic Advisers projects that gross (977) 24-833-69-pt. 4-2 PAGENO="0018" 978 national product will rise in 1969 by about $60 billion to a total of around $921 billion for the year, and this estimate is in accord with that of many private forecasters. An increase of about 6 percent is foreseen between the final quarter of 1968 and the fourth quarter of 1969, with a projected rise of less than 3 percent in rea.l output and an increase of a little more than 3 percent in overall prices. This estimate implies a diminution in the rate of inflation during the coming year as compared with the price advance of recent quarters. While we wOuld regard this degree of reduction in the inflation rate as a desir- able objective, we also believe that this goal may prove difficult to attain unless gradual but persistent restraint is applied through checks on Federal spending, extension of the 10-percent income tax surcharge, continued restraint in monetary policy, and prOgrams to improve productivity. POLICY FOR RESTRAINT OF INFLATION Effective action to break the grip of inflation and counter the threat from a deepening inflationary psychology requires a policy of simul- taneous restraint in four major areas, as outlined below. 1. Federal spending should be kept in check to avoid greater pres- sures on aggregate demand and to permit a balance or surplus in the Federa.l budget. The ability of the Congress and the executive branch to curb the growth of spending programs has been demon- strated by the Revenue and Expenditure Control Act of 1968. It is clear that the pressure of inflation during *the present fiscal year would have been even greater in the absence of this measure, but the need for continued holdbacks in Federal expenditures is no less press- ing today than a year ago. In our view, the $3.4 billion Federal budgetary surplus that is pro- jected for fiscal year 1970 in the Economic Report and in the Budget Message operates in the proper direction of fiscal restraint. But this planned surplus could be easily jeopardized or even reversed if the Congress relaxes its careful scrutiny of spending programs in both the civilian and military areas. Previous budget analyses have demon- strated how sizable are the budget outlays which are "relatively uncontrollable" as a result of commitments under Federal programs adopted in earlier years or enlarged by previous legislation. Accord- ingly, the need for close review of new proposals or expanded programs is heightened by the narrowing of congressional discretion over current spending. 2. Extension of the 10 percent tcw~ surcharge is essential in the present budgetary situation to achieve the budget surplus needed to maintain fiscal restraint in an inflationary economy. The life insur- ance business urged the imposition of an income tax surcharge on both individuals and corporations in August 1967, and we now favor extension of the 10 percent surcharge for the fiscal year ending July 1, 1969, as proposed in the Budget Message and the Economic Report. Failure to renew the surcharge beyond its June 30 expiration would lead to a Federal deficit in fiscal 1970 of about $5i/~ billion-a fiscal position which would be wholly inappropriate to the present eco- nomic outlook of excessive demand a.nd continuing inflation. PAGENO="0019" 979 Past experience has shown that unexpected developments in mu tary requirements, budgetary trends, or economic conditions sometimes call for rapid adjustments in Federal tax policies. But prompt changes in tax rates, either up or down, are typically difficult to obtain under present procedures. In order to permit more rapid adjustments in tax levels, we would urge that consideration be given to some flexible mechanism to permit removal of the renewed 10 percent surcharge by the President before the end of the 1970 fiscal year, if changing circumstances warrant such action. The precise form of such a mecha- nism would be a question for discussion between the Congress and the new administration. While we do not presently visualize the emergence of conditions that would call for early removal of the surcharge, we feel that this type of flexibility would represent a po- tential improvement in our fiscal controls. 3. Monetary restraint is vitally needed to hold down the growth rate of money and credit, perhaps for a considerable period ahead. Beginning last December with an increase in the discount rate, the Federal Reserve authorities have moved in the direction of more restrictive monetary policy which has slowed the growth rate of money supply and brought greater pressure on member bank re~ serve positions in recent weeks. We believe that monetary restraint should be applied in a gradual fashion, in order to avoid the violent disruptions of a "credit crunch" but should be presistently maintained for a sufficient period to break the inflationary psychology which has gripped the financial markets in recent months. As noted earlier, the upsurge of inflation during 1968 has quickened the desires of consumers, h'omebuyers and corporations to purchase goods in anticipation of rising prices, and to borrow to finance such purchases. The rise in interest costs of recent months has been out- weighed in the minds of many `borrowers by the expectation of higher prices for goods if the purchase were delayed. At the same time, lenders have become increasingly aware that they must obtain a higher re- turn on fixed-debt obligations if they are to be repaid in dollars that have `been cheapened by inflation. While precise measurement is diffi- cult, it appears that these attitudes have produced an "inflation pre- mium" on fixed-dollar investment, which has been an important force working toward higher interest rates in recent months. The Annual Report of the CEA expresses the hope that as fiscal restraint is continued through fiscal 197Q, monetary policy may grad- iially be able to shift to a less restrictive stance and that a decline in interest rates `may take place. In our opinion there is a grave danger that premature easing of monetary policy, at the `first `signs of economic slowdown or rising unemployment, would revive inflationary ex- pectation's among savers and lenders and lead to higher interest rates rather than lower rates. The prospect, of continuing inflation under these circumstances would impel the public to `borrow more, while lenders would shun fixed-dollar investments or build in an "inflation premium" in their fixed-debt lending rates. For these reasons, we believe it is imperative to maintain a restraining monetary policy until present inflationary psychology has `disappeared from the finan- c~al markets. This may require a considerable period to accomplish against the background of recent developments. PAGENO="0020" 980 4.~Otiier policies for price stability ëan also contribute to the objec- tive of reducing the. inflation rate, in addition to the aggregative effects from fiscal and monetary restraint. Chapter 3 of the Annual Report of the CEA contains a discussion of the effect on price levels of wage rates, labor efficiency and mobility, utilization rates of plant capacity, and competitive pricing policies. We endorse the perceptive analysis of the Council in that discussion, and feel that the sugges- tions put forward by the Council deserve the careful consideration of business and labor groups as well as the Congress. Improvements in the areas described in that chapter should also be pursued in the search for price stability consistent with high levels of employment of man- power and utilization of productive capacity. THE QUEsTIoN OF UNEMPLOYMENT The Economic Report expresses the fear that "an overdose of fiscal and monetary restraint" might bring on a recession with rising un- employment and growing social unrest. The life insurance business shares the concern over the economic waste and the damage to family stability and individual dignity that would result from deliberate policies to increase unemployment as a means of halting price infla- tion. It is for these reasons that we urge gradual and persistent policies of restraint that will permit adjustments in production and labor markets without the violent disruptions that an economic downturn would bring. Recent discussion of these questions has centered on the "trade-off" or choice between inflation and unemployment. According to this argu- ment, in the short run, unemployment can be reduced to nominal levels if demand is allowed to expand rapidly, at the cost of upward pressure on wages and prices; conversely, if demand is restrained to curb infla- tion, unemployment may increase. In our view, this argument overlooks the fact that unsustainable growth rates lead to distortions in the econ- omy which can bring on extremely painful downward adjustments with a steep rise in the unemployment rate. In a longer run analysis, an overheated economy that produces inflation will lead to higher un- employment in the subsequent economic downturn which follows as a corrective aftermath of unsustainable growth. The present 3.3 percent unemployment rate represents the lowest level in recent years. However, the social consequences of even this de- gree of unemployment should not be ignored. A great part of the pres- ent joblessness reflects the problem of "unemployables" who lack skills or training, as well as pockets of structural unemployment in certain urban or rural poverty areas. However, this type of unemployment does not respond readily to variations in a.ggregate demands. The social and economic problem of the "unemployables" should be attacked through redoubled efforts to bring this group into the labor force through programs of job training and relocation. Similarly, hard-core unemployment among minority groups in urban ghetto areas should be approached not through pressing harder on total demand but through direct programs for providing new skills and new job opportunities for these workers. It should also be recognized that inflation exacts a heavy toll on the meager living standards of the jobless and the low-income family PAGENO="0021" 981 through higher costs of food, shelter and clothing. Efforts to develop low-income housing are stymied by rising construction costs. Welfare payments and unemployment benefits provide less help when the prices of. essential goods continue to mount. Those who are socially and eco- nomically disadvantaged could be benefited most through a combina- tion of broad policies to curb~ inflation together with manpower pro- grams to bring them into the labor force and provide them with needed job skills. Efforts should also be made to improve Government em- ployment services and to develop a data bank on job vacancies in order to identify job opportunities and increase labor mobility. BALANCE OF PAYMENTS PROBLEMS The year 1968 produced the first surplus in our balance of payments since 1957, but there was little cause for elation in view of the con- tinued weakening of our merchandise trade balance from a $3% billion surplus in each of the years 1966 and 1967 to less than $500 million last year. A heavy inflow of foreign capital was primarily responsible for converting the deficits of earlier years into a narrow surplus in 1968. However, there is little or no assurance that these offsetting capital inflows will continue in the future, since they arose to a considerable degree from political disturbances in Europe rather than from basic economic relationships. Inflation and excess demand have doubtless played an important role in the deterioration of our trade balance this past year, by attracting an increased flow of imported goods while making our exports more expensive to many foreign buyers. If we are to maintain our competi- tive position in world markets, it is essential that we regain control over inflation to prevent rising export prices. The Economic Report recommends that controls over foreign lend~ ing and direct investment be maintained and that the interest equaliza- tion tax be renewed. While these measures may be unavoidable under present circumstances, we should not lose sight of the desirability of removing these restrictions on international capital flows as quickly as circumstances permit. The persistence of this type of "temporary" capital control illustrates the need to achieve domestic price stability and to restore a viable balance in our international trading position. MANAGEMENT OF DOMESTIC MONETARY AFFAIRS The Economic Report offers proposals to modify the organization of policy formation within the Federal Reserve System with a view to enhancing its effectiveness. If any modifications are to be made, how- ever, we believe it is highly important to maintain the independence of Federal Reserve policy from political supervision or direct control by either the executive or legislative branch. This independence permits monetary policy to respond to changing economic conditions with a speed and flexibility which would be sacrificed if the System operated under fixed political directives. In a related field, greater flexibility is also desirable in the manage- ment of the public debt and Treasury borrowing operations. For the past three years, the Treasury has been unable to market securities with a maturity beyond 7 years, because of the 41/4 percent interest rate PAGENO="0022" 982 ceiling on bond issues. As a result, the average maturity of the public debt has been steadily decreasing. In our view, the Congress should consider changes that would pro- vide Treasury access to the longer term capital market as a regular part of its debt management function. One method would be to raise or remove the 41/4 percent bond ceiling; another would be to extend the maximum maturity of note issues beyond the present 7-year limit. Regardless of the method, the ability of the Treasury to lengthen the maturity of the debt would help not only to improve the debt structure but also to reduce the frequency and size of Treasury financing opera- tions in the money and capital markets. In conclusion, we believe that the foremost objective of economic policies in 1969 must be a reduction in the rate of inflation. Anti- inflation policies should be applied in a gradual fashion, to avoid a downturn in economic activity or sha.rply increased unemployment. But the campaign against inflation must be pursued with persistence, to rid the economy of the inflationary psychology which threatens to distort the spending, lending, and borrowing decisions of the public.. The economy has enjoyed a prolonged period of rapid growth and prosperity over the past several years. Employment, production and incomes have advanced to record high levels. But the pressure of ex- cessive demand has outrun our capacity to produce, leading to an un- healthy and continuing rise in wages, costs, and prices. If we are to return to the path of sustainable economic growth with high em- ployment and price stability, it is essential that we achieve a signifi~ cant reduction in the rate of inflation in the months ahead. PAGENO="0023" COMMITTEE FOR ECONOMIC DEVELOPMENT By EMILI0 G. COLLADO, CHAIRMAN, RESEARCH AND POLICY CoM~IrrrEE We are especially pleased at this opportunity to comment on the Economic Report of the President and the annual report of the Council of Economic Advisers, because the subject matter of these important documents relates to many of the issues discussed in a January 1969 statement of CED's Research and Policy Committee, "Fiscal and Monetary Policies for Steady Economic Growth." * This statement, prepared by a subcommittee headed by Douglas Dillon, was the result of intensive analysis of the opportunities and problems facing the U.S. economy now and in the years ahead. It represents a modernization and restatement of our analysis and rec- ommendations for maintaining a steady rate of noninflationary growth, and is the latest in a series which began with our first stabili- zation statement in 1947. Since our analysis and comments on the Economic Report of the President and the annual report of the Council of Economic Advisers will draw heavily on the positions taken in this recent CED document, it is useful to briefly outline its contents and recommendations. In "Fiscal and Monetary Policies for Steady Economic Growth," the CED Research and Policy Committee asserts that the four basic economic objectives of the country are a high level of employment, general price stability, economic growth, and balance-of-payments equilibrium. In defining "high employment," the report notes that for many years an unemployment level of 4 percent of the labor force has been widely used to represent a high-employment situation. However, there is little economic justification for setting a target for high employment in terms of a constant fraction of the labor force. Rather, the ultimate objective requires the maintenance of a level of demand for labor which will provide a number of jobs equal to the number of workers looking for employment at wages which the marketplaces are willing to pay for their capabilities; that is, their productivity. With this employment objective, additional measures may `be neces- sary to increase the productivity of those workers whose productivity is insufficient to earn a decent standard of living. Before shifting away from the familiar measure of unemployment as a percent of the la)bor force, it will `be necessary to compile and utilize data on unfilled job vacancies, and on unemployment, `by both location and skill. Until this is done, we shall have to use the present measure of unemployment, keeping in mind that a satisfactory level of employment will imply lower levels of unemployment as the adjustment of workers to job opportunities improves. *Copy in committee files. (983) PAGENO="0024" 984 In a section of our policy statement whose implications we regard as most important, the Committee concludes that there is little reason to be concerned with the necessity of trading off some rate of price inflation to obtain tolerable levels of unemployment. Put in yet an- other way, there is no necessity for accepting a substantial perma- nent rise in unemployment to attain relative price stability. The analy- sis in the statement suggests that expanding demand from levels well below the country's potential to produce at stable prices does reduce unemployment. However, as unemployment expands, the economy begins to approach the position where increases in employment become harder and harder to achieve by simply expanding money demand. Potential workers are in the wrong location, have mismatched skills, or skills not particularly relevant to any of the existing demands for labor. Under such conditions, further increases in money de- mand become increasingly inefficient ways to reduce unemployment and result primarily in increases in the price level. Lasting expan- sion of employment beyond this "normal" level of unemployment requires specific steps to improve the efficiency of labor markets and cannot be obtained by continued expansion of demand. At the point where expandiii~ demand leads to inflation, further increases in de- mand have little, if any, lasting effect on employment. Thus, there is little, if any, trade-off between inflation and employment because expanding demand to a level generating inflation brings no lasting rise in employment. In dealing with the need for price stability, the committee states that the adverse effects of inflation on domestic economic growth, on the distribution of income and wealth, on resource allocations, and on the Nation's competitive position in the world economy are now fully evident. If policy is to be directed at price stability, it is essen- tial that a reliable measure of price movements be the basis for meas- uring whether this objective is met. The Consumer Price Index is the single most reliable of the major indexes for measuring price stability, and the economy ought to aim for stability in the Consumer Price Index after allowing for inability of this index fully to reflect quality changes in goods and services produced. The third objective, economic growth, is regarded as a prerequisite for the attainment not only of economic, but of other fundamental goals as well. With increasing levels of output, the standards of liv- ing and opportunity of the great majority of Americans rise. At the same time, an expanding economy provides the means to meet the minimum economic needs of all citizens, and to ease the stresses of a~ variety of current technological, social, and economic changes. For the postwar years, the measured trend rate of increase in productivity per man-hour for the private and nublic sectors combined has been just over 2.5 percent annually. Adding the growth trend of 1.5 per- cent in total man-hours worked, the annual rate of exapnsion of p0- t"ntial output has been about 4 percent. The Nation's economic growth objectives should be to maintain a rate of growth in productivity per man-hour at least equal to the 2.5-percent trend, and continuing attempts should be made to improve this performance. In defining the final objective, equilibrium in the Nation's balance of payments. the committee notes that in nearly every year of the last decade the TJnitecl States has experienced an annual deficit in the bal- PAGENO="0025" 985 ance of payments. In settling these deficits, our gold reserve has de- clined and our liabilities to foreigners have increased substantially. However, the acquisition of dollar balances by foreigners has also served a useful purpose. Private foreigners have volimtarily increased their dollar holdings to finance world trade and international business. Because of the dollar's important role as an international reserve asset, foreign official institutions may also want to add further to their liquid dollar assets. Equilibrium in our international payments is attained when, on aver- age, the deficits in our international accounts are equal to the addi- tional dollars the rest of the world voluntarily wishes to acid to its holdings at the existing exchange rates when there are no direct or indirect government controls over international trade or capital trans- actions imposed for balance-of-payments reasons. The United States is not likely to achieve longrun payments equilibrium unless the econ- omy reaches its other objectives of high employment, stable prices, and steady growth. The statement then specifies the role the Government plays in affecting the economy as being composed of two conceptually separate sets of forces: those which affect the level of output that the economy has the potential to produce at stable prices and those forces which affect the actual level of demand at any time. The Government's impact on the economic potential of the economy arises from its influence on the size of the labor force as well as its impact on the productivity of this labor force. While the factors affecting productivity are many and diverse, Government expenditures on health, education, urban development, research and development and the like have direct impact on the motivation and ability of the work force and thus affect the potential. Expenditures and tax programs designed to induce innova- tion and investment also provide significant stimuli to increase produc- tivity. However, to the extent we spend publicly to achieve these ob- jectives when the economy is at high employment, less resources are available to be used in the private sector. Thus, we conclude Our longrun objective for economic growth requires that the Federal Government manage its s~penciing, taxing, lending and borrowing programs in ways which assure that the resources of the whole economy are used a~s efficiently as possible. This means that the productivity of Federal spending and lending programs should be weighed against the productivity of private spending and that the tax system be one which fosters or least deters mi tiative, effort, and investment. These objectives can best be served if the Federal Government manages its spending and taxing so as to yield approximate balance in the overall budget when the economy is at a high level of employment and expevwncing stable prices. The Federal Government through its taxing, borrowing, spend- ing, and lending decisions exerts a significant influence on the actual level of the economic activity in the economy. Monetary policy simi- larly exerts a substantial impact on the level of demand, employ- ment, and prices. Our recommendations for public policy with respect to the objective of achieving high employment at stable prices are that if, with proposed Federal spending and the existing tax rates, total demands exceed or fall short of the country's capacity to produce at stable prices, the Congress should enact legislation affecting either PAGENO="0026" 986 spending or taxes or both so as to bring the total of public and private demands within these bounds. The method of temporary in- come tax change selected by Congress to stabilize the economy should be easy to initiate, easy to understand, and easy to administer, and it should not substantially alter the tax structure. Experience with the use of tax changes for economic stabilization purposes demonstrates that such action often needs to be taken more `expeditiously than the usua.l congressional procedures have permitted. There `should, therefore, be a consensus not only about the form of the tax change and the economy's need for it, but also a mechanism for obtaining timely action. The basic role of monetary policy in a broad program of economic stabilization should be to create and preserve an environment in which expectations of monetary developments are themselves stable. This requires a close coordination in the use of monetary and fiscal policies. Major failures in fiscal policy cannot be successfully offset by mone- tary measures. Experience has demonstrated that fiscal and monetary measures cannot be effective when used in substantially conflicting ways. This philosophy implies a restrained use of the basic monetary instruments consistent with long-run objectives, a.voiding drastic short-run changes in monetary postures. Given this general introduction to our policy statement it should be clear that there are many parts of the Report of the Council of Eco- nomic Advisers with which we heartily agree. The report's emphasis on the need to restra.in inflation and the necessity of both fiscal and monetary restraint are most appropriate. WTe especially agree that some more efficient procedures must be established within the Con- gress as well as within the executive to assure that the level of Fed- eral expenditures and tax rates are such as to keep the levels of de- inand within the country's potential to produce at stable prices. We agree with the report that this requires congressional review of the proposed budget as a. whole as well as the need for a prompt mechanism to enable the executive to propose and the Congress to enact tax changes. AGGREGATE DEMAND, EMPLOYMENT, AND INFLATION We are pleased to concur with the report's conclusion that exces- sive levels of demand leading to inflation produce little permailent decline in unemployment. As is suggested by the behavior of unem- ployment in the 1961-1965 period, when output was below our capacity to produce, raising demand resulted in a marked decline in unemploy- ment. Further increases in demand and unanticipated increases in prices brought some temporary further increase in employment and output. As the acceleration in prices became more obvious, however, the increases in employment became much less pronounced and the wage rates demanded by workers accelerated. \T\Te now find ourselves in the position where business and labor feel inflation is likely to persist `and are making price and wage decisions in this anticipation. The task before the country is to slow down the growth in total demand so that the rate of price increase gradually diminishes and anticipations of inflation are adjusted downward. We agree with the report that this must be a gradual process. Given these existing inflationary anticipations, if aggregate demand were sub- PAGENO="0027" 987 stantially reduced in an attempt to eradicate the inflationary anticipa- ~tions quickly, unemployment is likely to jump substantially. Excessive slowing of the growth in demand and a sharp reduction in prices will generate unnecessary temporary unemployment until price expecta- tions are gradually brought into line with the new reality of relative price stability. A more gradual reduction in the growth in demand and a more gradual reduction in the rate of price increase is consistent with little increase in unemployment. We would like to accentuate more than does the Council's Report, however, our belief that the elimination of the inflationary expecta- tions must be persistent and complete as well as gradual. If gradual action means that inflationary expectations are not reduced sufficiently by the end of calendar 1969, then aggregate demand policy in 1970 must be consistent with a continued reduction in such expectations to * the point of elimination. In this regard we are concerned about two features of the report. First, while the report is not precise about the pattern of economic activity throughout calendar 1969, it does suggest that real output will be accelerating toward `tl~e end of the year. It also suggests that the price level will still be increasing at a rate inconsistent with rea- sonable price stability. Should an acceleration of the economy arrest the decline in the rate of pric~ increase before something close to rela- -tive price stability is a.chi.eved,we shall not have achieved the primary * objective of eliminating the inflationary anticipations. To embark on a path of gradual reduction in the rate of price increase is better than pursuing a policy of sharp deceleration of demands only if the policy of gradually reducing demand is pursued long enough to *achieve its objective. There is no assurance that a gradual reduction in the rate of price inflation in 1969 followed by an increase in price inflation in 1970 would be more in our interests than a substantial reduction in the rate of growth of demand in 1969. If we are to athieve our ob- jectives for price stability we must take positive action to assure ag- * gregate demands in the years 1969 and 1970 are consistent with decel- erating prices. Given this need for persistent and complete elimination of the in~ flation and inflationary expectations, we agree with the report's con- clusion that the proper fiscal policy for fiscal year 1970 would be one that would yield a surplus in the Federal budget. It is mandatory, therefore, that planned Federal expenditures be reviewed closely in a search for opportunities to cut spending. Unless ways are found to reduce planned expenditures by a sufficient amount, it will be necessary, as the report recommends, to extend the income tax surcharge through fiscal year 1970 if a budget surplus is to be achieved. Second, the report suggests that business `and labor must make sac~flees in their price and wage decisions to assist the economy in achieving price stability. We think this is an ineffective approach to price stability. If the Government pursues actions to bring about price deceleration and if credit policies lead business and labor to anticipate a reduction in the rate of inflation they will in their own self-interest set prices and wages consistent with this deceleration; in this sense there need be no sacrifices. Wages and prices will have been set in the expectation of decelerating prices and such a deceleration will have `occurred. There will only be sacrifices if business and labor make PAGENO="0028" 988 decisions in the belief prices will decelerate and the Government does not take action to bring this deceleration about. Business and labor make their decisions, in part at least, on their expectations with respect to the future. If these decisions are to reflect a belief in diminishing inflation the Government will gain little by exhorting business and labor to make sacrifices. It can affect wage and price decisions only if it shows performance in actually reducing inflation. Thus the major emphasis in a policy to decelerate the rate of price increase and restrain inflation must be on controlling Government expenditures and taxes as well as on a stabilizing monetary policy, so that the economy exposes itself to very little chance that demands are excessive. A policy which places heavy reliance on attempts to administer prices and wages while at the same time managing fiscal and monetary policies so as to expand aggregat.e demand at danger. ously high rates would be an inappropriate and highly inefficient plan. POLICIES To REDnCE THE FRICTIONAL LEVEL OF UNEMPLOYMENT Unemployment can arise in a va.riety of ways. Total demands may be less than the country's capacity to produce at stable prices. With the economy operating at or close to its potential, temporary variations in unemployment can arise because business and labor are unable fully to anticipate short-term business variations. In addition, a. more per- maneEt or persistent ca.use of unemployment arises from the seasonal character of some work, the difficulties of matching job skills and job locations, the faulty information about job prospects or labor skills, from the effects of discrimination by employers and unions, and from restrictive labor practices. We agree with the council's report that there are several steps which can and must be taken to reduce the amount of unemployment arising from these sources. Such action must be taken for two reasons. The employment and income these workers could generate would provide the support they and their families need. In addition, however, pro- grams to improve the competitive character and efficiency of labor markets will increase the productivity of those now working as well as enhance the productivity of the unemployed. Thus, beyond its beneficial impact on the life and well-being of the unemployed and underemployed, programs which affect labor produc- tivity affect all of us in the sense that they change the potential out- put in which we all have a share. Indeed, it ha.s been estimated that as we continue to incorporate minority groups into our labor force more efficiently, this step alone will raise the rate of growth of our economic potential from about 4 percent to almost 41/2 percent per annum. With the level of output in 1969 close to $900 billion, this implies that this more efficient use of our resources will produce an annual increase in our real output of almost $5 billion. If such a program were to have this impact over 5 years, output in the 5th year would be almost $30 billion higher than if we had not engaged in such programs. This social benefit is greater than the private benefit these families obtain from becoming more productive members of society. FISCAL AND MONETARY POLICY AND AGGREGATE DEMAND The Council's report deals at length with the specific inipact of past fiscal policy actions on the economy. It leads one to the belief that we possess a knowledge of the impact of fiscal policy in rather sophisti- cated detail. On the other hand, it suggests that the impact of mone- PAGENO="0029" 989 tary policy is less clear. The exact mechanisms through which mone- tary policy works and the exact impact and timing are said to be unclear. The report concludes that it is likely to be unwise to attempt to use monetary policy with the hope of very closely controlling ag- gregate demand, that monetary policy should be flexible and not tied to any specific rule. We agree with these `comments about monetary policy, but we think many of the arguments the council poses against attempts to use monetary policy to "fine-tune" the economy apply to fiscal policy as well. Just as it is unclear how different definitions of money supply affect spending decisions, there is at least some uncer- tainty about the effects on spending by the private sector of Federal spending as opposed to Federal lending, of Federal spending as op- posed to Federal taxes, or direct Federal expenditures as opposed to transfer of payments, or of corporate income taxes as opposed to per- sonal income taxes. The report itself attests to the difficulties of mak- ing very precise predictions of the savings behavior of individuals and the determinants of business investment and inventory accumulation. The report reflects the uncertainty in most minds about the exact im- pact of fiscal or monetary policy on interest rates and thus on savings flows to mortgage lending institutions and thereby to expenditures on construction. We are not suggesting that we do not know enough about how mone- tary and fiscal policy affect the economy to enable us to use these tools to help us meet our economic objectives. However, we do not know enough about the precise effects of either monetary or fiscal policy to try to use them to contain the economy within very precise limits. ECONOMIC POLICY IN 1969 AND 1970 This difficulty in using either of these policies in very exact ways has substantial implications for economic policy in 1969 and 1970. The maj or problem facing the United States in the years immediately ahead is to eliminate the inflationary expectations which have been built up over the past 31/2 years. The elimination of inflationary ex- pectations requires that we expose our economy to very little risk of excessive demands-that we do not pursue fiscal and monetary policies which might lead to an acceleration of prices before the middle or end of 1970. Given our inability to predict exactly how fiscal and monetary policy work, we must take a fiscal and monetary policy position such that if we are wrong and if consumers and business expenditures as well as Government expenditures move differently than we expect, the economy does not accelerate too rapidly `toward the end of 1969. Such a policy necessarily exposes us to some risk that the economy will grow too slowly `and that unemployment will temporarily increase. Given our unwillingness to take sufficient action to control the infla- tion in the past 31/2 years, however, the price we may now have to pay is this exposure to the risk of `a temporary rise in unemployment. To be sure, we must stand ready to minimize the effects of this risk by being prepared to take steps to expand demand should it become clear it is growing more slowly than the return to relative price stability requires. In addition serious attenti'on should be given to making existing manpower and training programs more effective in order to minimize any temporary rise in unemployment. 1-lowever, since we are PAGENO="0030" 990 not able to use monetary and fiscal policies to control exactly the leveIl of the economy and since the eradication of the inflationary expecta- tions is our paramount problem, we must assure ourselves that aggre- gate demand does not accelerate too rapidly. From our current posi- tion, therefore, we must be more willing to bear the risk of a temporary rise in unemployment than to bear the risk of a reescalation of price rncreases. The second major economic problem facing the United States is the necessity for improving the productivity and expanding the eco- nomic potential of a large fraction of our unemployed and underem- ployed workers. While a part of the poverty problem is not directly associated with this productivity problem, a very large part is. Ac- cording to the report, two-thirds of the poor, nonelderly households are headed by able-bodied working-age men. The poverty of these families arises from an inability of these men to find jobs where their productivity enables them to earn a level of income high enough to raise their families above the poverty level. Vigorous efforts must be made to develop in these people the skills and motivation to be more productive and by working with business and labor to expand the job opportunities open to them. The Council of Economic Advisers has provided enlightening documentation of location and demographic factors associated with those families and persons experiencing low levels of income in the United States. It defines the "poverty gap" as the amount by which the income of these families and individuals falls below minimum income standards. In line with the concern for the productivity of many of these people, an alternate definition would be the shortfall of output they and the economy suffer because' many of them have such low levels of productivity. Their individual and collective inability to produce efficiently generates serious social and personal problems as do their low incomes. Social action should concentrate attention on improving productivity and output of many of these persons rather than concentrate attention on income supple-- ments. Tiii~ OVERALL DESIGN OF GOVERNMENT PROGRAMS To INFLtTENOE THE' EcoNo~rY There is little doubt but that society collectively, with the Govern- ment `as its agent, has a substantial responsibility and opportunity' to affect the economy. We feel it should be a guiding principle of such action that the Government should enact positive programs which create the environment of competition and efficiency and which make the economy more adaptive and self-reliant rather than design a. wide variety of specific programs to alleviate specific problems with little' concern for their cumulative impact on the character of economic life. On the basis of this point of view, there are at least two examples of such misplaced emphasis in the report. One is the role suggested for the Wage-Price Cabinet Committee. It is suggested that there' exists a number of product and labor markets in which "discretion- ary" power exists-power which presumably does not exist in com- petitive markets. To dea.l with this prc~blem the report suggests that the Cabinet Committee might evaluate the wage or price decisions' made in these specific markets, publicize any supposed deficiencies,. PAGENO="0031" 991 and attempt to obtain the cooperation of labor and business in reach- ing decisions which in the eyes of the Cabinet Committee were more in the public interest. Besides being an invitation to arbitrary and discriminatory practice on the part of such a committee and inviting a kind of collusion among producers and labor unions to "play the system," such a proposal is unlikely to achieve its objectives. To the extent there exist restrictive practices in labor markets or product markets, the Labor and Justice Departments have the direct responsibility to deal with such illegal practices using their legislative or judicial authority, with due process. To establish a Cabinet com- mittee with no such legislative or judicial authority is only to blunt the interest and activity of those who have authority to deal with the issues involved. In another area society's attempts to assure adequate living stand- ards for those living in poverty should concentrate as much as pos- sible on assuring these people the opportunity of becoming productive rather than simply attempting to funnel income to them from the more productive members of society. Social welfare programs clearly require more than attempts to improve productivity. Some people and. families will need income beyond what their productivity can earn and society will necessarily choose to provide this income to them. However, the major emphasis of the war on poverty ought to be a positive program directed toward improving productivity and output and the personal and social dignity which comes from being a produc- tive member of society. Throughout this program and other Federal programs, the driving emphasis ought to be on creating mechanisms which have the effect of improving productivity and efficiency, of freeing markets and persons from dependence on Government action and programs, and of making the economy conform as closely as pos- sible to the pressures of competition. TOWARD INTERNATIONAL EQIIILIBRrnM In its examination of the international economy, the Council's re- port reviews the progress that has been made in the growth of inter- national trade and capital movements since the end of World War IL We share many of the views expressed in this section. The contribution of the present IMF system, the importance of stable exchange rates, the need for continuing progress on the problems of liquidity, con- fidence, and adjustment, and the need for freer trade including re- duction of nontariff barriers are subjects which we have studied and on which we have taken firm position in recent years. While we share many of the positions expressed in the report on the necessity of restoring equilibrium in the U.S. balance of payments, there are some differences between our veiws that also should be highlighted. The basic objective of our international trade and financial policy should be to achieve the full benefits of international exchange for our- selves and others by reducing restrictions on international trade and investment. A primary requirement for the effective functioning of the international payments system is that the United States achieve equilibrium in its balance of payments and thereby eliminate a major source of instability which has impaired the effectiveness of that sys- tem in recent years. PAGENO="0032" 992 As we indicated in our most recent policy statement, equilibrium in our international accounts does not require the elimination of the deficit. Bather its size should be reduced to a level compatible with the willingness of the rest of the world to voluntarily maintain or to in- crease their dollar holdings in line with the need for world liquidity. The reduction in our balance-of-payments deficit by means of restric- tions on international trade and capital movements is inconsistent with our objective of securing benefits of grea.ter trade and investment. Despite some improvement in the underlying balance-of-payments position in 1968 compared to 1967, the underlying 1968 deficit (which excludes special transactions which our Government has persuaded other governments to undertake in order to make the recorded result look better) was still on the order of $~.7 billion on a liquidity basis. One encouraging aspect of the 1968 result is the large foreign purchases of U.S. stocks a.nd there is some reason to believe that this trend will continue. However, there was also an unusually large inflow of for- eign capital influenced by high interest rates in the United States and by reduction of outstanding foreign loans by U.S. banks. We cannot rely on these factors to provide lasting relief to our balance of Jayrnents. The most disturbing aspect of the 1968 result was the virtual dis- appearance of our traditionally large merchandise trade surplus from a~ level of $3.5 billion in 1967. Clearly this reversal is critical. It results in large measure from a surge of imports induced by the inflationary growth of demand to which we have referred earlier. It is interesting to note that the growth rate in exports in 1968 was 9.5 percent, sub- stantially above the rate in 1967. We do not share the views expressed in the report that restrictions imposed by the United States for balance-of-payments reasons have been helpful. While they may have afforded temporary relief, by now it is evident that the controls have not restored equilibrium in our inter- national accounts. Further, what started as a few, temporary controls have now become a network of apparenly more permanent controls which are wasteful, inefficient, and undermine our avowed objectives of encouraging international trade and investment. While the report does stress the need for a domestic stabilization program to `assist in the achievement of balance-of-payments equilib- rium, we believe that this is the critica~ `need. A stabilization program to achieve high employment and stable prices would serve to improve the trade surplus and to insure maintenance of sufficient dollar hold- ings by foreigners to reduce the need for controls. The Council report notes a number of proposals which have been ad- vanced for changes in the present exchange rate adjustment mecha- nism. While a review of the adjustment mechanism may be useful, we share the Council's view that intensive study would be required before serious consideration could be given to the adoption of any of the pro- posals which have been put forward. Such intensive study should focus on the practical effects on trade and investment flows of any changes from the present system. PAGENO="0033" COMMUNICATIONS WORKERS OF AMERICA In both the statements of President Johnson's Council of Economic Advisers and the new Council for President Nixon, there are references to the necessity, under the existing economic circumstances, for quaZz- tative adjustments in fiscal and monetary policies for 1969. In both statements there is a preoccupation with the problem of stifling infla- tionary pressures in the presence of persistence of some continuing troublesome residue of unemployment. This is expressed in an oft- repeated caution that it may be impossible to have full employment without some inflation. The policy considerations are concerned with the possibility that this problem is increasingly qualitative in nature, and that "doses" of ant-inflationary or anti-deflationary fiscal and monetary policy are not quite suitable as the remedy. The apparent requirement is alternatively expressed as a "fine mix" or "fine tuning." As has been the case with the development of general fiscal-monetary policy, direction for the more refined problem must be looked for in the behavior of the economy. The lessons simply are a little more diffi- cult to work out. The behavior of the economy in the last 2 years does appear to offer, however, some viable possibilities if they are carefully examined. A central characteristic of the behavior of the economy over the last 2 years, despite inflationary pressuers and the pressures of the Veitnam war, has been a certain basic balance. Consumer expenditures have been an important expansionary force in the economy for the last 3 years, although slightly less so in 1967. In 1968, consumer expenditures rose by $42 billion, while the increases in the previous 3 years had been in the neighborhood of $32 billion, although only $25 billion in 1967. More importantly, however, as a percentage of disposable income, while consumer expenditures had declined for the preceding 4 years from 92.7 percent to 90.1 percent in 1967, they returned to 90.6 percent in 1968. Savings, on the other hand, which reached an unusual peak of 7.4 percent in 1967-in spite of some inflation-from 6.4 percent in 1966, held to 6.9 percent in 1968. Included in the increase in consumer expenditures was a strong $10 billion increase in durable goods purchases. By contrast, business investment declined slightly as a proportion of the total national product, and business fixed investment declined by approximately the same amount in contrast to its usual tendency to rise in an expansionary year. The main point is that investment, which used to be regarded as the prime mover in the economy and has been regarded as a primary target for monetary and fiscal policy, may new be less the volatile lever among economic variables in the economy. It is expected, as a matter of fact, that the first half of 1969 will see a strong resurgence of busi- ness fixed investment on the basis of the experience in 1968. (993) 24-833-69-Pt. 4-3 PAGENO="0034" 994 It is somewhat startling to compare these changes with a number of other changes that took place during the last 2 years. During 1967, while the Government's 3.5-percent estimated productivity end of the wage-price guidelines was being effectively cracked, real average hourly compensation increased 3.2 percent, while productivity in output per man-hour increased 1.6 percent. The year saw a 6.1-percent increase in money earnings. During 1968, following effective "abandonment" of wage-price guidelines, money earnings increased 7.4 percent; real average hourly compensation increased 3.3 percent in spite of infla- tion; and it was supported by a 3.3-percent increase in output per man-hour. Unit labor costs, which rose 4.4~ percent in 1967, only rose 3.9 percent in 1968. Nevertheless, in spite of all this, corporate profits rose to an astro- nomical $92.3 billion from $81.6 billion in 1967, to continue what has been described as a profit inflation. This amounted to a 14.3-percent increase over 1967, although there had been a decline in 1967 from 1966. The fact is that the President's Council in 1967 viewed with alarm a develoj~ment which suggested that the proportion of national in- come gomg to profits was increasing at the expense of a slightly de- creasing proportion of income going to all wages and salaries. The Council wondered if the strong increase in the level of consumer ex- penditures for both 1965 and 1966 would hold up in 1967. It did not! What actually has happened to these shares is apparent in the record below: [In percentj Shar e of national income Wages (including Year Profits supplements) Other 1968 12.95 72.0 15.1 1967 12.5 71.7 15.8 1966 13.8 70.2 16.0 1965 1964 13. 8 12. 9 69. 8 70. & 16. 4 16. 5 The figures for 1968 appear to indicate some evening up of economic shares in 1968, in the face of an inflation which might otherwise have produced opposite effects, as well as aggravation of inequalities which seem to have a fairly direct bearing on the behavior of consumer expenditures. The record for 1968 might be taken to indicate that reasonable distribution of productivity in 1968 enabled the economy, apparently still capable of real expansion, to push ahead in spite of the pressures on cost from inflation. Of course, the growth in the second half of the year was dampened by the new surtax, while inflation slackened slightly. But this is a better adjustment to inflationary pressures than declines in produc- tion and employment. Clearly, also, profits have hardly suffered. While wages and salaries in 1968 finally reached 72 percent of th& national income (from 71.7 percent in 1967), this was largely at the expense of interest, rent, and independent incomes, as profits moved up to 12.95 percent from 12.5 percent in 1967. PAGENO="0035" 995 We think that these kinds of factors, involving a fine balance in the flow of goods and incomes in the economy, will have to become a focal point in the "fine tuning" of fiscal and monetary policy. For example, a considerable portion of the high profits for 1968 are going to go back into investment, adding additional fuel to an already overheated economy. We noted earlier that the old Council contemplates a considerable increase in business fixed investment for 1969. A substantial portion of such investment will be in respo~ise to 1968's notable increase in purchases of consumer durables-which were not very strong in 1967, and may not be again in 1969. Indeed,, some of the buying of durables in 1968 may well have been in re~ sponse to anticipated price increases during 1969. Increasingly, the economy is becoming consumer oriented-as might be expected in an affluent society. An additional measure of this may be found in the increase in the percentage of consumer expenditures which go for the purchase of services-which was around 371/2 per- cent of disposable personal income in 1967 and 1968, 37 percent on the average from 1959 to 1966, and only 34 percent on the average over the period 1956 to 1958. In addition, new investment in plant and equipment has an increasing tendency to be capital saving, as well as laborsaving, and its increased productivity is going to have to be thoroughly distributed, or the time will come when all the products will not be purchased back. These shifts in our economic situation appear to dictate some of the elements of a policy which may be pursued in an effort that may be called fine tuning. In the past, economists have said that the maj or problem in achiev- ing full employment without inflation was to balance aggregate mone- tary demand and aggregate supply. A critical factor is held to be the balancing of decisions to invest with decisions to save. This is because investment has always been regarded as the volatile element in aggregate demand. Indeed, if the proportion of consumer savings from the national income had not been inordinately large in 1967, we might have had more inflation that year. Generally, Government policy to influence investment has been direct monetary policy or indirect fiscal policy. That is to say, Gov- ernment has sought to influence investment decisions through the monetary mechanism and interest rates, directly. Indirectly, it has sought to influence investment decisions by increasing or decreasing spendable incomes through fiscal policy. The difficulty with the latter policy, in the present circumstances, is that fiscal policy is a general onslaught against all spending. The requirements of "fine tuning" do not seem to permit this. Consumer expenditures are increasingly critical to stability in the economy. It is increasingly clear that high profits heavily outweigh the influence of interest rates in investment decisions. While consumer expendi- tures as a proportion of the GNP have fluctuated from something over 64 percent to something under, gross private domestic investment has fluctuated from 13.83 percent in 1961 to 16.56 percent in 1966-and suffered for it somewhat in 1967. As the basis of a high proportion of incomes, consumer expenditures are heavily dependent upon wages and salaries, in order that goods and services for profit can be "cleared from the shelves" without PAGENO="0036" 996 inordinate, unanticipated increases in inventories. At the same time as purchasing power is maintained, it should not, of course, find a shortage of goods and thus produce imfiation. If more purchasing power is channeled into time-consuming investment than is going to be provided from current savings, inflation will be the result. This condition has been the situation now for some years. Investment has proceeded apace in response to perhaps the wildest profit boom in our history. It is in this context that we have never been able to accept the Teracity of a voluntary "incomes policy" comprehended in wage-price guideposts. A sacrificial wage policy will not keep profits up, if con- sumer expenditures fall below the level anticipated as necessary to ~`clear the market," if the low-wage increases merely leave incorrect unticipations of higher profits. We think the wage policies of unions have helped sustain an expanding market by preserving the propor- tion of the national income going to wage and salary compensation. The old Council urges labor to accept wage increases (money) of no greater than 5 percent, and businesses to accept profit margins no higher than the average achieved in 1967-68--probably as high as they have been in recent years-and asks that they absorb increases in unit labor costs up to 1 percent. The profit margins of 1968 required a 2.6-percent increase in in- dustrial prices. The corresponding increase in the Consumer Price Index was 4.2 percent. If these increases are approached in 1969, it does not appear that an increase in money average earnings of 5 per- cent would increase real average earnings sufficiently to maintain the present distribution, as between wages and profits, from the national income, unless there were less than a 3.3-percent increase in produc- tivity-in which case the profit margin would not be retained anyway. We find it gratifying that the new Council of Economic Advisers has abandoned the idea of wage-price guidelines as a mechanism for maintenance of distributive shares. Since, as the Wall Street Journal recently acknowledged, it is prices which lead wages upward, a guide- lines policy is poorly desigiied for its job-because it always leaves wages behind. While wages and salaries have gone up by 40.5 per- cent since 1960, profits have gone up 85.7 percent. We think profit margins are aheady too high, and offer too high an incentive for further investment. We note a recent release from the Internal Revenue Service indicating that, for the fiscal year end- ing in June 1968, while individual income tax collections increased by $8.7 billion over the previous year, corporate income tax payments declined by $5 billion. Note that this period covered the higher rate of expansion in the first half of calendar 1968. The current additional "dosage" of indirect fiscal policy contained in the 10-percent surtax, though probably necessary to curb a runaway inflation incident to heavy governmental expenditures, does not appear to be depressing investment aspirations as much as it affects consumer expenditures, if the last half of 1968 is any indication. V\Te suspect that this is partially the effect of high returns from investment in industries with a heavy concentration of Government contracts. We think it is time to attack inflation on a discriminating basis, by a frontal attack on the proportion of national income going to profits as compared to wages and salary compensation, in order to stabilize PAGENO="0037" 997 consumer expenditures without inflation. Consumer expenditures have been quite stable as a proportion of the national product-but only with inflation. We think the problem of maintaining consumer pur- chasing power for increased consumer goods and services without in- flation is directly related to the issue of tax reform. In addition, in the midst of inflation, we continue to have "pockets" of hard-core unemployment and serious "pockets" of poverty amid affluence. Continuing unemployment is always a waste in any form. We think the new Council has correctly made a decision that a dis- criminating expenditure policy is required here, too, as compared with some "dosage" of fiscal policy. Both the unemployment and the poverty problems are also related, in our mind, to tax reform. The present revenue level from individual income taxation can be retained with considerable shifting in the progressivity of the indi- vidual rates. We feel that this should be done on a basis which would allow negative income taxation at poverty levels, exemption from in- come taxation on family incomes between $3,000 and $5,000 a year, the imposition of a minimum tax on all income above a reasonable level, and the application of higher marginal rates at high-income levels. We think the corporate income tax should be overhauled as well. For one matter, the existing rates are considerably overstated on the basis of current depreciation and depletion guidelines. These were a part of an earlier tax reduction `and recession-induced expansion pro- gram, and are contributing to the present inflation. In particular, the continuation of the oil depletion allowance is scandalous and an affront to the poverty ridden, not only of the United States, `but of the world. Higher corporate income tax rates will reduce the level of invest- ment expenditures and induce more careful use of resources. If higher individual income tax rates on higher incomes are to be put into effect, some partial exemption from a higher corporate tax rate schedule could be given to distributed corporate profits (dividends). The latter measure might alleviate a number of the current pressures in the money market. However, if the latter effect is not forthcoming, we feel there is an urgent need for Federal subsidization to lower interest charges on housing and residential construction. Investment in these areas has been drained by high profits elsewhere. While we agree that tax credit for investment in training and edu- cation of the unemployed through private enterprise is a nice idea, we feel that this would become a very unwieldy mechanism, and we are in serious doubt as to the interest of private enterprise in this particular problem. On the other hand, direct cooperation between Government and private enterprise will `be a necessary base for solu- tions to the problems of the hard-core unemployed. We would hope that movements in these directions could be a sub- stantial step toward dealing with some of our more vexing domestic problems. Finally, we offer some comments on the balance-of-payments prob- lem. It seems clear that the various measures undertaken during 1968, including direct controls on foreign investment, the cessation of gold shipments for private markets among the gold pooi nations, and the ending of the gold-backing requirement for U.S. currency, have tem- porarily allayed any immediate balance-of-payments crisis. PAGENO="0038" 998 We cannot help noting, however, the necessity of Government con- trols on direct foreign investment as an interesting commentary on the haste of American profits to seek an ever-higher rate of return, in the midst of developing inflation at home. Actually, it now begins to appear that this program has less resistance as a result of invest- ment abroad, perhaps having run most of its course before the restric- tions were imposed. In contrast, the net balance on foreign investment income now has attained a level such that it has given considerable improvement in the balance-of-payments problem. Although it may be true that we cannot assume the same improvement increments in future years, there does not seem to be any reason to believe that this factor will recede very quickly. The overriding issue in the balance-of-payments problem lies in the fact that, presumably, we have been importing too much. Ironically, a larger factor in this has been the importing of I 0 TJ's-"exports" of capital which have given others claims on us. In a free market for international exchange, this should have meant that there was a grow- ing demand for foreign claims in order to pay for foreign debts, and a consequent premium for exporters who provide the major source of such foreign claims. Of course, when it becomes too expensive to liquidate debts through the exchange system, there are, as there have been, gold payments. This increasing pressure has suggested that a freeze on gold and "freely fluctuating exchange rates" would correct the import sit.ua- tion. We now have, for practical purposes, the gold freeze. The objec- tions to a proposal for freely fluctuating exchange rates center around problems of uncertainty, disturbance to trade and investment rela- tionships, and requirements of shifts of resources among industries which export and those which compete with imports. Most of these arguments are invalid from an economic point of view. The only ultimate remedy in a world economy in which gold no longer is an adequate medium of exchange is freely floating exchange rates. However, inasmuch as our international trade still only amounts to 5.3 percent of GNP, other international considerations may be re- garded as more pressing. Under freely flexible exchange rates, much importing would likely be cut off. The present domestic inflation, as a matter of fact, receives some relief from imports. On the other hand, we feel some approach to flexible exchange rates will have to be made in the not-too-distant future. In summary, it is our view that the "fine tuning" which is called for under a gradua.listic approach to deflation ought to concentrate on the profit-push phenomenon, and its insidious ally, the new boom in corporate investment. Coupled with such an approach must be a serious and searching restructuring of the entire Federal tax-levying mechanism, with a view to long-range revision of the distributive shares of our national income. PAGENO="0039" CONFERENCE ON ECONOMIC PROGRESS By LEON H. Ki~~xs:Iniu4n~a,* PRESIDENT CONTENTS Page Introduction 1000 Reasons for main concentration upon CEA Report 1000 Need for a long-term perspective 1000 Plus marks for the "New Economics" 1001 Minus marks for the "New Economics" 1002 Significance of my earlier studies 1002 Outline of my presentation 1003 Chapter I. THE PROBLEM OF OPTIMUM ECONOMIC GROWTH: The growth record and the growth need in detail 1003 The "longest upward movement on record," and the economic outlook_ - - 1004 Productivity trends, and their significance 1005 Bearing of rate of economic growth upon employment and unemployment_ - 1005 Targeting economic growth through 1967, and its significance 1007 The erroneous views of the CEA on economic growth 1007 Chapter II. THE PROBLEM OF ECONOMIC EQUILIBRIUM, OR BALANCE: Essentials of economic equilibrium or balance 1008 Factual anatomy of the economic disequilibrium 1009 The rampant profit inflation 1009 CEA neglect of economic equilibrium problem 1010 ~2hapter III. THE PROBLEM OF SOCIAL EQUILIBRIUM, OR PLAIN JUSTICE: Identity of economic and social objectives in the United States 1011 Poverty and income maldistribution 1012 Social equilibrium involves the public sector 1013 CEA position on poverty: talk versus action 1014 Chapter IV. FISCAL POLICY: Misdirection of tax cuts to date 1015 Narrow view of scope of the total tax burden 1016 The issue of "tax reform" 1016 Neglect of core purpose of the Federal Budget 1017 Appropriate fiscal policies 1018 Increasing fiscal responsibilities of Federal Government 1019 A model Federal Budget, responsive to needs and capabilities 1019 CEA views on fiscal policy 1021 Chapter V. THE PROBLEM OF INFLATION: Three main errors in approach to problem of inflation 1021 Evaluation of magnitudes of inflationary trends 1022 CEA has not probed deeply into actual consequences of rising prices 1023 The CEA has gravely misjudged the causes of inflation 1023 My thesis with respect to recent and current inflation 1024 Analysis of cost-push inflation 1025 Shortcomings in CEA treatment of inflation 1027 *Chapter VI. PROBLEMS OF MONETARY POLICY: General considerations 1028 Tight money and rising interest rates work against economic equiibrium_ 1029 Tight money and rising interest rates are in themselves inflationary 1030 Tight money and rising interest rates are appallingly unequitable 1031 CEA comments on monetary policy 1032 * Former Chairman, Council of Economic Advisers; consulting economist, and attorney. (999) PAGENO="0040" 1000 Page Chapter VII. THE INTERNATIONAL ECONOMY 1033 Chapter VIII. THE ECONOMIC REPORT OF THE PRESIDENT... 1034 Chapter IX. M~ OWN RECOMMENDATIONS~. -- - 1035 CHARTS (Appearing at end of statement) 1. U.S. economic growth rates, 1922-68, and needed rates, 1968-77, for opti- mum resource use. 2. Long-term trends in productivity, U.S. private economy, 1910-68. 3. "Economic Growth Dividend", U.S. Economy, 1968-77. 4. Goals for the U.S. economy, 1972 and 1977, projected from levels in 1967. 5. The goals for 1972 and 1977 maintain balance of public and private respon- sibilities. 6. Comparative growth in various aspects of U.S. economy, 1961-68. 7. Price, profit, investment, and wage trends during 1960-68. 8. Number in United States living in poverty, deprivation, comfort, and affluence, 1967, and goals for 1972 and 1977. 9. Share of families in total family income by quintiles, 1947, 1953, 1960, and 1966. 10. Allocation of tax cuts, 1962-65: investment and consumption purposes. 11. 1964 Tax Act, personal tax cuts. 12. Taxes paid as percent of income, United States 1966. 13. Resources of State and local governments more strained than those of Fed- eral Government, relative trends, 1947-67. 14. Goals for a Federal budget, 1972 and 1977, geared to economic growth and priority needs. 15. Selected price trends, 1918-68, United States and selected other countries. 16. Relative trends in economic growth, unemployment, and prices, 1952-68. 17. The lag in wages and salaries behind productivity gains, 1960-68. 18. Comparative trends in GNP, prices, and nonfederally held money supply, 1955-68. 19. Average interest rates on total public and private debt, 1952-67. INTRODuCTION Once again, as in previous years, I deeply appreciate the oppor- tunity accorded to me by the Joint Economic Committee to set forth my analysis and conclusions related to the Economic Report of the President and the Annual Report of the Council of Economic Advisers. Rea~so~w for main concentration i&pon CEA Report In the very nature of things, there must be almost absolute con- sistency between these two documents. It is fair to state, without any implication of criticism, that the President's Economic Report tends to become virtually a summary of the Annual Report of the Council of Economic Advisers. This Annual Report contains, entirely appro- priately, the detailed economic analysis and other statistical appraisals, as well as the economic forecast, upon which the President's Report is based. For these reasons, it would appear to be most helpful to the Joint Economic Committee for me to concentrate upon the CEA Report, and this I shall do in accord with my practice during recent years. Need for a long-ter'm perspective The 1969 CEA Report brings to a close a clearly distinguishable era in the development and application of national economic policies, extending from January 1961 through December 1968. Those who have been basically responsible for these policies have given them the appeal- PAGENO="0041" 1001 ing appellation of the "New Economics." It was reasonably to be ex- pected, and in fact it has so developed, that the final CEA Report of the "New Economists" should be, in substantial measure, `an explana- tion, defense, and praise of the policies, accomplishments, and economic philosophy of the "New Economics." It would therefore seem most fitting, and I hope most helpful to the Joint Economic Committee, that I focus mainly, not upon what has happened during the past year or so, but instead focus in `broad per- spective upon what has happened during the past 8 years, and in this larger view appraise the "New Economics" of the recent CEA members. This course seems particularly desirable at this time, for `at least three reasons: First, it has long been my view that economists in general, including conspicuously the "new economists," `have devoted relatively too much attention to short-range trends and policies, and far too little atten- tion to long-range trends and policies. In the main during the most recent years, the "fine tuning" attempts to adjust policies and programs to short-range trends have in some important respects been unsuccess- ful, not primarily because of detailed errors in judgment, `but rather because of failure to invoke sufficiently a longer term perspective. So- called fine tuning has fallen short, not primarily because of the nature of the instruments, `but primarily because the listening apparatus has been far too circumscribed and insulated. It is my view that the great- est single improvement in national economic policies would be to turn more sytematically and comprehensively to longer range analysis and programs. Indeed, I believe this to have been the core intent of the Employment Act of 1946. A second reason why this appears to me to be a very appropriate time to evaluate the "new economics" in the full perspective of 8 years is this: It is the very nature of our political system that the recent change in the national administration should be expected to bring forth a fundamental reexamination of national economic policies and programs, and some considerable changes in them. It is my hope that the type of analysis which I shall bring forward may be helpful toward changes in proper directions. In the third place, the fundamental approach I am undertaking would seem desirable, because we now stand at what appears to be a clear and important transition in the economy. Despite the current stress upon curbing inflationary forces, which has come to amount to almost a sole preoccupation, the even more important challenge now confronting us is the threat of a serious retardment in the rate of real economic ~owth, a serious rise in unemployment, and in consequence an increasing inability-at least in the context of general attitudes- to meet adequately the great priorities of our domestic and inter- national needs. Pius marks for the "New Economics" There can be no doubt that the "new economics" has accomplished much, even though these accomplishments have unfortunately been accompanied by an unusual degree of public self-praise which has im- peded critical evaluation. For the 8 years as a whole, a high, though not entirely satisfactory, rate of economic growth has been maintained. Unemployment has been reduced greatly, even though not sufficiently. For the 8-year period as a whole, in terms of the realities rather than PAGENO="0042" 1002 the ideal, a fair measure of average price stability has been main- tained. Established programs, devoted to the well-being of the peo- ple, have been greatly expended. Many innovative social programs have been initiated, some of them successfully. The conscience of America has been aroused to the problem of poverty, even though the measures forged to deal with it have thus far been inadequate and dis- appointing. The responsibility of national fiscal and monetary policies to contribute to economic stability and growth has fortunately be- come increasingly recognized, even though the equal or even greater responsibility of these and other national policies to improve income distribution and enlarge social justice has been grievously neglected. The level of economic literacy and interest has been greatly elevated, largely through national leadership, and an enlarged consensus on many important matters has been achieved, perhaps enduringly. But many problems have remained unsolved, some vital problems have been seriously neglected, and economic analysis and policy- making have been guilty of many serious errors of commission and omission. Minus marks for the "New Economics" The above critical comments would not seem excessive. Despite policies put forward to achieve stable and optimum economic growth, the real growth rate for the 8-year period as a whole has been some- what on the low side, the 2-year period 1966-68 averaged a palpably and seriously deficient real rate of economic gTowth, and the short-term outlook can hardly be called favorable. Meanwhile, instead of seeking to reverse this low-growth-rate trend, policies and exhortations seem directed toward carrying it further. Dspite programs and policies put forth to curb inflation and improve the balance-of-payments situation, the 2 most recent years, a.nd especially the past year, have evidenced the highest rate of price inflation since one short period during the Korean war, and the end is not yet. The international financial situa- tion remains parlous, and fundamental remedies have been avoided. Despite the long-avowed promise to get unemployment down to levels consistent with maximum employment, the rate of unemployment among some vulnerable groups remains tragically high, and is con- tributory to political, civil, and social unrest, notoriously in our urban areas. Despite the promise to move toward a Great Society, which in proper context clearly means a good society, some of the greatest and most pressing priorities of our domestic public needs remain sorely neglected. And there have not thus far emerged, either in the pro- nouncements of the "new economists" or in the declared intentions of the new administration, any substantial and specific programs and policies offering reasonable prospects of overcoming these manifold difficulties. Significance of my ear~ier studies I approach the task of specifying my reasons for the foregoing con- clusions with mixed feelings. On the one hand, I regret that more and better have not been done, and this is my primary sentiment. On the other hand, I feel justified, rather than prideful, in calling to the attention of the Joint Economic Committee and others that, year by year for many years, my presentation of matters to the Joint Economic Committee and to the public at large have identified fairly consistently PAGENO="0043" 1003 what was going wrong, and have to a high degree been vindicated by where we now stand. I take no particular satisfaction in this, except that I feel duty bound to point out that there is a lesson to be learned, that is, that the extent to which I have turned out to be correct may be explained mainly by my attempt to work in a long-range perspective. Thus, it might be profitable and in the public interest for economists in the public service, and others, to examine more carefully than they have thus far done what I have made available to the Joint Economic Committee practically year by year during the past 8 years. Outline of my presentation I shall deal specifically with the following: I. The problem of optimum economic growth. II. The problem of economic equilibrium or balance. III. The problem of social equilibrium, or plain justice. IV. Fiscal policy. V. The problem of inflation. VI. Problems of monetary policy. VII. The international economy. VIII. The Economic Report of the President. IX. Summary of my own recommendations. In dealing with the first seven of these nine topics, I shall in each instance state first my own analyses and conclusions (responsive, naturally, to my examination of the CEA annual report), and then discuss those portions of the CEA report which seem to me most relevant. I. THE PROBLEM OF OPTIMD~t ECONOMIC GROWTH The growth record and the growth need in detail During 1960-68, the average annual rate of U.S. economic growth was 4.8 percent in real terms, a marvelous record when compared with the 2.4-percent average rate during 1953-60. Nonetheless, the evidence is strong that this performance was somewhat short of the optimum, particularly when one considers the historic record; the identity of optimum economic growth with optimum resource use; the current level of unemployment, and more essentially its distribution; the im- perative nature of our unmet domestic needs; and the scope and weight of our international obligations. Turning first to historical review: Our average annual rate of real economic growth was 4.7 percent during 1922-29, 4.5 percent during 1947-50, 5.1 percent during 1950-53, 5.1 percent during 1960-66, 4.8 percent during 1960-68, and 5 percent from 1967 to 1968. I should mention at this point, although I will deal with the inflationary prob- lem in detail later on, that the periods 1922-29 and 1960-66 were char- acterized by a quite satisfactory degree of price stability, and that the price inflation during a portion of the period 1950-53 was mainly a speculative reaction to the Chinese intervention in the Korean war, and was not due to an excessive rate of economic growth. All this ap- pears to support my conclusion that the 4.8-percent average annual rate of real economic growth during 1960-68 was somewhat on the low side. In view of technological trends, the unsolved unemployment problem, and the pressures of our domestic and international needs, I believe that we should aim toward a real rate of economic growth averaging PAGENO="0044" 1004 at least 5 percent annually from 1970 to 1977, and averaging about 6 percent during 1968-70, toward restoration of optimum resource use. The "longest upward movement on record," and the economic outlook More important still, the 4.8 percent average annual rate of real economic growth during 1960-68 is not indicative of the most recent trends, nor of the economic outlook. From 1966 to 1967, the real rate of economic growth fell to only 2.5 percent, and the average for the 2 years 1966-68 was only 3.7 percent. Taking into account current in- formed forecasts, and the purpose of recent and current economic poli- cies to "slow down" the economy further, there is strong evidence that we may be reverting to the recurrent periods of economic stagnation, if not absolute recession, to which I commenced to call attention so insistently from 1953 forward. It is remarkable and indicative that this possibility has thus far received so little attention.1 Actually, the insistent chorus about "the longest upward movement on record," from early 1961 to date, has been both misleading and overly prideful. The recovery movement from early 1961 until circa the massive tax reductions of 1964 was not the result of important positive cha.nges in national economic policies. It was more or less a normal or autonomous recovery after the mini-recession of late 1960, early 1961, and continuation of the recovery from the substantial re- cession of 1957-58. This movement from 1901 forward was hardly more impressive than the upward movements which had followed the periods of stagnation and then recession during the years 1953-60, and it was recognition of this lack of impressiveness that finally prompted the massive tax reduction in 1964. These massive tax reductions provided a very strong stimulus to the economy for less than 2 years, but even that amount of money thrown into the streets and scrambled for would have done that. Because these tax actions represented a basically erroneous analysis of the entire problem of economic equilibrium or balance (as I insisted at the time of their enactment, and as I shall discuss further when I come to the matter of fiscal policy), the real rate of economic growth turned very sharply downward early in 1966 and has averaged far too low during 1966-68. Moreover, I believe the developments during 1966-68 would have been far more unfavorable, and might well have carried us into an absolute recession, but for the unexpected acceleration of defense spending due to the Vietnam war and some other factors. After all, measured in current dollars, national defense spending rose from $50.0 billion in 1964 and $50.1 billion in 1965 to $60.6 billion in 1966, $72.4 billion in 1967, and $78.9 billion in 1968 (calendar years). There is no particular trick in maintaining an upward movement, albeit at a declining real rate of growth, in the presence of these kinds of iumps in defense spending. Those who are still chuckling about their role in promoting "the longest upward movement on record" should have it recalled to their attention that we have also had "the longest war on record." Regardless of the merits or demerits of that war, these most recent developments appear to have justified my earlier findings that a more rapid expansion of Federal spending than earlier had been projected 1 See chart 1, following text. PAGENO="0045" 1005 would be essential to maintenance of an adequate rate of real economic growth. The lesson to be learned from this, which has not yet been learned, is that we should contemplate large increases in domestic spending for priority needs during the years immediately ahead, and further that these increases should be much greater than any reductions which may result from a change in the international situation, or from our reactions to it. Productivity trends, and their significance Careful examination of productivity trends more than support my findings as to the needed rate of real economic growth, in order to ab- sorb the annual increments in our productive capabilities under con- ditions of reasonably full resource use. Over the decades, under the impact of advancing tecimology, inventiveness and innovation, rising labor skills, improved management, and more `effective public policies, tlie average annual rate of productivity growth in the U.S. private economy has tended to accelerate greatly, except when inhibited by the repressive influence of inadequate demand and low real economic growth. Thus, the average annual rate of productivity growth in the U.S. private economy was 0.4 percent during 1910-20, 2.3-2.4 percent during 1920-40, and 3.2 percent during 1940-55. (It was 4.0 percent during 1947-53). It fell to a 2.4 percent during 1955-60, when the real rate of economic growth was very low and punctuated by two absolute recessions. But during 1960-66, the average annual rate of productivity growth rose to 3.7 percent. And it averaged 3.5 percent during the full 8-year period 1960-68, even though it averaged only 2.4 percent during 1966-68, when the real rate of economic growth averaged the unaccept- ably low level of only 3.7 percent. The only reason why the very low economic growth rate during 1966-68 did not increase unemployment was that underutilization in the plant, resulting in much lower pro- ductivity, was preferred to more overt unemployment. These two dis- mal alternatives are not acceptable, nor could they be available en- duringly even if acceptable. This leads me to the conclusion that the productivity growth-rate potential in the U.S. private economy dur- ing the years ahead cannot possibly be less than in the neighborhood of 4.0 percent and may be considerbaly higher, under conditions of optimum resource use. Even `allowing for a lower productivity growth rate in the public sector (not yet subjected to enough analysis to verify this common assumption), it appears that the productivity growth rate potential in the total U.S. economy for the years ahead must be in the neighborhood of 3.5 percent, or even higher. Adding to this the projected growth in the civilian labor force under conditions of maxi- mum employment, about 1.5 percent, the optimum overall U.S. eco- nomic growth rate during the years ahead cannot be less than 5 percent, after restoration of reasonably full resource use, and might even be considerably higher.2 Bearing of rate of economic growth upon employment and unemploy- ment There are even more important reasons for striving to restore and maintain optimum economic growth than those set forth above. Never during recent years have we come close to reasonably full utilization 2 See chart 2, following text. PAGENO="0046" 1006 of our basic productive capacities. In 1968 and on into 1969, many if not a majority of our key industries were operating at capacity levels well below the optimum. Although officially recorded unemployment averaged only 3.6 per- cent in 1968 (not far from the 3.8 percent in both 1966 and 1967), the true level of unemployment in 1968 (taking into account the full-time equivalent of part-time unemployment, and the concealed unemploy- ment resulting from those not participating in the civilian labor force because of scarcity of job opportunity and therefore not counted as unemployed) was in the neighborhood, as I estimated it, of 4.2 per- cent or higher. Moreover, as we all know, unemployment has tended to be two to three times as high among teenagers and Negroes as the na- tionwide average, and has remained as high as 30-40 percent in some critical sectors of some urban areas. We simply cannot afford to tolerate the urban consequences already revealed, nor those in the off- ing, which stem so largely from this amount of unemployment. One of the most striking illustrations of poor economic analysis is the viewpoint expressed by many economists, and at least intimated by the CEA, that the average level of unemployment is not now too high (or may even be too low from the viewpoint of combating inflation), and that the excessively high level of employment among vulnerable groups is a "structural" problem rather than a problem of aggregate demand or overall economic growth. They therefore conclude (as does the CEA 1969 report) that this structural problem should be dealt with by measures which do not aim at a more rapid expansion of ag- gregate demand or a more rapid rate of economic growth. The use of the word "structural" may be valid in explaining that the unemployed are unemployed because of an improper fit between them and existing jobs, and that programs of training and other forms of adaptation are needed (even though that explanation is seriously overworked). Be that as it may, how can the level of excessive unem- ployment among the vulnerable groups be reduced, without reducing the nationwide average level of unemployment, unless the reduction of unemployment among the vulnerable groups is to be accomplished by more unemployment among others? Further, whatever may be the reasons why an unemployed person is unemployed, and even if it were to be assumed that there is a "job vacancy" awaiting for him if he were more fit, it still remains true that a job vacancy is not a job. A job vacancy involves no expenditure, while the putting of an unem- ployed person into a job involves an expenditure sometimes estimated in the nature of $15,000. It follows that putting a million people (I take this figure arbi- trarily, merely by way of example) who are now unemployed into jobs would involve additional outlays in the neighborhood of $15 bil- lion, which means an increase of that size in aggregate demand, and correspondingly means a considerably higher rate of economic growth in real terms. There is absolutely no merit in the proposition that un- employment can be reduced to acceptable levels, without expediting the rate of real economic growth. Those who ignore this fact are curi- ously inconsistent when they argue that slowing down the rate of real economic growth to combat inflation would result in more un- employment. PAGENO="0047" 1007 Targeting economic growth through 1967, and its significance The vital importance of an optimum rate of economic growth is in- dicated by estimating, for the 10-year period 1968-77 inclusive, the difference between an optimum rate of real economic growth (some- where in the neighborhood of 5.3 percent as an annual average, and a 3.5 percent average annual rate of economic growth (cf. the rate of 3.7 percent during 1966-68). The difference, measured in fiscal year 1969 dollars (as estimated in January 1969, and for the purpose of approximating the current price level) comes to $1,255 billion over the 10-year period, or an average of about $125 billion a year, and comes to $226 billion in 1977 alone. Surely, we cannot afford to forfeit these amounts in terms of real goods and services, or anything even approxi- mating them, when we consider the tasks that confront us, and how far we are from doing more than scratching the surface with respect to many of them.3 My next two charts depict in more detail my optimum high and low economic growth projections through 1967, and also indicate how well they maintain the traditional balance between private and public responsibilities.4 The erroneous views of the CEA on economic growth I turn now to what the 1969 CEA report says on the subject of eco- nomic growth, bearing in mind that what it now says is quite con- sistent with the position it has been taking in earlier years. What the CEA now says indicates why I have felt it necessaary to develop this phase of my analysis so extensively, and perhaps may convince many others as to the validity of my conclusions. The 1969 CEA report states that the increase in the U.S. growth rate potential was at an average annual rate of about 3.5 percent from the mid-1950's to the early 1960's; that for the last few years it is esti- mated at 4 percent a year; that it was 4 percent from fourth quarter :1967 to second quarter 1968; and that it was 4 percent at the end of 1968. The CEA therefore concludes that this is the growth potential for the years shortly ahead (pp. 40,45,64, 66). The CEA bases this finding upon the observation that, since 1950, the annual growth rate of productivity in the private economy was 3 percent, and for the entire economy 2.5 percent, and that adding to this a 1.5 percent annual growth in the civilian labor force results in the 4 percent figure (p. 66). I find it utterly impossible to find any justification for this CEA finding, in view of the productivity trends which I have depicted (con- sistent with data appearing in CEA reports). The CEA average of productivity trends since 1950 is the result of very different produc- tivity trends during periods of rewarding economic growth, economic stagnation, and economic recession. Such an average figure would be ncceptable only if the goals for the future were to contemplate recur- rence of these same three types of periods. Such an average has nothing whatsoever to do with the growth potential, nor with sustained maxi- mum production and employment under the mandate of the Employ- ment Act of 1946. And such a finding by the CEA appears even more outlandish, when the CEA itself admits that only a serious departure ~ See chart 3, following text. ~ See charts 4 and 5, following text. PAGENO="0048" 1008 from optimum growth reduces the productivity performance to levels consistent with the 3-percent average in the long run. Thus, the Coun- cil finds: "In early 1967 the diminishing pace of the expansion was reflected in a slowing of productivity growth rather than a sharp rise in unemployment" (p. 34). The CEA does even worse than this. It does not set a target for real economic growth during 1969 even at this improperly low 4-percent figure. Whether interpreted as a goal or as a welcome forecast, the CEA says: "The rise in real output during the four quarters of 1969 should be less than 3 percent," consistent with a 6-percent rise in price terms (p. 56). Why does the CEA want us to move in this direction? Its answer is made clear: "Although economic expansion is expected to moderate during the first half of 1969, a continuing policy of restraints is essen- tial to curb inflationary pressures and to strengthen our internationa.] trade performance" (p. 53). My comments as to the quality of the finding that we should further reduce the rate of economic growth as a "promising" way of containing inflation will come later. My other comment comes now: It is, in my view, frightening that we should be willing to forfeit what will be forfeited by bringing the real rate of economic growth so low, risk the unemployment which will result, risk the recession which may result, and starve our domestic priorities to the extent built into the achievement of this objective, meanwhile regarding the problematical strengthening of our international trade performance as a gain comparable to this forfeiture. II. THE PROBLEM OF ECONOMIC EQUILIBRIUM OR BALANCE Essentials of economic equilibrium or balance No economist of substance would deny that maintaining an optimum rate of economic growth, and maintaining optimum employment con- sistent with minimal or frictional unemplyoment, depend essentially upon an econornicequilibrium or balance in the allocation of the current or functioning GNP between (a) the investment which adds to our capabilities to produce and (b) ultimate consumption in the form of private consumer spending and public outlays combined. Yet there has never been a time when the "New Economists" or the CEA reports have offered tangible and substantial quantitative evidence of comino to grips with this analytical problem, or of adjusting policies an~ programs accordingly. This has been an oversight so glaring that I have been unable to offer a rational explanation for it. The closest that the CEA has come to any such attempt was whei1 it suggested, some years back, that optimum economic growth depended upon a much hig'her permanent ratio of investment in plant and equip- ment to GNP. However, as I have frequently pointed out, (a) a sustainable ratio of such mvestment to GNP depends upon the pro- ductivity of capital (which is advancing), not upon the overall growth rate targeted, and (b) the record since 1952 has uniformly shown a strong tendency toward relative overinvestment of this type, corrected only when "overcapacity" leads to sharp cutbacks in such investment, with unfavorable consequences throughout the economy. The empirical evidence, detailed in my repeated public studies from 1953 forward, has made it very clear that the transition from moder- PAGENO="0049" 1009 ately adequate though not optimum economic growth to stagnation and then recession occurred when the failure of ultimate demand as I have defined it (or, even more pertinently, the private incomes and public spending which underlie ultimate demand) to keep up with the investment in plant equipment which is primarily responsible for our increasing capabilities to produce became abundantly visible. From the time of the advent of the "New Economics" in early 1961, I continued my studies along these same lines. Well before 1966, I pointed out that the same type of disequilibrium augured the very sharply reduced average annual rate of real economic growth during 1966-68. In fact, my opposition to the massive tax reductions of 1964 and some subsequent tax concessions was based upon the proposition that, while these would stimulate the economy for a time, they were in the longer-run so enormously misdirected that they would bring on another period of serious economic stagnation, and increase infla- tionary manifestations to boot. It is true that the "New Economists" and the CEA reports at times, but almost entirely as a matter of hindsight, observed that investment in plan and equipment was advancing relatively too rapidly to be sustainable, and advocated such measures as the suspension of the investment tax credit. But later on they advocated its reinstitution, and I could never understand why, because this contributed further to the economic disequilibrium. I shall deal further in detail with these tax or fiscal policies later on in my statement. Factual anatomy of the economic disequilibrium An examination of relative trends in various key sectors of the economy illustrates rather dramatically how the economic disequilib- rium made itself manifest, and indeed was aggravated by key policies and programs. From 1961 to 1968, measured in constant dollars, total national production grew 42.2 percent, private consumer spending grew 39.6 percent, and government outlays for goods and services at all levels grew 50.1 percent. Private business investment (including net foreign) grew 42.3 per- cent, but this reflected home construction on the average far below our priority needs. Private investment in plant and equipment, and this is the indicative figure, grew 65.7 percent. The disequilibrium in income flows was roughly compatible. Wages and salaries grew 45.5 percent, total labor income including fringe benefits grew 51.2 percent, and farm proprietor net income grew only 3.1 percent, while corporate profits and investory value adjustment grew 55.4 percent, personal dividend income grew 58 percent, and personal interest in- come grew 84.9 percent. The rampant profit inflation It is equally important to look at the trends during 1967-68 alone. First, of all, the disparities indicated in the previous paragraph were even greater during 1961-67, but were "corrected" somewhat by what happened from 1967 to 1968. But what were the nature of these correc- tions? The main correction was that private investment in plant and equipment shrunk to an annual growth rate of only 1.0 percent. That is far too low. However, this happened just because of the disequilib- rium created by the relatively excessive advance of this type of invest- ment for a number of years. This is one of the most striking illustra- 24-833-69-pt. 4-4 PAGENO="0050" 1010 tions of the entire equilibrium thesis which I have set forth for so many years, and restated in earlier portions of my discussion above. Moreover, and again in substantiation of my basic thesis, this private investment in plant and equipment did not turn down so sharply during 1967-68 because of any general inadequacy of profits or other investment funds. It turned down because relatively excessive profits in earlier years contributed powerfully to the various disequilibrium which brought about the sharp investment reaction during 1967-68. Equally or even more seriously, the relatively excessive and dis- equilibrating profit binge continued on into 1968, and so did the price increases which fed them, despite the ominous warning signal in the sharp downturn in private investment in plant and equipment. During 1967-68, measured in constant dollars, while wages and salaries grew only 5.6 percent, labor income only 6.5 percent, and farm proprietors' income only 1.4 percent, corporate profits and inventory adjustment grew 7.1 percent, or considerably more rapidly than the average an- nual rate of advance (allowing for compounding) during the 7-year period 1961-68 as a whole.5 In short, the disturbing inflationary trends during 1967 and 1968 have been very clear demonstrations of profit inflation. This is one of the most dangerous and disequilibrating kinds of inflation. One must be deeply concerned that this whole matter has been so completely disre- garded in the 1969 CEA report, and equally so in the whole range of policies which emerge from the highly defective CEA analysis. In- stead, the CEA urges that real hourly wage rate increases be held to 2.0 percent during 1969. To reinforce this profit point by returning to the 1961-68 analysis in another aspect: From 1960 to 1968 (measured in current dollars, which is satisfactory for the purpose), prices in tota.l manufacturing rose 7.5 percent, contributing to an advance of 111.6 percent in profits after taxes. Reflecting in part the profit yield, investment in plant and equipment grew 84.9 percent, but wage rates grew only 33.1 percent. In motor vehicles and equipment, prices rose 3.8 percent, profits after taxes 89.4 percent, investment in plant and equipment 71.9 percent, and wage rates only 34.4 percent. In three other key industries shown on the same chart, the respective trends told essentially the same story. My utilization of wage rates rather than aggregate wage payments in this exercise appears to me to be justified for a variety of technical reasons which I shall not cover at this point, although much light is shed upon this problem by my subsequent discussion of the compara- tive trends in productivity and hourly wage rates.6 GEA `neg7ect of econontio equilibriu~m prob~em The poverty of economic analysis displayed by the CEA throughout the years, with respect to the whole issue of economic equilibrium, is genuinely distressing. Considering the resources available to the Council and the importance of the problem, and the rich experience made manifest in the performance of the American economy under widely different sets of circumstances, one would have thought that by now the CEA would have developed and made available a thorough See chart 6, following text. See chart 7, following text. PAGENO="0051" 1011 and discerning study of this whole problem of economic equilibrium. My own view is that, by now, they should have had a 50-page chapter in one of their annual reports on this subject. But only pages 70 to 74 are devoted to the "Problem of Economic Fluctuations" in the 1969 CEA report. The quality and depth of what is said is revealing indeed. We learn this: "Sudden changes in Federal spending have, on occasion, seriously disrupted the stability of the economy" (p. 71). "Consumer outlays normally follow the path of household incomes fairly closely" (p. 71). This statement is so bland that it masks some of the most serious problems in the whole area of economic equilibrium. Variations in the rate of saving, at any given level of aggregate con- sumer incomes after taxes, are profoundly important. Why and how have these variations occurred? The ratio of aggregate personal saving to aggregate personal income after taxes is profoundly affected by income distribution. What is the significance of this, in the actual context of what has been happening to the economy during the past 8 years? "But fluctuations in capital spending have often been important sources of instability. For example, real investment (constant prices) rose by 42 percent between 1963 and 1966, contributing to a strong expansion of aggregate demand, but this leveled out in 1967" (p. 71). This is true, but what conclusion does the CEA draw from it? I pointed out in 1963 (not in 1969) that the proposed tax reductions would have just this unfortunate result by way of disturbing further the economic equilibrium. Is the CEA now prepared to reappraise its fiscal policies, or does it continue to extoll them, except to the extent of claiming that the Congress prevented action as promptly as it otherwise would have been undertaken? III. THE PROBLEM OF SOCIAL EQUILIBRIUM, OR PLAIN JUSTICE Identity of economic and socia' objectives in the United States Even if the policies and programs of the "new economics" in general, and of the CEA in particular, had not been erroneous during the past 8 years with respect to the restoration and maintenance of economic e~uilibrium or balance, they were certainly highly vulnerable from the viewpoint of social equilibrium, or plain justice. It is conceivable, in some economies, that social justice must tempo- rarily be sacrificed in the short run, in the interest of economic develop- mnent and growth, narrowly conceived. That may be true of an under- developed country, such as India. But it is not true of an economy so highly developed and richly endowed as our own. If called for, even some sacrifice of optimum economic growth would be justified in the cause of social equilibrium, in that we are a wealthy enough economy to afford to do justice and~as we have recently learned `at great cost~- too sensitive `a body politic to afford to do without it. But the case is even `stronger than this. In line with the economic analysis set forth above, the failure to achieve or maintain economic equilibrium at optimum resource use and optimum economic growth has been inextricably interwoven with the failure to achieve an im- proved allocation of income flows `and human `employments in terms of the criteria of social equilibrium, or plain justice. It is one of our essential `assets as `a nation `and `a people, and we should exploit it to PAGENO="0052" 1012 the hilt, that economic progress and social progress call essentially for the same policies and programs. More consumption relative to investment would have been, and still would be, more conducive to both types of equilibrium. Better income distribution would enlarge the propensity to consume. Lifting the poor to at least minimum-decency standards of consumption and living would open up additional markets for the products of our factories: and our farms. More rapid expansion of public-priority services in the fields of health, education, and housing, and some others, would not only serve the cause of social justice and make deep inroads upon poverty, but would also improve productivity, open up new job op- portunities, and augment a more healthful and sustainable rate of economic growth than we have recently experienced. All of these pro- positions are so close to universally accepted, and so explicit even in. the pronouncements at times of the "New Economics" and of the CEA,. that the question naturally arises as to why these pronouncements have not been translated into more effective action. Poverty and income maldi~tribution The pertinent facts are brutally clear. In 1967, 5.3 million American multiple-person families and 4.9 million unattached individuals lived~ in absolute and dismal poverty, even according to the low poverty-~ income ceilings officially set by the Social Security Administration in the Department of Health, Education, and Welfare. The total num- ber of people living in abject poverty in 1967 aggregated somewhere in the neighborhood of 26 million people, or about 13.5 percent of the total population in that year. In addition, about 11.0 million families and about 2.4 million unat- tached individuals, coming to about 35.4 million people lived above the officially established poverty-income ceilings, but in deprivation nevertheless. Therefore, in the neighborhood of 61.4 million people, or not very far from one-third of the Nation in 1967, lived either in pov- erty or deprivation. It is noteworthy, in this connection, that the Bu- reau of Labor Statistics in the U.S. Department of Labor indicated in 1967 that somewhere in the neighborhood of $9,000 for a four-person family and about $3,400 for an unattached individual would be re- quired to maintain a moderate standard of living in metropolitan areas.7 Even though all empirical evidence proves conclusively that opti- mum economic growth and reasonably full employment are by far the most important avenues toward the liquidation of poverty, it hardly seems conceivable that substantial redistribution programs are not also essential. They would be essential in any event, because the concept of poverty is and should be in part a relative concept, which cannot be blind to the state of the industrial arts and the general income situation throughout the Nation. It is thus of high import that we have thus far made very little progress toward improved income distribution since World War II. Among multiple-person families in 1947, the top income fifth enjoyed 43 percent of the total money income of families, while the lowest fifth obtamed only 5 percent. the lowest two-fifths only 17 percent, and the lower three-fifths only 34 percent. In 1966, the top fifth enjoyed 41 percent, while the lowest: 7See chart 8, following text. PAGENO="0053" 1013 fifth obtained oniy 5 percent, the lowest two-fifths oniy 17 percent, and the lower three-fifths only 35 percent. Among unattached individ- uals in 1947, the highest fifth enjoyed 59 percent, while the lowest fifth obtained only three percent, the lowest two-fifths only 8 percent, and the lower three-fifths only 20 percent. in 1966, the respective figures were 52 percent, 3 percent, 11 percent, and 24 percent.8 Social equilibrium involves the public sector Adequate programs in the public sector are equally relevant to any meaningful war against poverty, and indeed to the life and living of the preponderant portion of the total population. And it is here that the trends in public expenditures at the Federal level become so dis- thrbing. During the fiscal years 1947-1953, Federal spending for all domestic programs came to 6.92 percent of GNP (despite the Korean ivar during 3 years of this period), while during the fiscal years 1954- 1968, these domestic programs came to only 5.64 percent of C-NP. The figure of 6.10 percent in fiscal 1968 compared with 8.17 percent in fiscal 1947 and 6.13 percent as late as fiscal 1959. There. is no legitimate explanation of these domestic-spending trends in trends in defense and other international spending, for total Federal spending declined from 16.52 percent of C-NP during fiscal 1947-1953 to 16.23 percent during fiscal 1954-1968. With respect to fiscal 1969, the President's Budget initially pro- ]ec.ted total domestic spending at 10.91 percent of C-NP. But this fig- ure cannot validly be contrasted with the ratios for the earlier years. Beginning with fiscal 1969, the Federal Budget included immense trust funds, which in the main are not supported by Federal outlays (for example, the payroll taxes under the social security program). The relative starvation of the public sector must also be taken into account, toward realization that a meaningful definition of poverty in America must go far beyond the 13 percent or less of the people of the United States who are below poverty-income ceilings as of now in 1969. At least one-sixth of our people are ill-housed. At least one- *third cannot afford adequate and modern medical care. Perhaps 90 percent of the children in our public schools go to schools where the teachers and para-professionals are grossly inadequate in number and still grossly underpaid; and perhaps a majority are in overcrowded classrooms, a large portion of which are either fire-traps or in other respects unsafe. As the public schools are increasingly becoming the habitation of the poor and deprived, a very large portion of those ivho go to these schools-are drop out-go home to parents who live in slums, do not enjoy an American minimum decency standard of in- come, suffer excessively high unemployment, and altogether too fre- quently are alienated and restive, if not rebellious. Many of our trans- portation systems are obsolete. Air and water remains poisoned, with at least the air getting worse. Our central cities are deteriorating if not already decayed, and are increasingly unable to meet the rising costs of education, police and fire protection, and other essential pub- lic services. In its most recent issue, Fortune magazine, a distinguished business publication, contained a vivid article reiterating what so many other individuals, research organizations, and special commissions have been S See chart 9, following text. PAGENO="0054" 1014 saying now for so many years-that we can afford to rescue and restore the public sector, and cannot dare to do less. GEA position on poverty: talk versus action The current CEA report sets forth succinctly a quite good outline of approach to the problem of poverty. It sets forth a strategy in- cluding sustained high employment and economic growth; education, training, medical assistance, and access to well-paying jobs; some form of income maintenance for those not within the employment stream; and attacks upon poverty pockets in the ghettos and certain rural areas. The CEA further states that "the number of poor in poverty pockets ca.n be reduced by promoting public and private' relocation assistance to those with employment opportunities else- where" (p. 155). Elsewhere in the same chapter, the CEA points out that a small redistribution of the benefits of growth would greatly speed reduction of poverty (p. 160); that the tax system itself redistributes income away from the poor (p. 160); that minimum welfare benefits should be established, financed wholly by the Federal Government (p. 167) and that there should be guaranteed work programs (p. 171). All this sounds fine, but where are the quantified and specific pro- grams needed to carry forward along these lines? How can benefits of growth be redistributed in favor of the poor by the tax policies and interest-rate policies during recent years, advocated or approved by the CEA, which have redistributed income in a very regressive direc- tion? How can guaranteed work, which implies full employment by direct Government action if that is the only way to achieve it, be squared with reluctant insistence that perhaps the current level of employment needs to be increased somewhat to fight inflation? How can the degree of population relocation which may be required be undertaken, without penetrated quantitative analysis of what kind of relocation should take place, how people are going to get there, and who is going to finance the costs of such relocation, including not only the transportation costs and the housing costs, but also the needed shifts in industry? How can this new awakening to the problem of relocation he squared with farm policies and other policies which, during the past 8 years, have "relocated" millions of farm families to urban areas, where they have contributed so mightily to relief costs,. unemployment, urban decay, and urban unrest? The sad fact of the matter is that CEA has not come to realization that the achievement of social equilibrium through a full-scale war against poverty is not a side issue to be treated superficially in one chapter of a CEA report. It must instead interpenetrate with the whole process of the development of a long-range social and economic budget for the Nation, and the adjustment of all basic economic policies thereto, something which the CEA has never attempted. The inclusion within the current document of the report to the President from the Cabinet Coordinating Committee on Economic Planning for the End of Vietnam Hostilities (pp. 181-220) under- scores two shortcomings. The first is failure to recognize that planning must be a continuing process, and that the work and the responsibility of the CEA with respect to so vast a.n issue cannot be done separately and apart from the work of a Cabinet Coordinating Committee. The PAGENO="0055" 1015 second defect is failure to recognize that we will not move suddenly from a state of high defense expenditures to a state of low defense expenditures, but instead will move very gradually. The problems of poverty and social disequilibrium, inseparably connected, as well as the problem of economic disequilibrium, cannot wait until the Vietnam hostilities are over, or even beyond that to the time when a truly peaceful world assures a lower level of total defense outlays. Even now, there is some prospect of an antimissile defense system, of incalcuabie but huge costs. The war against poverty and social disequilibrium should have started long ago, it should start now,. and it should be at the very heart of the study programs and recom- mendations of the CEA, because it is at the very heart of our total economic problem-not a year or 10 years from now, but now. IV. Fiso~r, P0LTOY 1lIisd&ection of tax cuts to date In all the plethora of detailed examination of national fiscal policy during recent years, we have in large measure ignored examination of the purposes and consequences of the fiscal policies, actually put into motion. Consequently, the recent and current debate and concern on the subject has arrived at a condition for which the term "im- maturity~~ would be a charitable description. By the test of economic equilibrium, for reasons already discussed, the massive tax cuts of 1962-65, accompanied by earlier tax concessions from 1962 forward, were fundamentally misdirected. Viewing tax cuts having a total original value estimated at $19.2 billion-having a very much higher value now, because of the great expanded tax base-$8.6 billion were allocated, according to my analysis, to investment pur- poses, and only $10.6 billion were allocated to consumption purposes. This was in no degree responsive to the economic developments between 1953 and 1962 or 1965 which gave rise to this veritable orgy of tax cut- ting. Even if we were determined-as we should not have been-to attempt the major stimulus to the economy in the form of tax cuts, an entirely different composition would have been much more con- ducive to economic equilibrium and optimum economic growth in the long run, as well as to the restraint of inflation, than the tax cuts ac- cordingly engineered. To illustrate, a very large portion of the tax cuts should have been devoted to lifting the personal exemptions from $600 to $1,200, or preferably to $1,800.~ Because of the importance of enlarging the propensity to consume, the composition of the tax cuts was also highly undesirable from the viewpoint of long-range economic equilibrium, not to mention the even more important issue of social equilibrium and economic justice. The 1964 personal tax cuts added only 2 percent to the after-tax income of the four-person family with $3,000 income; only 1.6 percent in the case of $5,000 income; and only 2.1 percent in the case of $7,500 income. But the same tax cuts added 3.8 percent in the case of $25,000 income; 6.2 percent in the case of $50,000 income; 8.3 percent in the case of $100,000 income; and 16 percent in the case of the $200,000 income. These comparisons are even more shocking when we take account of the fact that they are based upon established tax rates, and take in- See chart 10, following text. PAGENO="0056" 1016 adequate account of evasions and loopholes available to so many people in the high-income brackets.1° Narrow view of scope of the total tax burden But this is only the beginning of the travesty. Among all the "new economists" including the CF~A membership who appeared before the Joint Economic Committee to urge and applaud the changes in the Federal tax structure which have actually occurred, hardly a one of them had the breadth of perspective to focus upon the entire tax structure throughout the Nation. rather than exclusively upon the Federal tax structure. Yet a. first year course in economics should have encouraged them to do just that. In 1966, looking at all persons in all the income classes shown, those with incomes under $3,000 paid only 3.7 percent of their incomes in the form of Federal income taxes, and this percentage moved upward to 14 percent in the case of t.hose with incomes from $15,000 to $19,999, and to 33.6 percent in the case of those with incomes at $50,000 and over. This gives the appearance of a quite progressive tax structure, although again ignoring the fact that these comparisons are based upon tax rates without adequate allowance for evasion, avoidance, and loopholes. But looking at total taxes naid, including all Federal income taxes, social security taxes. State and local income taxes, sales and gasoline taxes, and personal property and real estate taxes, how differ- ent the true Picture is. Those with incomes under $3,000 paid 14.1 percent of their incomes in total taxes. Those with incomes of $3,000 to S3~999 paid 19.3 percent. But those with incomes of $5~000 to $9,999 paid only 17.5 to 17.6 percent. Those with incomes of $15,000 to $19,999 paid 19.8 percent., or very little more (ratio concept) than those with incomes of S3,000 to $3,999. Those with incomes of $20,000 to $49,999 paid 24.2 percent, and those with incomes of $50,000 and over paid B8.8 percent. again looking only at the tax rates on the books. In the main, this represents a. horribly unjust and inequitable nationwide system of ta.xation.'~ The situation is worse now than it was in 1966, although compre- hensive data are not available to me for the most recent years. The regressive State and local taxes, and the sales taxes, have continued to mount.. And when the time came for the Federal Government to lift taxes in order, avowedly, "to fight inflation," the sound decision was not made to lift taxes in accord with the same pattern which had governed their previous reduction. Instead, a 10-percent across-the- board "temporary" surcharge tax was imposed, which manifestly adds to the regressive nature of the entire nationwide tax burden, or at least is certainly not progressive. The issue of "tax reform" There is now a great deal of discussion about "reform" in the Federal tax structure. Such discussion concentrates mainly upon plugging loopholes which enable large numbers of very wealthy taxholders to pay no taxes at all, or to pay only token taxes, or to pay distressingly low taxes relative to those very much lower down in the income struc- ture. Sometimes this proposa.l is coupled with the idea that there shall 10 See chart ii, following text. ~ See chart i2 following text. PAGENO="0057" 1017 be a ceiling upon the taxes that anybody shall pay, relative to income- say, 50 percent. There is much merit in some aspects of these proposals, but nobody has yet made clear whether the net impact of them would be to make the total tax structure more or less progressive. iRelated to those who really pay the tax rates as written on the books, instea.d of engaging in avoidance or evasion, it would be a very good bargain for many to consent magnanimously to the proposition that they should pay some taxes in exchange for being assured that under no conceivable set of conditions would they have to pay more than 50 percent of their income in taxes. As a matter of stark fact, I believe that the whole issue of tax reform becomes confusing and misleading, when it is not recognized that the major j oh of tax reform is to remedy the gross distortions in the Fed- eral tax structure, both on economic equilibrium and social equilib- riuin grounds, which have resulted solely from the misguided and massive tax reductions during recent years, aggravated by the 10- percent surcharge. I submit that the most useful reform which could be made in the Federal tax structure would be to lift the exemptions greatly, and to restore the rates, at least in the high-income portions of the structures, a good part of the way to where they were before 1964. The argument that this paralyzed investment and initiative was mereticious from the outset. The argument that the high marginal tax rates caused people to try to evade taxes, by legitimate methods, was foolish from the outset. Those who hired expensive lawyers and accountants to get their taxes as low as possible when the marginal rate was 92 percent did not stop doing so when the marginal rate was reduced by about 30 points. Neglect of core purpose of the Federal budget All of what I have thus far said only touches the outskirts of why the massive tax reductions were so wrong, at. least from the viewpoint of social equilibrium and plain social justice. The "new economists" have claimed and propaganded that they have done a great service in the improved use of national fiscal policy to stabilize the economy and promote its real growth. But they have entirely forgotten the real purpose of the Federal budget and of national economic policy,. as made manifest by the Federal budget. The main purpose of the Federal budget is neither to stabilize nor promote the growth of the economy, although this would be a very useful byproduct if the policies are more correctly devised than they have been thus far. The main purpose of the Federal budget is to allocate to the public sector enough expenditures to meet the great priorities of those public needs which cannot be served, or cannot be served so well, in any other way. If the only or main purpose were stabilization, we could simplify matters grea.tly by having 10 or 15 billion dollars' worth of Federal spending and no Federal taxation when we were threatened with deflationary forces, and the reverse when we were threatened with inflationary forces. But this would be forgetting what the Federal budget is really for. PAGENO="0058" 1018 Appropriate fiscal policies The appropriate coures is to determine what portion of our resources, through Federal spending, should be allocated to public purposes, both domestic and international. This should be done on a long-range basis. We should then allocate to these purposes, through the Federal budget, such percentage of our potential total national product, estimated at optimum resource use. If, in fact, this leads, in conjunction with all other spending, to inflationary pressures in the form of excessive ag- gregate demand, we should then not cut back on these priorities, but instead increase taxes to curtail the extravagant, wasteful, or at least expendable, instead of sacrificing the essential. Curtailment of Federal spending to comba.t inflation negates the priority purposes of Federal spending. If, on the other hand, t.he determined levels of public spend- ing plus all over spending do not generate sufficient aggregate demand to avoid deflationary trends, we should certainly not cut Federal spend- ing on the ground that the revenues yielded by a deficiently perform- ing economy are not sufficient to cover this Federal spending. Instead, we should obviously reduce ta.xes. In short, all taxes are burdensome, and practically no taxes have intrinsic value in themselves. It is the tax, rather than the spending side of the Federal Budget, which should serve the purposes of stabilization. All this is so elementary that it is almost inconceivable that the "new economists" and the CEA could have forgotten it. But they did forget it, almost entirely, and so did their allies and protagonists in the academic world. In 1964, they arrived at the miraculous conclu- sion tha.t a lot of people would rather have their taxes reduced than to witness increased Federal spending. An equal amount of action in either direction would have had the same deficit impact upon the Federal budget in the short run, although in the long run the spending route would have increased revenues faster than an equivalent amount of tax reduction because the former approach would have been sounder from the viewpoint of economic equilibrium and growth. But having arrived at the miraculous conclusion that tax reduction was "easier," these economists drew upon their full intellectual and propagandist resources to argue that it really made no difference to the Nation and the people which of the two routes were taken, or what blend of the two routes were chosen, because the impact upon the economy would he the same at any given dollar level of net action. Never before in my recollection was there such forgetfulness of the purpose for which a responsible Central Government exists, nor of the purpose for which a. responsible CEA should exist. To be sure, it was not foreseeable how much expenditures would increase for the Vietnam war. But it was manifestly foreseeable that our international burdens would remain immensely heavy, and perhaps even grow, for as far ahead as we could foresee. It was not only foreseeable, but currently apparent. that our great domestic priorities had been starved at least since the beginning of the great depression, and that, at least since the launching of the first sputnik in 1957. the urgency of the need to allocate much larger absolute amounts of resources to the public sector, if not larger relative amounts, had been recognized by almost all responsible people and organizations everywhere. To cap the climax of this farrago of national fiscal policy, the "new economists" and the CEA were hoisted on their own petard from 1967 PAGENO="0059" 1019 forward. Having argued that it made no great difference whether we reduced taxes or increased expenditures when the economy needed stimulation, they were led to argue that it made no great difference whether we reduced expenditures or increased taxes when it was felt that the economy needed restraint. They even came to the point where they were supinely accepting some of both medicine, which was almost equivalent to the preposterous proposition that a tax increase would be more acceptable if spending were reduced and the pressures on the economy accordingly reduced than if spending were not reduced. It will take us many years, at best, to work our way slowly and painfully out of this hole into which the "New Economics" has so proudly put us. Increasing fiscal responsibilities of Federal Government I have only one additional point to make in this phase of my dis- cussion, but it is one that cannot be overlooked. Another reason why the recent fiscal policies have been so inadequate is that they have failed to recognize the inescapable increasing responsibility of the Federal Government to meet a larger share of the burden of the cost of rescuing our urban areas and making war against poverty. I can never under- stand how my friend Walter Heller2 so ardent an advocate of massive Federal tax-sharing with the States, thus evidencing the recognition of what I have just stated, could have gone all out for the kind of incontinent tax reduction which was sure to make the Federal Govern- *ment have so much less to share. From 1947 to 1967 (fiscal years), Federal spending increased at an average annual rate of 6.1 percent, while State spending increased at an average annual rate of 9.1 percent, and local spending at an average annual rate of 8.9 percent. During 1953-61, the respective average an- nual rates of advance were 3.4 percent, 9 percent, and 9.1 percent. From 1961 to 1967 the respective average annual rates of advance were 8 percent, 8.2 percent, and 6.5 percent. From 1947 to 1967, the average annual increase in the public debt was 1.1 percent for the Federal Government, 12.6 percent for State governments, and 9.1 percent for local governments. From 1961 to 1967, the respective average annual rates of advance were 2 percent, 8.4 percent, and 6.9 percent.12 Coupling these trends with the extremely regressive nature of State and local taxation, and the relatively greater impact of tight money and rising interest rates upon the State and local governments in view of the immensely greater percentage increases in their necessary `bor- rowings than in the case of the Federal Government, the full con- sequence of recent Federal fiscal policies are clearly revealed. A model Federal Budget, responsive to needs and capabilities At an earlier stage in my discussion, I set forth projections for gross national product aFid its components running ahead to 1977. A Federal budget showing trends compatible with its responsibility for economic and social equilibrium is an indispensible element toward achieving these goals. My next chart sets forth a model for such a Federal budget. It indicates that outlays for all domestic programs should rise from 10.91 percent of GNP, as estimated for fiscal year See chart 13, following text. PAGENO="0060" 1020 1969, to 13.32 percent in calendar 1977; that expenditures for the economic opportunity program or its equivalent should rise from 0.23 percent to 0.39 percent of GNP and from $9.86 on a nationwide per capita basis to $24.04 (measured in fiscal year 1969 dollars); that outlays for housing and community development should rise from 0.32 percent to 0.64 percent of GNP and from $13.72 to $39.34 on a per capita basis; that outlays for education should rise from 0.53 percent to 2.36 percent of GNP, and from $23.16 to $143.79 on a per capita basis; that outlays for health services and research should rise from 1.21 percent to 1.43 percent of GNP, and from $52.51 to $87.41 on a per capita basis; that outlays for public assistance and labor manpower and other welfare services should rise from 0.69 percent to 1.08 percent of GNP and from $30.95 to $66.00 on a per capita. basis; and that outlays for agriculture and natural resources should. rise from 0.91 percent to 1.11 percent of G-NP, and from $39.91 to $67.75 on a per capita basis. These goals include Federal contributions of $1 billion in 1970 and more than $2 billion in 1977 to the OASDHI to help increase benefit payments to the aged. This tableau provides, if it should be needed, an increase from $89.5 billion to $94 billion for national defense, space technology, and all inter- national, but this would involve a decrease from 10.11 percent to 6.73 percent of GNP, and from $441.18 to $410.84 on a per capit.a basis. Yet, in an adequately expanding economy, all Federal budget outlays, while increasing from $917.01 to $1,223.77 on a per capita basis, would actually decline from 21.02 percent to 20.06 percent of GNP.'3 With this feasible degree of dedication to do what we ought to do and cannot afford to do without, we could by 1977 virtually liquidate poverty in the United States; 14 provide a decent home for every Ameri- can family (which we have promised since 1939) ; achieve lmnirnuln standards of uniform excellence in our public schools throughout. the Nation; and bring adequate health services, at costs within their means, to all of our people. The projections for all domestic programs cover also our transportation needs. The projections for agriculture and natural resources contemplate that we reverse the trend-a. trend against which I have been protesting for 16 years or longer-toward the impoverishment of our farm population and the abysmal neglect of rural life and living standards, toward malnutrition and hunger among millions of our people despite indescribably abundant agricul- tural production, and toward the forced movement of millions of farm families t.oward our great urban areas, where t.hey have contributed. and contributed disproportionately, to unemployment, relief costs, overcrowded housing, urban decay, and urban unrest. In fact, the failure of the CEA, in its preoccupation with fiscal policy, and erroneous fiscal policy at that, to give adequate attention as mandated by the Employment Act of 1946 to the other great areas of major economic policy, such as farm policy, social security policy, housing policy, and internationally economic policies, has been a signa.l aspect of the CEA failure to view our economy in a sufficiently broad and long-range perspective, and to develop an integrated policy and program in lieu of a spawling proliferation of policies and programs ~` See chart 14, following text. 14 See again chart 8, following text. PAGENO="0061" 1021 ivhich already have become almost too numerous to count and too corn- ~plex to harmonize. CEA `views on fiscal policy The current CEA report reaches the conclusion that fiscal policy on the whole during the past 8 years has been both wise and effective, and that "most of the shortcomings of the period were errors of omis- sion rather than commission" (p. 77). It then makes clear that most of the errors of omission were due to tardiness, and could be cured in part by better forecasting, but in the main by conferring upon the President the discretionary power to make certain kinds of tax changes (see discussion pp. 78-85). The conclusions which I have set forth above are very diffierent. A revealing portion of the CEA discussion says: "The experience of 1961-65 demonstrated that an effective fiscal policy to stimulate the economy could be carried out without adding unnecessarily to the size of the Federal budget. Since the aims of stabilization be imple- mented either through tax changes or expenditure changes, decisions regarding Federal expenditures can be properly based on the desired allocation of resources between the public and private sectors" (pp. 77-78). My objections are as follows: The period 1961-65 is too short to make a full evaluation of fiscal policies during the past 8 years; the actual policies during that period fell far short, for reasons which I have already stated, and while a proper principle is stated for the desired allocation of resources between the private and public sectors, such allocation was not undertaken, and such allocation is of profound significance with respect to economic equilibrium as well as with re- spect to social equilibrium. Even more broadly, the emphasis upon fiscal policy in this chapter and throughout the report ignores the fact that fiscal policy-and to a degree monetary policy-are but segments of a wide variety of na- tional economic policies, including those related to social security, agriculture, housing, and international economic policy. There can be no sound and sufficiently comprehensive nor integrated development of economic and social policy for the Federal Govermnent, as intended by the Employment Act, until these other profoundly important policies become as important portions of the economic report of the CEA report as fiscal policies have been to date. This process is also essential to the correction of fiscal policy itself. A striking demonstration of this shortcoming is revealed by the fact that the treatment of agriculture is confined in the CEA report mainly to pages 115 to 116 thereof. Yet the problems of agriculture and other aspects of rural life are among the most urgent and important that we face. V. THE PROBLEM OF INFLATION Three main errors in approach to problem of inflation The "new economists" and the CEA during the past 8 years have committed three serious errors in dealing with the problem of inflation: First, they have grossly exaggerated the problem in the United States, and gross exaggeration is always undesirable because it distorts the evolution and disturbs the balance of economic policies and programs; second, they have offered no serious analysis of whether the amount of PAGENO="0062" 1022 inflation we have had in the United States during these 8 years has on net balance done more good or harm, and whether alternative policies which might have been devised to restrain iuflation further would on net balance have done more good or harm than has resulted from avoidance of such policies. It is no answer to this criticism to say that it is difficult to make this kind of analysis, for there are many types of economic analysis which are difficult, but which nonetheless must be undertaken instead of following a course without such analysis; and third, they have completely misjudged the causes of recent and current inflation, and, therefore, the policies they have adopted to deal with it have both aggravated the inflation and caused other damage far more costly than the inflation itself. It is highly desirable to consider the problem of inflation in a long-term perspective, rather than to focus excessively upon the ad- mittedly high rate of price inflation during 1967, and especially 1968. In a matter of this kind, short of a runaway inflation which we have not had even during the past 2 years, the longer term averages are in my view far more significant and a better guide to policies ad- dressed to the future than rather extreme aberrations from these longrun averages during a year or two. It is noteworthy that 1967 and 1968 are by no means the first time when such aberrations ap- peared, nor the first time when the reaction to them was excessive. Moreover, it would be very unfair for the CEA to claim-and I do not assert that it has claimed-that its large attention to the problem of inflation arose during the past 2 years. Even during 1961-66, when we experienced unusual relative price stability, there were constant alarms about the problem of inflation, especially on the ground that it was a basic cause of our unfavorable balance-of-payments position, in that it put us at a competitive disadvantage in the international exchange of goods and services. Yet the fact of the matter was that we maintained a quite favorable balance in these categories, and our unfavorable balance was due to causes which had very little to do with the American price level, such as our international spending abroad, the flow of American capital to other countries, the with- drawal of foreign capital from the United States, and so forth. Fur- ther, some of these unfavorable developments were due to some coin- petitive disadvantage exhibited in the overall performance of the American economy, which in turn was due to some of the repressive measures adopted for the alleged purpose of restraining inflation. Eva~uation of magnitudes of inflationary trends The average annual increase in consumer prices in the United States was 1.7 percent during 1918-68, 1.8 percent during 1928-68, 3.1 percent during 1938-68 (affected greatly by the reflation after the Great Depression and the World War II era), 1.9 percent during 1948-68, and 1.9 percent during 1958-68. Even during 1960-68, the average annual increase in consumer prices was only 2.0 percent, and during 1960-66 it was much less than that. During 1966-68, the aver- age annual rate was 3.5 percent, and from 1967 to 1968, it was 4.2 per- cent. My next chart, depicting these trends, also depicts the trends with respect to wholesale prices and industrial prices, but I am not dis- cussing these in detail, because the conclusions I would draw from PAGENO="0063" 1023 such discussion would be essentially the same as those I draw from discussion of the trends in consumer prices.'5 Viewing this performance sensibly, I do not see how we can con- clude that our economy has been threatened or will be threatened in future by anything approximately a "runaway" or even unusual amount of price inflation in any fair perspective. This fair perspective is further reinforced by comparisons with other countries. During the 5-year period 1962-67 (1968 not comprehensively available to me), compared with the 2.6-percent average annual increase in con- sumer prices in the United States during the 5-year period 1963-68 (and only 2.0 percent during 1962-67), the average annual increase in consumer prices was 3.3 percent in the United Kingdom, 3.2 percent in France, 2.7 percent in Germany, 4.7 percent in Italy, 2.7 percent in Canada, and 5.4 percent in Japan. Comparisons of the wholesale price trends in these countries with those in the United States would lead broadly to the same conclusions.16 CEA has not probed deeply into actual consequences of rising prices Coming to the second phase of this aspect of my analysis, at no time during the past 8 years has the CEA undertaken anything approxi- mating a definitive nor even substantial analysis of the economic or social consequences of price trends in the United States during this period. Nor has CEA attempted to evaluate what the alternative con- sequences of more restrictive price policies would have been. A mere regurgitation of the word "inflation" as a horror signal, or of the charge that inflation is "the cruelest tax of all" provides no substitute for such empirical analysis, especially when in the long run the Amer- ican experience indicates strongly that periods of rising prices (with rare exceptions) have been periods `where production, employment, and income distribution have behaved more satisfactorily `than during other periods. The GEA has gravely misjudged the causes of inflation Coming to the third phase of this aspect of my analysis, which is the most important of all, the CEA's entire approach to the problem of inflation throughout has been based entirely upon the rather prevalent assumption that a more rapid rate of real economic growth is more ~onducive to price inflation than a lower rate, and/or that a lower level of unemployment is more conducive to price inflation than a higher rate of unemployment, and/or that an economy operating close ~o reasonably full or optimum resource use is more prone to inflation than an economy with a larger amount of economic slack. The empirical evidence irrefutably refutes these unalloyed assump- tions, even more though it may not conclusively prove the contrary. During 1952-55, the average annual rate of consumer price iiiflation was only 0.3 percent, when the average annual rate of real economic growth was 3.5 percent, and unemployment as officially counted aver- aged 4 percent. During 1955-58, the average annual increase in con- sumer prices was 2.6 percent, although the average annual rate of real economic growth was only 0.8 percent, and unemployment averaged 4.9 percent. During 1956-58, the average annual increase in consumer prices was 3.1 percent, while the average annual rate of real economic `~ See charts i5 and 16, following text. 16 See again chart 15, following text. PAGENO="0064" 1024 growth was only 0.2 percent, and unemployment averaged 5.1 percent. During 1958-60, the average annual rate of consumer price inflation fell back to 1.2 percent, while the average annual rate of real economic growth was 4.3 percent, and unen~ployment averaged 6 percent. Dur- ing 1960-68, the average annual rate of real economic growth rose to 4.8 percent, and the average annual increase in consumer prices was only 2 percent. Unemployment averaged 4.9 percent, but was reduced greatly to 2.6 percent by 1968. During 1960-66, the average annual increase in consumer prices was only 1.6 percent, while the real rate of economic growth averaged 5.1 percent. Unemployment averaged 5.3 percent, but was reduced to 3.8 percent by 1966. During 1966-68, the average annual rate of increase in consumer prices was 3.7 percent, although the average annual rate of real economic growth fell to 3.5 percent. Unemployment averaged 3.7 percent, or almost the same as the 1966 level. The trends in wholesale prices and industrial prices are shown on the same chart, but I do not analyze them in detail because they tell basically the same story. Certainly, these trends in the main indicate an inverse or negative rather than a positive correlation between the rate of real economic growth and the rate of price inflation. Nor do they indicate in the main that a movement toward reduction in unemployment promotes an increase in price inflation. But it may be argued that, while a higher rate of real economic growth or a lower level of unemployment does not in itself promote inflationary tendencies, inflation is nonetheless promoted by an econ- omy moving to reasonably full or optimum resource w~e. However, this thesis is also discredited by the trends depicted above. For exam- ple, during 1956-58, with unemployment averaging 5.1 percent, and with the sharpest recession since 1952 occurring within that period, the average annual rate of consumer price inflation of 3.1 percent was about twice as fast as the 1.6-percent average during 1960-66 when unemployment averaged 5.3 percent, or about the same. From 1966 to 1967, the price inflation was 2.8 percent, and unemployment stood at 3.8 percent. The analysis could be further complicated, and my conclusions might be somewhat modified, by the introduction of time-lag~ factors and some others. But I submit that my analysis and conclusions are in the main sustainable, and most assuredly do not justify the unalloyed position of the CEA which is at times deliberately sought to generate excessive deviations from optimum real economic growth, and at least to tolerate excessive unemployment, in the pursuit of a nonsustain- able proposition bearing upon the relationship between price trends and these other factors.17 My thesis with respect to recent and current inflation My own explanation of inflationary trends-which I commenced to set forth in the mid-1950's before future experience lent much further support to my position-runs as follows: In an economy characterized so largely by administered prices, and inadequate volume of real eco- nomic activity and insufficient employment, or even the clear prospect of these, tend to generate protective efforts to compensate for these 17 See again chart iG, following text. PAGENO="0065" 1025 deficiencies through the managerial price-making process., This thesis is perhaps most clearly borne out by the resumption of a relatively high rate of price inflation from early 1966 forward, when the signs became large and unmistakable that the economy was entering a period of severely reduced real economic growth, and when recession talk was in the air. In some other areas, such as medical care and housing, and at times in the area of farm prices, rising costs or prices have been due to entirely different factors. In the medical field, there have been short- ages of facilities and personnel relative to the real need, engendered by long neglect of adequate public spending for these purposes, such neglect being fomented by the avowed desire to fight inflation. In the area of housing, rising costs have not been due to excessive aggregate demand for housing relative to the Nation's needs, but instead have been due in large measure to the fantastically rising interest rates, again allegedly designed to fight inflation. The thesis that excessive aggregate demand (which in fact we have not had any time in recent years, when measured against the demand required to sustain optimum economic growth and bring unemploy- ment low enough) explains the inflations during recent years, and particularly during 1967-1968, breaks down at all points. It is further corroded by the special industry studies which I have made from 1952 forward, indicating even more clearly the propensity to increase prices more rapidly during periods of relatively high unused capacity and relatively high unemployment than during periods of relatively less unused capacity and relatively less unemployment. Analysis of cost-pwsh inflation Frequently, it is argued that the inflation has been of the cost-push variety, occasioned by wage costs per man-hour rising faster than productivity. Repeatedly and systematically, the CEA has taken this position. But it is completely torpedoed by the empirical evidence. During 1960-1968, in the total private nonf arm economy, measured appropriately in constant dollars, productivity rose at an average annual rate of 3.1 percent, while hourly wages and salaries rose at an average annual rate of 2.9 percent. It is even more revealing to break this period into two parts. During 1960-1966, productivity rose at an average annual rate of 3.4 percent, while wages and salaries rose at an average annual rate of only 2.7 percent. This was a period when the average annual rate of real economic growth was 5.1 percent. But during 1966-1968, when the average annual rate of real economic growth declined to 3.7 percent, productivity rose at an average annual rate of only 2.2 percent, and wages and salaries at an average annual rate of 3.2 percent. The trends in manufacturing tell the same story, only more so. Dur- ing 1960-68, the figures were 3.2 percent for productivity, and 2.2 per- cent for wages and salaries. During 1960-66, the figures were 3.7 per- cent for productivity, and 1.9 percent for wages and salaries. During 1966-68, the figures were 1.7 percent for productivity, and 2.9 percent for wages and salaries. This leads to the implication that the relative trends during 1966-68 exerted cost-push inflation, and thus explained the rapidly accelerat- ing inflationary trends (it should be noted that the "New Economists" 24-833 0-69-pt. 4-5 PAGENO="0066" 1026 and the CEA talked a great deal about cost-push inflation, and devel- oped the unworkable and unfair price-wage guidelines accordingly, long before 1966, when the rate of real advance in wages and salaries was lagging far behind the rate of productivity gains). I cannot ac- cept the CEA position, implied if not made explicit, that the relative trends in wages and salaries and productivity during 1966-68 justi- fied in any sense the accelerated price inflation during this period, par- ticularly in view of profit margins and aggregate profits, which the CEA appears extremely anxious to avoid discussing in its 1969 re- port, and handled very gingerly in previous reports. Consumption, supported so substantially by wages, had certainly not been excessive, but rather has been deficient, during the past 2 years, by economic equilibrium tests which the CEA never brings forth. But let us assume for the moment-contrary to my own view- that the relative trends in wages and salaries and productivity dur- ing 1966-68 "caused" or even "justified" the accelerated price infla- tion. In that event, this happened, not because the rate of advance in real wages and salaries was too high in terms of any equilibrium model for reasonably full use of our potentials, but rather because the rate of productivity growth dropped abysmally. And this happened pre- cisely because of the abysmal decline in the real rate of economic growth, coupled with the election (desirable in itself) to translate this into less efficient utilization of the employed labor force rather than into more overt unemployment. Of course, such inefficient utilization is a form of concealed unemployment, although the CEA has not yet come to think that way.18 Under these circumstances, how wrong and upsidedown it is to try to stop this kind of cost-push inflation by further repressive measures, designed to reduce still further a seriously inadequate rate of real eco- nomic growth. Further, my basic position is that policies designed effectively to achieve a stable and optimum economic growth would in the long run yield less net price inflation than result from erratic ups and downs in the real economy, rapidly changing labor and business ex- pectations, and general uncertainty. The evidence to date on this seems fairly clear. But even if the evidence were less conclusive or more arguable on rationa.l grounds, we should choose the certain benefits of steady and optimum economic growth and minimal unemploy- ment, instead of committing ourselves to a theory as to the cause of inflation which cannot be squared with what has been happening. In the foregoing discussion of wage and salary trends, the data are based upon hourly rates of pay, and do not include other so-called labor compensation in the form of fringe benefits, while the CEA does include fringe benefits in its analysis of this problem. I am convinced that my approach is preferable, because fringe benefits in general do not enter currently into the disposable income of wage and salary earners, and it is this disposable income which must keep up with productivity trends in order to maintain a reasonable balance between growth in output and growth in consumer demand. From the view- point of total labor costs including fringe benefits, there is no evidence that the trends in total labor costs have militated against adequate 18 See chart 17, following text. PAGENO="0067" 1027 profit margins. To the contrary, the evidence is that profit margins have in many cases been far too high, and that this has contributed powerfully to the recurrent tendency of the rate of growth in invest- ment in plant and equipment to exceed the rate of growth in consump- tion, particularly in view of the increasing productivity of capital. But even if it were to be conceded that fringe benefits should be in- cluded in the comparisons between hourly wage and salary trends and productivity, the picture which I have set forth above would not be changed materially in its fundamental import. The picture would still show that real labor compensation `lagged seriously behind produc- tivity trends, until the advent of a seriously retarded. rate of real economic growth. Finally, in this phase of the discussion, I have used the trends in real hourly wages and salaries, while the CEA consistently has com- pared the current dollar trends in wages and salaries (or in total wage costs) with productivity trends. This posture on the part of the Council is completely indefensible. Productivity is a real output concept, and the core problem of maintaining a balanced relationship between pro- ductivity trends and hourly wage and salary trends must involve the concept of the real purchasing power of wages. And from the view- point of business costs, there has been absolutely no evidence that the adjustment of real rather than current dollar wage and salary trends to productivity trends impair profit margins. This is true in part be- cause, when the price level is generally rising or under conditions of reasonably full prosperity even with a relatively stable price level, the price makers are in at least as good a position to protect their profit margins as other income earners are to protect themselves. Shortcomings in GEA treatment of inflation With respect to 1968, the CEA report says that "The pressures of excessive demand pushed up the price level at the unacceptable rate of nearly 4 percent," and insists that "Total demand must be brought into better balance with the Nation's productive capacity" (p. 33). I have stated above my disagreement with this position. Further, and in accord with my own basic position, the CEA says that erratic ups and downs in the economic performance "would probably involve a more serious danger of inflation than would steadier movement that remained close to the path of potential output" (p. 54). So why, acqui- esce in, or even promote, such erratic movements? Yet, the CEA's entire fiscal-policy position, including extension of the 10-percent surcharge tax for another year, and the extension at present levels of excise taxes on automobiles and telephone services, has moved in just that direction (p. 54-55). Then, the CEA report states that "In a slack economy, rising prices are hardly a problem," and attempts to support this as follows (p. 94) The difficulties of combining price stability and high employment in the past 15 years are evident. . . In 1956-1967 and from 1960 to 1908, when the unemploy- ment rate was between 3.6 and 4.3 percent, price increases ranged between 3.1 percent and 4.1 percent. In contrast, between 1958 and 1964 the unemployment rate consistently exceeded 5 percent, and price increases were uniformly less than 2 percent. I submit most earnestly that this fragmentary a.nd highly selective use of figures will not stand comparison with my more complete analysis of relative trends in prices and economic performance, as set forth above. PAGENO="0068" 1028 Further, the CEA report says this (p. 97) But h'istoricafly, unemployment rates of 4 percent or below have been associated with a price performance that most Americans considered unsatisfactory price increases at the rate recently experienced clearly impair our international trade performance, cause a haphazard redistribution of income and wealth, and may jeopardize sustained prosperity. The first line of defense against inflation must be fiscal and monetary policies that avoid excessive pressure on a productive capacity. My criticisms of the foregoing statement are explicit in all that I have said. They combme an incorrect, analysis of the causes of recent and current price inflat.lon with a ver curious set of values as to the relative importance of the balance-of-payments problem and the prob- lem of unemployment., inadequate economic growth, and social clis- equilibrium at home. It is incredible to propose, or even accept, the proposition that the unemployed should be asked to protect the affluent from paying the allegedly higher prices which more jobs might cause. As for impact upon income distribution, the CEA has not examined that at all. In line with its analysis, the CEA urges, as a measure against infla.- tion, an "increase in money wage rates a. little better than 5 percent" for 1968 (p. 59), which would mean an increase of about 2 percent in real terms. I suggest that no economist could meet the challenge of developing a responsible economic equilibrium model based upon an increase in the hourly-earned purchasing power of wage earners of only 2 percent a. year, less taxes paid. In consequence of these deficiencies in its entire analysis of the infla- tionary problem, the programs to deal with inflation which the CEA sets forth are in the main a medley of relatively minor and traditional approaches, for example, increased mobility, training, promotion of competition, antitrust activity, etc. (pp. 99-122). \TJ. PROBLEMS OF MONETARY POLICY General consideration.s My view-s with respect to the prevalent monetary policy during the past 15 years or longer have beeii diametrically opposed to those of the CEA and of most of the "New Economists." Generally speaking, their view is that. tight money and rising interest rates help to contain inflation. My view- is that tight money and rising iiiterest rates exacerbate inflation, and are in themselves highly inflationary. My view is that tight money and rising interest rates pow-erfully inhibit optimum real economic growth and contribute to economic instability (for the reasons stated above, these. consequences are in themselves inflationary). Their view on this subject is iiot made ex- plicit and is certainly not advanced in the in the 1968 CEA Report, becau~e it seems to b~ worried about the falitasy of too high a rate of real economic growth and too much employment rather than about the ominous reality of too low- a rate of real economic growth and too much unemployment. My view is that tight money and rising interest rates have been monstrously inequitable and adverse to social equilibrium andl plain justice; they appear elttllhely impervious to this aspect of the probl~m. My view~ is that we need a much more selective monetary policy, PAGENO="0069" 1029 because an aggregate or blunderbuss monetary policy represses what ought to be accelerated, and has little or no impact upon what ought to be restrained, and feeds the fat while starving the lean. The 1969 CEA Report appears impervious to this problem, although it does make some very slight obeisance to the damage earlier done to housing by the prevalent monetary policy. My view is that one of our largest problems is to integrate the policies of the Federal Reserve System with the policies of the Federal Gov- ernment, and indeed to make monetary policy the servant of the ob]ec- tives of the Employment Act of 1946, and of the governmental policies designed to achieve these objectives. The CEA has never come to grips with this problem, and its friendly commentaries about the prevalent monetary policy in its 1969 report ignores this problem. Tight money and rising interest rates work against economic equilibrium Let me now become more specific about the very foundation of the prevalent monetary policy during the past 15 years or longer-the entirely erroneous proposition that tight money and rising interest rates serve admirably to help contain inflation. This erroneous idea is essentially allied with the erroneous idea (discussed above) that policies inimical to optimum economic growth and conducive to exces- sive unemployment help to contain inflation. Consequently, the analy- sis which I present immediately below is essentially similar in method to that which I used in discussing the inflationary problem generally. During the period 1955-68 viewed as a whole, the average annual growth in the nonfederally held money supply was only 2.5 percent, and the average annual real growth rate in total national production was at the deficient rate of 3.8 percent. I believe that there was a strong relationship between the deficient growth in the money supply and the inadequate economic performance, but I will not elaborate upon this particular point, especially because I believe that too much weight has been attached to monetary policy in the aggregate in this particular connection. Theoretically, and perhaps practically also, a more or less rapid growth in the money supply might affect the level of prices con- siderably, but should not affect the real trends in production and em- ployment if economic equilibrium were maintained in the fundamental allocation of resource and in income distribution, which can be achieved either at a more or less rapid growth in the nonfederally held money supply. Nonetheless, what I have just said does not apply to extreme cases. It seems perfectly clear that the extremely low growth rate in the money supply during 1955-57, aiid again during 1958-60, was inti- mately associated with the recession of 1957-58 and the minirecession in late 1960 and early 1961. It also seems abundantly clear that the extraordinarily low growth rate in the money supply during 1955-66 was an important factor in initiating the extremely low real economic growth rate during 1956-67 and the unsatisfactory average annual rate during 1966-68. The relatively more rapid rate of growth in the money supply during 1957-58 and during 1960-61, and again during 1962~-65, appears to have been conducive to more favorable trends in the real rate of economic growth. The rapid expansion of the money supply during 1966-68 seems clearly to have helped prevent the very serious deterioration rate of economic growth during 1966-67 from being con- PAGENO="0070" 1030 tinued over a longer period of time. On net balance, in a long term perspective, it seems quite clear that the monetary policy has been much too tight, a.nd that a relatively liberal monetary policy is highly conducive to satisfactory economic growth. More seriously, the monetary policy has worked powerfully against economic equilibrium, because it has helped to reallocate resources in directions bearing no relationship to econoniic equilibrium, and in many cases quite destructive of it. The tightening of the money supply has had practically no effect upon the relatively excessive investment booms in plant and equipment, because those indulging in these booms are not greatly affected either by general shortages of credit or. by rising interest costs; they finance mainly out of retained ea.rmngs and out of the price structure. On the other hand, a better rate of economic credit nor by rising interest costs; they finance mainly out of retained earnings and out of the price structure. On the other hand, a better rate of economic expansion in other important sectors, or, more gen- erally, a relatively larger ultimate demand composed of both private consumption and public demand, would have been much more con- ducive to economic equilibrium at steady and optimum growth, and these developments have been very harshly impeded by both tight money and rising interest rates. Tight money and rising interest rates are in themselves inflationary Most important of all, in the context of the argument that tight money and rising interest rates restrain inflation, let us look at the empirical evidence. The extraordinarily contraction in the growth rate of the money supply during 1955-57, while it impacted severely upon the real rate of economic growth, was accompanied by a 3.5 per- cent average annual rise in consumer prices from 1956 to 1957. The greatly expanded growth rate in the money supply during 1957-58 was accompanied by a reduction in the ra.te of consumer price infla- tion to 2.8 percent. During 1958-61, there was throughout an inverse or negative correlation between the trends in the money supply and the rate of consumer price inflation. During 1962-65, a sustained and relatively rapid expansion of the money supply was accompanied by remarkable price stability. During 1955-66, a very sharp contraction in the rate of growth of the money supply was accompanied by a very rapid acceleration of the rate of price inflation. During 1966-67, the money supply expanded about three times as fast as during 1966-67, but the rate of consumer price inflation was slightly lower. During 1967-68, the rate of expansion of the money supply was the same as during 1966-67, but the rate of consumer price inflation was tremen- dously higher.19 Viewing these relative trends in an adequate time perspective, it ap- pears to be clear that excessive restraints upon the growth of the money supply worked toward more price inflation in the long-run for prac- tically the same reasons that excessive restraints upon real economic growth and employment expansion worked in the long run toward more net price inflation. Beyond all this, the almost unbelievably erratic changes in the rate of growth of the money supply over the years represents an attempt at "fine tuning" which is utterly impractical, and really indicative of ~ See chart 18, followIng text. PAGENO="0071" 1031 a wayward and thoughtless long-range monetary policy, and general economic policy as well. Tight money and rising interest rates are appalbing~y unequitable In this connection, I set forth the following: (1) From 1952 to 1967, the interest rates on new Treasury borrow- ings rose 144.7 percent for 3-mont.h bills, 167.4 percent for 9- to 12- month issues, 138 percent for 3- to 5-year issues, and 81 percent for long-term bonds. The computed average interest rate on the Federal public debt rose from 2.33 percent in 1952 to 4.15 percent in 1967, an increase of 78.3 percent. For the 15-year period as a whole, the rising interest costs to the Federal Government alone aggregated $35.1 bil- lion, and stood at about $5 billion in 1967 alone. The annual cost to the Treasury now in 1969 is close to $8 billion. These rising costs to our Federal Government have in part been paid for by taxes imposed upon the people, but in the main these rising interest costs have added to the Federal deficit. Those who claim that Federal deficits are infla~ tionary per se will thus be hard put to explain how rising interest rates can contribute to the war against inflation. (2) During the same 15-year period 1952-67, the rising interest costs have imposed an additional burden of $5.2 billion upon State and local governments. This additional cost burden stood at $1 billion in 1967 alone, and is very much higher than that now in 1969. (3) During the same 15-year period, the computed average interest rate on the total interest-bearing private debt rose from 4.97 to 6.24 percent, a rise of 25.6 percent. Thus, the aggregate burden imposed upon private borrowers during the period as a whole was $66.4 bil- lion, and stood at `about $11 billion in 1967 alone. This increased burden is at an annual rate of between $12 and $13 billion now in 1969. (4) Looking at all types of borrowings, both private and public, the computed average interest rate rose from 3.5 percent in 1952 to 5.4 percent in 1967, a rise of 54.3 percent. This imposed in the aggregate an `additional interest burden o'f $106.6 billion, and $17.7 billion in 1967 alone. The additional interest burden in 1967 alone was about two and a half times as high as the average annual additional interest burden during the 15-year period. Now, in 1969, the `annual rate of the excess interest burden is considerably above $20 billion.20 (5) If the trend toward rising interest rates continues, I estimate conservatively-and my estimates made many years ago h'ave turned out to be conservative to date-that the additional or excessive interest burden might well rise to $25 billion in 1977 alone, averaging annually well `above $20 billion during 1969-77 inclusive, and aggregating well above $180 billion over the 9-year period. (6) The additional interest burden aggregating $106.6 billion dur- ing the 15-year period I have reviewed equates with an excess interest cost per capita for the entire U.S. population of $88.90 in 1967 alone, and $591.89 for the period as a whole. Thus, the additional or excessive interest costs for a family of four came to $355.60 in 1967 ajone, and $2,367 for the period as a whole. (7) Upon whom, in the main, has this unconscionable interest bur- den fallen? It ha's fallen upon the `small businessman and the farmer; the person who buys a car on time to get to work; the family who buys 20 See chart 19, following text. PAGENO="0072" 1032 on time a refrigerator or television set or other consumer durables; the family who borrows money to pay the hospital bills when there is a long illness; the family who borrows money to put a child through college; the States and localities borrowing money to have enough policemen and firemen and teachers, and trying to pay them adequately compared with other occupations. The rising interest rates enter into the cost of living, and yet the workingman is told that cost-of-hvmg adjustments in his wages are "inflationary." The average family with an income of $8,000 before taxes, buying or renting a $16,000 home, will pay out over the life of the mortagage about $8,000 more in interest rates alone than if interest rates had stayed where they were in 1952. (8) We are committed to making an effective war against poverty. The additional interest burden today, at an annual rate, is about 65 percent higher than the amount by which t.he incomes of all the poor people in the United States would need to be raised to lift them above the poverty-income level as defined by the Government. In the entire history of American economic policy, I submit that there has been nothing more wrongful, more injurious to the public interest, and more in contrast with our most cherished principles of equity and fairplay, than the long and tremendous rise in interest rates which has already occurred. The efforts now, on so many fronts, to push interest rates still higher needs to be stopped in its tracks. GEA com~ments on monetary policy The CEA appears to be very complacent, and even cheerful, about the prevalent monetary policy. It refers to a "dramatic demonstra- tion of the effectiveness of monetary policy," and adds that "the record of the past 8 years demonstrates that flexible, discretionary monetary policy can make an effective contribution to economic stabilization" (p.85). Most of the CEA discussion of monetary policy is extremely the- oretical and of the textbook variety, with little or practically no at- tempt to develop a quantitative empirical analysis of just what mone- tary policy has done during the past 8 years, and what we can learn from the varied experience. There is no mention of the iniquitous effects of rapidly rising interest rates. There is no adequate integration of monetary policy with treatment of all other basic national economic policies such treatment actually omitted, as I have already pointed out). What the CEA has to say about housing is most extraordinary (p. 86): Although the demand for housing-and for mortgage credit- does not appear to be especially responsive to mortgage interest rates, the supply of mortgage funds is quite sensitive to several interest rate relationships. This comment is hardly short. of ignorance. Has the CEA forgotten the vast and salutary changes in homeownership and financing brought about by the tremendous reduction in interest rates on lions- ing, in response to the great depression? Why does the CEA ignore the entire market current situation with respect to housing, demon- strating so clearly that. a mass market for decent housing for low- and lower-middle income people requires above all low financing charges? How can the CEA reconcile its commentary with the very nature of PAGENO="0073" 1033 the long-range housing program proposed by the President and en- acted by the Congress not so long ago, the very heart of which is rec- ognition that a full-scale housing program, adequately directed toward the slums and poverty, requires a very wide range of charges to the user? Whether the charges to the user are reduced by lower interest rates, or by subsidies covering the cost of higher int.erest rates, has no bearing upon the erroneous nature of the CEA commentary. Indeed, this CEA commentary about housing reinforces, possibly more than anything else in the CEA report, my conviction that the CEA has not assumed the responsibility to develop that expert and comprehensive treatment of all basic national economic and social policies which alone can fulfill its responsibilities under the Employ- ment Act of 194G. VII. THE INTERNATIONAL ECONOMY The treatment of the international economy in the 1969 CEA report is expert and informative, but excessively conventional, complacent, and nonenterprising in view of the unsettled state of international economic arrangements and the recurrent crises during recent years. I would have been more impressed if the CEA had dealt positively and firmly with these issues, which I deem to be of central and pressing importance: (1) Some nations must run an unfavorable balance of payments, as that term is conventionally defined, and should not the United States be one of them? Our preeminence in economic and financial terms, and many other factors, have led me to the conclusion that, for a number of years ahead, we should be huge net investors in overseas areas, especially in underdeveloped areas If we are to pursue such a policy, we must run a large unfavorable balance of payments for some time to come, measured short term. (2) Does the customary method of recording international accounts correctly reflect our true international position, or is it highly mis- leading? As in the case of the Federal Budget, especially until the most recent year or so, the commingling of all types of outflows and receipts in our international accounts presents an entirely unrealistic and ex- cessively alarming picture. For example, defense outlays overseas do not have the same economic nor financial significance as loans or in- vestments overseas. There is also failure to distinguish realistically between short-range and long-range positions. (3) Viewing our unfavorable balance of payments in ratio to our GNP during reëent years and currently, have we not made a mountain out of a molehill, to the extent that we have allowed efforts to solve this problem-substantially unsuccessfully, at that-to militate against adoption of infinitely more important programs and policies directed toward the optimum advancement of economic and social equilibrium, optimum economic growth, and minimum unemployment at home? (4) Can we really determine optimum international economic poli- cies without setting them in the broader perspective of total economic analysis and programs, which I have stressed throughout this dis- cussion, and which the CEA has not yet brought forth? (5) Do we not need to move more vigorously and rapidly toward the gradual abandonment of the gold anachronism? PAGENO="0074" 1034 (6) Instead of temporizing and extemporizing, should we not move more positively and broadly to improve the international mechanisms of exchange, so as to make them fully contemporary, rather than sub- stantially obsolete or at least inadequate to the times? VIII. THE EcoNo~nc REPORT OF THE Pm~smExr As I said at the outset, it would be both burdensome and cumber- some for me to attempt a detailed examination of the Economic Report of the President, in that the foregoing analysis of the council's annual report makes clear my views. Succinctly, the President's report recommends a tight budget policy; extension of the 10 percent tax surcharge for another year; Presi- dential discretion in the matter of tax policy; voluntary cooperation and increased productivity, toward price stability; and promotion of world trade by reducing trade barriers. The President's report also concludes that "our monetary institutions are working well" (p. 13). The mere listing of these proposals, combined with what I have said about the CEA report, indicates fully my attitude toward most 0± them. They appear to me to represent, in the main, excessive satisfac- tion with policies already adopted and now in being; a negative atti- tude toward the imperative need for profound correction of some of the most important of these policies; and a generally quiescent attitude, when the country's needs are crying out for a great program of action. There are only two items on the list which would seem to call for further comment. I am opposed to the vesting of discretionary tax authority in the President. This proposal places relatively too much emphasis upon fine-tuning and quick and frequent changes in tax policy, when we need a fairly long-range and stable fiscal and economic policy, geared to a long-range and continuous pro-prosperity program, rather than anti or counteracting measures of a ma.ginot line nature. Moreover, the fact that the administration then in office took from early 1961 to early 1963 to recommend a vigorous fiscal policy, despite the promises made during the 1960 campaign and the urgency of the need throughout, plus the fact that it took the Congress only 1 year to enact the recom- mended progra.m (with some modifications), indicate to me the im- propriety of blaming delay excessively upon the legislative branch. Further still, and perhaps most fundamental of all, I do not believe that something as close to the lives and livelihoods of the people should be removed from direct consideration and approval by the people's representatives in the Congress. I think we would lose far more than we would gain by any such change, and I am heartened by the fact that the Congress to date has felt the same way. I am not against voluntary methods of improving price-wage-profit and other adjustments in the private economy, and I think them to be a preferable alternative to direct controls under current and foresee- able circumstances. But meaningful progress in this direction will require institutional changes toward improved and more continuous consultation among industry, labor, and Government. The first require- ment for this will be recognition by CEA of its responsibility to pro- vide a broader perspective for such consultation, in the form of the kind of long-range, comprehensive, and integrated economic and social analysis which thus far has been so sorely lacking. PAGENO="0075" 1035 The President's report also recommends some improvement in dis- ability insurance, an average 13-percent increase in social security benefits, and improved unemployment insurance, with special federally financed benefits for long-time unemployment. These proposals are all in the right direction, although they do not go far enough. Short-time unemployment is bad enough, and I believe that the federally financed benefits should be applied to it also. Maintenance of income among the short-term unemployed would also help to reduce the translation of short-term unemployment into long-term unemployment. IX. M~r OWN RECOMMENDATIONS My own recommendations are so explicit in what I have already said, that unnecessary duplication would result if I set them forth again compr~li.ensively. However, some of the highlights are these: (1) The CEA should develop and include in each annual report a long-range and carefully quantified program and policy for economic and social equilibrium at sustained optimum resource use. This should set quantified goals for employment, GNP, and its maj or components, with explicit regard for the problems of both economic and social equilibrium. I have at times called this an "economic performance budget." Without this, all short-range policies tend to be improperly oriented, and are frequently at cross-purposes. Economic and social policies and programs are so inseparable that I do not favor the pro- posal-although it has considerable appeal-that a separate Council of Social Advisers be established; (2) Maximum employment, with unemployment as conventionally defined held down to not more than 21/2 percent of a broadly defined civilian labor force, should be an unalterable must. Placing upon the unemployed the burden of protecting the employed and the affluent against inflation is utterly indefensible. The concept of the civilian la- bor force should be expanded to include, not only those customarily in it, but to all those for whom gainful employment would be better for them, and for the Nation at large, than economic disutilization. As a last resort, if all else falls short, there should be federally guaranteed employment; (3) The long-range economic and social budget referred to above should include, in proper `balance, every policy and program of the Federal Government which is economic and financial in the sense that it utilizes and allocates substantial portions of our economic resources. It should include the Federal budget, which is but one aspect of basic economic policy; (4) Even though in the long run we should be able to accomplish our social imperatives with the ratio of Federal spending to GNP no higher in 1977 than it is now, nonetheless in the years more im- mediately ahead we should shift much more resources to the public sector, and lift Federal spending accordingly. We should reject with- out equivocation the proposition that spending and taxation are avail- able alternatives, even toward stability and growth, much less toward social equilibrium. The needed `evel of Federal spending should be determined first, and variations in tax rates should be utilized to com- bat inflation or deflation as the case may be. We urgently need a very much more progressive tax policy than we have, and this should PAGENO="0076" 1036 commence with lifting the exemptions plus elevating some of the rates, from somewhat above the middle-income levels upward, such eleva- tion retracing the pattern of the personal income tax reduction of 1964. Corporate taxes should be increased, possibly along the lines of the 1964 redu~tions, but preferably on a more progressive basis. Some Federal deficit should be run, until optimum resource use is restored; (5) The monetary policy has been and still is atrocious. We need a much more stable and a much more liberal monetary policy, a much more selective monetary policy, and insistence upon the proposition that the Federal Reserve System and all its works must be subordinated to the requirements of the Nation and its people, through subordina- tion to the general economic policies and programs of the Federal Government itself. This probably requires legislation. Monetary pol- icy should be nationalized, within the Economic Reports of the President; (6) We need to reexamine thoroughly the causes and consequences of inflation, thus transmuting the treatment of this important eco- nomic and social problems from unrealism to reality, and from slo- gan to substance. We should establish new institutional devices for concerted consultation on this subject among industry, labor, and Government. This consultation should be integrated with consulta- tion regarding the overall development of the CEA Annual Report and of the long-range economic and social budget which should be contained therein; (7) We need to accelerate greatly the war against poverty, to stream- line its efforts, to integrate it with general economic and financial pol- icy, so that the striking force of a unified national policy may be brought to bear upon the liquidation of poverty in America within decade; (8) We need, as part and parcel of the war against poverty, and for many other reasons, to achieve wtihin a decade decent homes, ade- quate educational opportunity, and good medical care for all our peo- ple. These, fully quantified and supported by implementary policies, should be essential elements in the long-range goals within the CEA Annual Reports; (9) We need to dispel the dangerous and diverse dichotomy or com- petition between our domestic requirements and our international re- quirements, and recognize that we have the resources to meet both adequately, if need be, by willingness to limit the nonessential; (10) We need to concentrate far more than we have upon reversing the persistent degradation of fa.rm life and incomes and the disparities in our rural areas, and start building the people who live in these areas, instead of driving them elsewhere, as we have done by the mil- lions during recent years. We need, in this connection, to budget and fulfill the duty to provide a balanced and nutritious diet for every American. These goals, also, should be essential elements in the CEA Annual Reports; (11) We need to guarantee, not only sustained full employment, but also at least minimum-decency incomes, through a unified nationwide program initiated and supported mainly or entirely by the Federal Government, for all those who cannot be brought within the employ- ment stream. This should not compete with a full-employment policy, PAGENO="0077" 1037 nor minimum-wage legislation, designed to prevent substandard wages for those employed; (12) We need not only to talk about housing and urban renewal (and not only to enact plenary authorizing legislation without the funds to carry it fully forward), but also to recognize that an adequate housing program for the appropriate income groups is absolutely essential to the problems of liquidating poverty, achieving and sustaining opti- mum economic growth and full employment, advancing social justice, and restoring and maintaining civil order; (13) We need to stop frightening ourselves by talking about what America "cannot afford," and start encouraging ourselves by just rec- ognition of what our resources will permit, and what our problems require that we do; (14) It goes without saying that what I have set forth above, with respect to the content and purposes of the OEA Annual Reports, must carry over naturally-in properly abbreviated form-to the content and purposes of the Economic Reports of the President. PAGENO="0078" 1038 Charf 1 U.S. ECONOMiC GROWTH RATES,I922-i968~ AND NEEDED RATES, 1968-1977, FOR OPTIMUM RESOURCE USE Average Annual Growth Rates in GNP,Constant Dollars Post World Wan Post World Warn Period of Stagnation Renewed Growth Period Growth Period Limited War Period Growth Period Growth Period (~. _ _ 5.1% 5.1% I°Iiiot 1922-1929 1947-1950 1950-1953 1953-1960 1960-1966 NEEDED IN VIEW OF NEW TECHNOLOGY AND LABOR FORCE GROWTH RoasonablyHigh Renewed Low A!IowingforRostoraUso AfthrRootoration Mixed Period Growth Period of Reasonably of Reasonably Full Resource Use Full Resource Use 6.0% 1972-1977 1960-1968 1966-1968 1966-1967 estimates is preliminary. Basic Data: Dept.of Commerce,Otf ice of Business Economics 1968-1972 PAGENO="0079" 1039 LONGTERM TRENDS IN PRODUCTIVITY U.S. PRIVATE ECONOMY, 1910- I968~ Average Annual Rate of Growth in Output per Man-hour for the Entire Private Economy Chart 2 fl~l~ RECORD 1910-1968: /ND/CAT/N6A CENERALLYACCELERAT/NOPRODUCT/V/TY CR01 VT/I-RATE TREND 3.7% 350/, 3.2% 777 2.3% 2.4% 2.4% 1jUl11 1910- 920- 1930- 1940- 1955- 1960- 960- 920 930 940 1955 1960 966 968 1-HE POST WORLD WAR fl RECORD INDICATING THATEXCESSIVEECONOM/CSLACK/NTERFERES IVITH THE TRUEPRODI/CT/V/TYCROJVTH-RATE TREND 4.0% 3.7% 7 3.3% 2.6% 24% ,*** t.6% UllillUl 1947-1953 1953-1960 1960-1966 1966-1968 1966-1967 1967-1968 Pnniodof Period of Recessions, Peniodof Periodof Peniodof Period of High Economic VeryLow Economic Reasonably High Veny Low Economic Extnemely Low Restoned Gnowth and Gnowth,ond lncneasing Economic Growth Economic Economic Reasonably Full Economic Slack Gnowth,but St ill Gnowth Growth Resource Use Substantial Economic Slack PAGENO="0080" 1040 "ECONOMIC GROWTH DIVIDEND", U.S. ECONOMY,I968~'77 Total National Production (GNP) in Billions of EY.1969 Dollars V//~ø~~ Optimum economic growth rate V/////////////A Low economic growth rate Chart 3 $303 GNP Economic Average Annual Aggregate 977 Growth Dividend' 5Economic Economic 1977 Growth Dividend" Growth Dividend" 1968-1977 1968-1977 $3,031 $1,396 $ 567 Projections by Leon H.Keyserling. PAGENO="0081" 1041 GOALS FOR THE U.S. ECONOMY~1972 8~ 1977 PROJECTED FROM LEVELS IN 1967 Chart 4 972 977 ~_I~ Down Down 2.3 FULL-TIME REPORTED UNEMPLOYMENT 1972 1977 rn-~-=~i-~ ~ Down Down 0.6 0.7 GOVT OUTLAYS FOR GOODS AND SERVICES - (CalendarYears) ~ FEDERAL Up $27.7 972 1977 STATE AND LOCAL Up -1'The single projections relate to goals of such high priority that they should not be reduced even if only the lower goals for GNP are attained. In that eventlower priority objectives should be modified accordingly. Single Projection .Li EMPLOYMENT I In Millions of Man-Yearsl I (Dollars Items in Billions of FY. 1969 Dollars) ~ Optimum Economic ~ Economic Growth Projection ~ Growth Projection TRUE UNEMPLOYMENT lb Millions of Man -Yearsl TOTAL PRODUCTION "p CONSUMER SPENDING I PRIVATE BUSINESS INVESTMENT ~ (bnc.Net Foreignl Up $102.4 Up $53.0 ~ ~30.7~ ~ Up $366.8 1972 1977 1972 1977 ~IDENTIAL STRUCTURES Up Up $44.0 $28.0 gj~j ___ Up $32.1 ~ JI~1j 972 972 1977 24-833 0 - 69 - pt. 4 - 6 PAGENO="0082" 1042 Chart 5 THE GOALS FOR 1972 AND 1977 MAINTAIN BALANCE OF PUBLIC AND PRIVATE RESPONSIBILITIES COMPONENTS OF GN~ Billions of FY l969Dollors Total GNP -~ $1,099.3 $984.8 ~ $8292 ~ 55.8 17~.I I l25.I~ I I'~ IL_I ~ ~34~1~2 - 967 Low Optimum Actual 972 Goal $1,396.0" $11697 I 8836 _Prwafe Consumer 700.4. ::.~...::...: 184.4 227.5 Low Optimum 1977 Goal Private Business - Investment (including net foreign) Public Outlays - at all levels for goods and services~~ ?ERcEt~T~ RELATIONSHIPS.. outlays ore of such high priority that they ore projected identically for the lower and higher GNP goals, with modifications of other goals accordingly. Projections by Leon H.Keyserling. PAGENO="0083" 1043 Chart 6 COMPARATIVE GROWTH IN VARIOUS ASPECTS OF U.S. ECONOMY 1961 1968 (Constant Dollars) PRIVATE CONSUMER SPENDING TOTAL NATIONAL PRODUCTION (G.NE) Up 42.2% 5D% 1961-1968 1967-1968 Up 39.6% IUP 4.7% 1961-1968 1967-1968 GOVT. OUTLAYS FOR GOODS AND SERVICES Up 50.1% Up ~ 6.1% ~E~1 1961-1968 1967-1968 1961-1968 PRIVATE BUSINESS INVESTMENT (INC. NET FOREIGN) Up ~ I ~ 1961-1968 1967-1968 PRIVATE INVESTMENT IN PLANT AND EQUIPMENT Up 65.7% ~ Up 0% 1961-1968 1967-1968 CORPORATE PROFITS (a VA) Up 55.4% ~ 71% ~ 1967-1968 - PERSONAL. INTEREST Up INCOME 84.9% . Up 1967-1968 PERSONAL DIVIDEND Up INCOME 58.0% - ~ Up I I 1967-1968 TRANSFER U PAYMENTS 70.2% I ~ ~iiJ 1961-1968 1967-1968 WAGES AND SALARIES 445% ~ Up 5.6% FI~L.~[ IS ~7- 968 LABOR INCOME 5;~1% ~:.:.... Up .. :*.~~* 6.5% i i FARM PROPRIETORS' NET INCOME Up 3.6% Up ~ 4 1961-1968 1967 -1968 1961-1968 1967-1968 I. 1961-1968 Source: Dept of Commerce, Office of Business Economics and CEP. PAGENO="0084" 1044 Thart7 PRICE, PROFIT, INVESTMENT, AND WAGE TRENDS DURING I96O-I968~ Percentage Change,I960-I968 ~ Prices2'~ Profits offer Taxes~' ~ Investment in Plant and Equipments' fl Wage Rates~~ II~% °~ ~ 849% 879% `~ UP UP 33.1% 29.7% ~ 30.5% ~~llA~II1 t1~L DOWN 2.0% TOTAL PETROLEUM CHEMICALS MANUFACTURING and COAL PRODUCTS and ALLIED PRODUCTS UP 41.3% UP 92.6% UP 39.0% UP 28.5% 26.4% ~L=Ifl iJit[IL ELECTRICAL IRON and STEEL MOTOR VEHICLES MACHINERY and EQUIPMENT I/All 968 data preliminary. .~ata:U.S.Dept.of Labor,wtsolesaie commodity price indexes. .~t)cta:Federal Trade Commission-SecurItIes and Exchange commission. ~ata:U.S.Dept.of Commerce and Securities and Exchange Commission. ..~ota:U.S.Deptof Labor, Bureau of Labor Statistics; Average hourly earnings of production workers. PAGENO="0085" 1045 NUMBER IN U.S. LIVING IN POVERTYV DEPRIVATIONO COMFORT AND AFFLUENCEO I967~ AND GOALS FOR 1972 AND 1977 Annual Money Incomes, Before Taxes, in 967 Dollars C!sart E Under $2,000 Under $3,335~J POVERTY In Millions ~iI:i.. l966~'Actual ~ I972,Goal ~ 1977, Goal 4.9 2.5 J1~~i L~ ~ Under $1,000 Under $l,635~J POVERTY 2.4 2.5 2] fJ~~ 6.3 7.1 ~ 2.3 ~ ~ 4.5 2.8 3.4 1J~4 $1,635- $3,000- $5,000 B 2,999 4,999 over COMFORT & DEPRIVATION COMFORT AFFLUENCE 1-'Poverty-income ceilings vary by size sf family. The figure of $3,335 applies to a family of four, according to the estimates of the Social Security Administration,Dept.of HEW. The average size of families in poverty being four, 5.27 million families involve about 21.1 million people. i/The average size of families living in deprivation is about 3.0, coming to about 33 million people. .~/The poverty-income ceiling of $1,635 accords with the estimates of the Social Security Administration,Dept.of HEW .~-"l967 not available. All projections,however,in 1967 dollars. Basic Data: 1966,1967: Social SecurityAdministration,Dept.of HEW.; Bureau of the Census, Dept of Commerce. In Millions ~ 1967, Actual 1972, Goal ~ 1977, Goal 5.3 3.2 fl02 ni 49.1 In Millions 347 25.0 5.8 110 104 Ui~n~n $3,335- $6,000- $8,000a 5,999 7,999 over DEPRIVATION- COMFORTS DEPRIVATION COMFORT AFFLUENCE In Millions PAGENO="0086" 1046 Chart 9 SHARE OF FAMILIES IN TOTAL FAMILY INCOME BY QUINTILES, 1947, 1953, I96Oand 1966 Money Income) 1947 43 1953 23 I 24 ~iIII ~iI~ LOWEST SECOND MIDDLE FOURTH FIFTH LOWEST SECOND MIDDLE FOURTH FIFTH FIFTH FIFTH FIFTH 1960 FIFTH FIFTH 42 FIFTH FIFTH FIFTH 1966 FIFTH FIFTH ~ El fl fl 23 fl I 24 LOWEST SECOND MIDDLE FOURTH FIFTH LOWEST SECOND MIDDLE FOURTH FIFTH FIFTH FIFTH FIFTH FIFTH FIFTH FIFTH F1FTH FIFTH FIFTH FIFTH SHARE OF UNATTACHED INDIVIDUALS IN TOTAL INCOME OF UNATTACHED INDIV., BY QUINTILES, 1947, 1953, 1960, and 1966 Data: Bureau of the Census. PAGENO="0087" 1047 ALLOCATION OF TAX CUTS1 1962-1965: IN VESTMENT AND CONSUMPTION PURPOSES (Billions of Dollars) TOTAL TAX CUTS i-/Through Congressional & Executive Action .?JThrough Executive Action .~/ Estimated portion of personal tax cut,for those with incomes of $10,000 and over, which they would save for investment purposes. Based on estimates of excise tax cuts passed on to consumers through price cuts. Personal tax cuts for those with incomes under $10,000. .~/ Estimated portion of personal tax cuts for those with incomes of $10,000 and over, which they would spend for consumption. C~,rt itt ESTIMATED ALLOCATION TO INVESTMENT PURPOSES ESTIMATED ALLOCATION TO CONSUMPTION PURPOSES 10.6 8.6 Ii 0.5 LI PORTION OF EXCISE TAX CUTS l965~/ PORTION OF ~ 2.5 ~ PERSONAL TAX CUTS~l964~/ ________ TAX CONCESSIONS irmir~riumim TO INVESTORS, 11111 I965?' 1111 CORPORATE TAX I~k~L~J~1 CUT, 1964 TAX CONCESSIONS ~ 2.7 ~ TO INVESTORS, 19621/ Note: Estimates of excise tax reduction allocation by C.E.Fi.(omount might be passed onto consumers by price reductionslHowever, a large portion of thIs did not go to low income consumers. PAGENO="0088" 1048 1964 TAX ACT, PERSONAL TAX CUTS Percent Tax Cut And Percent Gain In After-Tax Income Married Couple With Two Children At Various Income Levels ~` 25.7% 1.6% Percent Percent Gain In Tax Cut After-Tax Income Chart 11 Percent Percent Gain In Tax Cut After-Tax lncxme 2.7% . Percent Percent Gain In Tax Cut After-Tax Income r~i ~ 3.8% Percent Percent Gain In Tax Cut After-Tax Income $50,000 Income $100,000 Income $200,000 Income~~ 144% II $3,000 Income 100.0% $5,000 Income $7,500 Income 0% Percent Percent Gain In Tax Cut After-Tax Income $10,000 Income $15,000 Income $25,000 Income Percent Percent Gain In Tax Cut After-Tax Income 6.2% Percent Percent Gain In Tax Cut After-Tax Income 8.3% ~- Percent Percent Gain In Tax Cut After-Tax Income Percent Percent ...ain In Tax Cut After-Tax Income -1~Adjusted groxs income levels. ~`Estimated Note: Standard deductions for $ 3,000 income level. Typical itemized deductions for other income levals. PAGENO="0089" 1049 TAXES PAiD AS % OF INCOME,U.S. I966~ ~ãb?~pjij,Lo~j l74~pfTot~iilncome)~ -1-'lncome relates toTotal Gross Adjusted Incomeof all persons in the income classes shown. Z.Jlncludes Federal income taxes;social security taoes;State and local income,sales and gasoline totes; and personal property and real estate taxes. Basic Data:lnternal Revenue Service and Brookings Institution Chart 12 33.6% 14.0% 11.7% ~6%flflflflJ - Under $3,000- $4,000- $5,000- $7,000- $10,000- $15,000- $20,000- $SOpOO $3p00 $3,999 $4,999 $6,999 $9,999 $14,999 $19,999 $49,999 and 388% 24.2% 9.3 12% 7.5% 17.6% - Under $3,000- $4p00- $s,000- $7,000- $10,000- $15,000- $20,000- $50,000 $3,000 $3,999 $4,999 $6,999 $9,999 $14,999 $19,999 $49,999 and over PAGENO="0090" 1050 STATE LOCAL 12.4% I 11.1% 9O~~ 9.I% I~uuIi.° 947- 953- 1961- 947- 947- 953- 1961- 1953 1961 1967 1967 953 1961 1967 RESOURCES OF STATE AND LOCAL GOVERNMENTS MORE STRAINED THAN THOSE OF FEDERAL GOVT. RELATIVE TRENDS, 1947-1967 INCREASES IN PUBLIC EXPENDITURES1' (FiscolYears,AverageAnn~alRale): FEDERAL I 9.1% 78% 8.O%l rbrlrorlI 1947- 1947- 1953- 1961-; 947- 1967 1953 1961 19671 1967 INCREASES IN PUBLICDEBT (As of Year End, Average Annual Rate) "Expenditures classified by source of finoncing,i.e., intergovernmental transactions treated in terms of originating level of government,rather than recipient government. Basic Data: Department of Commerce PAGENO="0091" 1051 Chart 14 GOALS FOR A FEDERAL BUDGET, 1972 AND 1977, GEARED TO ECONOMIC GROWTH ~ PRIORITY NEEDS 1969,fiscal year; goals for 972 and 1977, calendar years All figures in fiscal 1969 dollars~~' NATIONAL DEFENSE, SPACE TECHNOLOGY, & ALL INTERNATIONAL Total Per %of Expend. Capita GNP Year (Bit $) ($) (%) 969?! 89.515 441.18 10.11 972 90.000 424.73 8.19 1977 94.000 410.84 6.73 ALL DOMESTIC PROGRAMS Total Per % of Expend. Capita GNP Year (Bll.$) ($1 (%) l969?J 96.547 475.84 10.91 1972 136.500 644.17 12.42 1977 186.000 812.93 13.32 PUBLIC ASSISTANCE; LABOR, MANPOWER, AND OTHER WELFARE SERVICES Total Per %ot Expend. Capita GNP Year (Bit $1 1$) (%) 1969?/6.280 30.95 0.69 1972 9.500 44.83 0.86 1977 15.100 66.00 1.08 ALL FEDERAL OUTLAYS Total Per % of Expend. Capita GNP Year (Bli $) l$( (%) I969~~ 186.062 917.01 21.02 1972 226.500 1,068.90 20.61 1977 280.000 1,223.77 20.06 ECONOMIC OPPORTUNITY HOUSING AND AGRICULTURE; AND PROGRAM COMMUN1TY NATURAL RESOURCES DEVELOPMENT ~ . a~ Total Per % of Total Per % of Total Per % of Expend. Capita Year (Bit $1 ($1 GNP 1%) Expend. Capita Year (Bit $1 ($( GNP 1%) Expend. Capita GNP Year (Bit $1 1$) (%) 1969?! 2.000 9.86 0.23 969?! 2.784 13.72 0.31 969?! 8.099 39.91 0.91 1972 3.800 17.93 0.35 1972 5.500 25.96 0.50 1972 12.000 56.63 I .09 1977 5.500 24.04 0.39 1977 9.000 39.34 0.64 1977 15.500 67.75 1.11 EDUCATION HEALTH SERVICES . AND RESEARCH Ii Total Per ¼ of Total Per ¼ of Expend. Year (Bit $1 Capita 1$) GNP (%( Expend. Capita Year (Bit. $) ($) GNP (%( 969?! 4.699 23.16 0.53 1969?! 10.655 52.51 1.21 1972 16.200 76.45 1.47 972 14.000 66.07 I .27 1977 32.900 143.79 2.36 977 20.000 87.41 I .43 Dollars of purchasing power apparentlyassumed in Presidents fiscal 1969 Budget. _g, Administration's Proposed Budget as of Jan.29, l96B. Beginning with fiscal 1969,the Budget includes the immense trust funds, net lending,ond other relatively minor new items. Note: Goals include Federal contributions atone billion in 1970, and more than two billion in l977,to the OASDHI to help increase benefit payments to the aged. Projections by Leon H.Keysenling. PAGENO="0092" 1052 SELECTED PRICE TRENDS, 1918-1968 U.S. AND SELECTED OTHER COUNTRIES AVERAGE ANNUAL RATES OF 0-lANGE ~Chart 1 5 -IUN lIED STATES]-~ ~~-~HOLESALE PRICES = INDUSTRIAL PRICES oP UP UP UP UP 9: id ~ ~ ~1~'~t1rI~I!L __________________________ 1923- 196G UP ~ UP 14% L I r~~~/// U UP UP ~ UP 35h~ UP UP ~ ~ ~ I ~ 1912- 1963 I95~'. 196g 1963- 196T UP * ~ Up .4.2% UP ~Lii~r~~ UP 3.1% UP I~]Eh~ 1966 - 1963' i9~7 -1663 1956 - .1958 ISELE CTED OTHER COUNTR E....JCONSLPAER PRIC ES E-~~~N-4OLESALE PRIC6 UNITED KINGDOM UP FRANCE GERMANY UP ~~L1~ii~ 49% u~ UP ~ ~fli~4% 1957-1967 1962-1967 1962.1967 1957-1967 1962-1967 ITALY CANADA JAPAN 1957-1967 1962-1967 . UP UP 4.7% ~ . 2~% UP ~LZ~ 2~% 15% ~ H ~ L ~ 1957-1967 1962-1967 UP 5.4% 4.3% [1 UP ~LLL~J~ 1957-1967 1962-1967 -0.2% -0.2% .1/~~Lt PRICBS OF FUIISIIED GOODS (VHGLESALE PRICZS OF BASIC MATERIA1.S IPCB~AS1.D O.I~ A Y3A~ J~;~ 1957-'B7 A4D i.B% A YZAR DU~IN9 19B2.'SY), S ~` IB~7 o~TA AIIZ PRZLIUU4ARY ~5T~bAT~S DASZb li~ON FlItSI P~IP1E TO tL~VDl~ r~Q1THZ. ~ ~JREA1J 0? LAEOR STATISTICS; OFFICE OF ~JBI8E6Z ECO~1ICS; AISD T)13 U33ITEO BATI0~ISI oc~. LR *959 9*9~IZATIEQI FQ~ ~C~I~IC 609PC3ATI ~ *959 BEVELOP~~T ~....:..:.JCONS(JMER PRICES 1913 - 1968 1933- 196~ PAGENO="0093" 1053 :-:rtlE, RELATIVE TRENDS IN ECONOMIC GROWTH UNEMPLOYMENT~~ PRICES,I952-I968~' Consumer Prices Wholesale Prices Industrial Prices 31% __ ~]sI2sEiIl5L ~i20%fl~j.0~/~ -0.2% 1952-1955 1955-1958 1956-1958 1958-1960 1960-1968 1966-1968 Average Annual Rates of Change Total National Production in Constant Dollars, Average Annual Rates of Change Industrial Production,Average Annual Rates of Change ~ Unemployment as Percent of Civilian Labor Force,Annual Averages* 77% 60'/~ 54% 5.1/, . 4Q~/ riflG ~il ~J1 fi H nfln n~n' -10% 1952-1955 1955-1958 1956-1958 1958-1960 1960-1968 1966-1968 -1'Preliminary 968 data. ~These annual averages(as differentiated from the annual rates of change)are based on full-time officially reparted unemployment measured against the officially reported Civilian Labor Force. Source: Dept. of' Labor, Dept. of Commerce, 8 Federal Reserve System. PAGENO="0094" 1054 THE LAG IN WAGES ANDSALARIES BEHIND PRODUCTIVITY GAINS, I96O-I968~ (average annual increasesconstantdollars) GNP I Chart 17 48% 5.1% i-rni 1960-1968 1960-1966 PRODUCTIVITY, 8 WAGES & SALARIES TOTAL PRIVATE NONFARM ECONOMY 1960-1968 1960-1966 1966-1968 Output Wages Output Wages Output Wages and and and Salaries Salaries Salaries PER MAN-HOUR PER MAN-HOUR PER MAN-HOUR PRODUCTIVITY, 8 WAGES & SALARIES TOTAL MANUFACTURING 1960-1968 1960-1966 1966-1968 ~- PER MAN-HOUR PER MAN-HOUR PER MAN-HOUR 1968 data preliminary. Basic Data: Dept.of Commerce; Dept.of Labor PAGENO="0095" 8w C) 0 C) 30. -C. II~J~ ~ ~ -f m (J~ C) .D c 2 ~G~) w Q 0. a C, z 0 ~C) rn~ rn> r~-1 Tm rn-1 Drn z 0(1) z-. rn -