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JA N U A R Y
19 6 3
E C O N O M IC
TH E
R EPO RT
O F
P R E S ID E N T
HEARINGS
B EF O R E T H E
J O IN T
E C O N O M IC
CONGRESS OE T H E
C O M M IT T E E
U N IT E D
STATES
E IG H T Y -E IG H T H C O N G R E SS
FIRST SESSION
PURSUANT TO
Sec. 5(a) of Public Law 304
(79th CONGRESS)
JANUARY 28, 29, 30, 31, FEBRUARY 1, 4, 5, AND 6, 1063
Printed for the use of the Joint Economic Committee
PART 1
JA N U A R Y
19 6 3
E C O N O M IC
TH E
REPO RT
O F
P R E S ID E N T
H E A R IN G S
BEFORE THE
J O IN T
CONGRESS
E C O N O M IC
OP TH E
C O M M IT T E E
U N IT E D
STATES
E IG H T Y -E IG H T H C O N G R E SS
FIRST SESSION
PURSUANT TO
Sec. 5(a) of Public Law 304
(79th CONGRESS)
JANUARY 28, 29, 30, 31, FEBRUARY 1, 4, 5, AND 6, 1963
Printed for the use of the Joint Economic Committee
PART 1
U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 1963
93762
For sale by the Superintendent of Documents, U.S. Government Printing Office
Washington 25, D .C . - Price $1.75
JOINT ECONOMIC COMMITTEE
(Created pursuant to sec. 5 (a ) of Public Law 304, 79th Cong.)
C h a ir m a n
V ic e C h a ir m a n
P A U L H . D O U G LAS, Illinois,
R IC H A R D B O L L IN G , Missouri,
SENATE
JO H N SP A R K M A N , Alabama
J. W . F U L B R IG H T , Arkansas
W IL L IA M P R O X M IR E , W isconsin
C L A IB O R N E P E L L , Rhode Island
JACOB K . J A V IT S , New York
J A C K M IL L E R , Iowa
L E N B . JO R D A N , Idaho
H O U SE O F R E P R E S E N T A T IV E S
W R IG H T P A T M A N , Texas
H A L E BOGGS, Louisiana
H E N R Y S. R E U SS, W isconsin
M A R T H A W . G R IF F IT H S , Michigan
T H O M A S B. C U R T IS, Missouri
C LAR EN CE E . K IL B U R N , New York
W IL L IA M B . W ID N A L L , New Jersey
/J a m e s W . K n o w l e s , E x e c u tiv e
J o h n R. S t a r k , C le r k
n
D ir e c to r
CONTENTS
PANEL DISCUSSIONS AND INDIVIDUAL WITNESSES IN ORDER OF
APPEARANCE
Page
Council of Economic Advisers______________________________________
1
Walter W. Heller, Chairman; accompanied by Gardner Ackley,
member___________________________________________________
1
67
Director, Bureau of the Budget____________________________________
Kermit Gordon, Director; accompanied by Elmer B. Staats, Deputy
Director, Charles L. Schultze, Assistant Director, and Samuel M.
67
Cohn, Deputy for Fiscal Analysis, Office of Budget Review______
Secretary of Agriculture-----------------------------------------------------------------128
Orville L. Freeman, Secretary__________________________________
128
173
Secretary of Labor--------------- --------------------------------------------------------W. Willard Wirtz, Secretary; accompanied by Seymour L. Wolfbein,
Director, Office of Manpower, Automation, and Training; and
Stanley Ruttenberg, Special Assistant for Economic Affairs______
173
Secretary of Commerce____________________________________________
236
Luther H. Hodges, Secretary; accompanied by Richard H. Holten,
Special Assistant for Economic Affairs, and Louis J. Paradiso,
Assistant Director, Office of Business Economics, U.S. Department
of Commerce_______________________________________________
236
Secretary of the Treasury---------------------------------------------------------------279
Douglas Dillon, Secretary--------------------------------------------------------279
Federal Reserve Board____________________________________________
337
William McChesney Martin, Jr., Chairman, Board of Governors,
Federal Reserve System; accompanied by Ralph A. Young, secre
tary, Federal Open Market Committee, and Director, Division of
International Finance; and Guy E. Noyes, Director, Division of
Research and Statistics, Federal Reserve______________________
337
George W. Mitchell, member, Board of Governors of the Federal
Reserve System____________________________________________
379
Eliot J. Swan, president, Federal Reserve Bank of San Francisco, San
Francisco, Calif____________________________________________
387
National Planning Association_____________________________________
437
Gerhard Colm, chief economist_________________________________
437
National Bureau of Economic Research_____________________________
487
Arthur F. Burns, Director_____________________________________
487
523
Fiscal policy—panel discussion__________________________________ __
William F. Hellmuth, dean, College of Arts and Sciences, and professor
of economics, Oberlin College________________________________
523
Neil H. Jacoby, dean, Graduate School of Business Administration,
University of California at Los Angeles________________________
537
John Lintner, Harvard Graduate School of Business Administration— 543
Monetary policy—Panel discussion_________________________________
589
Lester V. Chandler, professor of economics, Princeton University___
589
James S. Due&enberry, professor of economics, Harvard University. _ 592
Meltzer, Allan H., Carnegie Institute of Technology______________
595
nz
STA T E M E N T S A N D E X H IB IT S
Page
Burns, Arthur F., Director, National Bureau of Economic Research_____
487
Chandler, Lester V., professor of economics, Princeton University______
589
Colm, Gerhard, chief economist, National Planning Association__ ______
437
Comparison of Mr. Gordon’s versus NPA estimates of expenditure
decreases in 1964__________________________________________
460
Details of adjustments—Administrative budget expenditures (changes,
1963-64)____ _____________________________________________
447
Federal expenditures (administrative budget), by functions (except
defense, space, and debt service)______________________________
446
“ Government’s Role in a Free Economy,” article in Challenge maga
zine, November 1962________________________________________
447
439
Job needs for full employment, end of 1963______________________
“ New Look for the Employment Act,” article in Challenge magazine,
February 1963_____________________________________________
452
Note on the multiplier and acceleration principle_________________
476
Past and projected GNP alternative assumptions_______________ 446, 447
Dillon, Douglas, Secretary of the Treasury_______J___________________
279
Full year effect of the tax program (excluding capital gains) on indi
viduals distributed by adjusted gross income classes_______ ______
637
Information re Federal National Mortgage Association Charter Act__
Letter of Acting Secretary Robert V. Roosa, to James W. Knowles,
executive director of the committee forwarding written answers to
questions by Senator Douglas, Senator Javits, and Representative
Curtis--------------------------------------------------------------------------------324
U.S. overall balance of payments, deficits, and reductions in U.S.
gold stock, 1958-62--------------------------------------------------------------306
592
Duesenberry, James S., professor of economics, Harvard University_____
Freeman, Orville L., Secretary, U.S. Department of Agriculture________
128
Commodity Credit Corporation financing------------------------------------169
133
How and where farmers spent their additional income in 1962______
Letter and enclosure to chairman re U.S. import restrictions_______
137
Specific county illustrations------------------------------------------------------133
Gordon, Kermit, Director, Bureau of the Budget; accompanied by Elmer
B. Staats, Deputy Director, Charles L. Schultze, Assistant Director,
and Samuel M. Cohn, Deputy for Fiscal Analysis, Office of Budget
Review------------------------------------------------------------------------------------67
Additions to nondefense assets__________________________________
78
Budget totals________________________________________________
74
Central government surpluses and/or deficits for recent years for four
countries__________________________________________________
85
Changes in administrative budget expenditures for programs other
than defense, space, and interest---------------------------------------------72
Composition of Federal payments----------------------------------------------77
Economic effect of a tax increase or a cut in expenditures in the fiscal
year 1964---------------------------------------------------------------------------106
Executive branch civilian employment___________________________
82
Federal aid to State and local governments______________________
79
Federal nondefense expenditures and State and local expenditures___
78
Federal payments as a percent of gross national product___________
80
Fiscal year 1962, Government agencies reported recoveries (deobliga
tions) of prior years obligations in the 1964 budget schedules_____
87
Gross public and private debt---------------------------------------------------81
1963-64 changes in administrative budget expenditures (other than
defense, space, and interest)--------------------------------------------------79
Office of Economic Adjustment in the Department of Defense, infor
mation re------------ ---------------------------------------------------------------103
Payments to the public________________________________________
70
Principal Federal statistical programs included in the 1964 budget__
115
Public debt as a percent of gross national product________________
80
Heller, Walter W., chairman, Council of Economic Advisers; accompanied
by Gardner Ackley, member--------------------------------------------------------1
Average annual rate of growth (GNP in constant prices and total em
ployment), 1947-62--------------------------------------------------------------28
Explanation of charts on effects of tax reduction__________________
12
Chart 1.—Effect of tax reduction on consumption and GNP___
13
Chart 2.—Distribution of an additional dollar of GNP________
14
CONTENTS
Heller, Walter W.—Continued
Explanation of charts—Continued
Chart 3.—Effect of tax reduction on consumption and GNP ineluding stimulus to investment-----------------------------------------Recent tax reductions in other countries_________________________
30 cents of added net revenue for every dollar 6f gross national prod
uct. ______________________________________________________
Hellmuth, William F., dean, College of Arts & Sciences and professor of
economics, Oberlin College_______________________________________
Comparison of present situation with proposed changes on corporate
income after tax and on stockholders’ dividend income after tax
(at selected tax rates)-----------------------------------------------------------Hodges, Luther W., Secretary of Commerce; accompanied by Richard H.
Holton, Special Assistant for Economic Affairs, and Louis J. Paradiso,
Assistant Director, Office of Business Economics, U.S. Department of
Commerce_____________________________________________________
Analysis of corporate liquidity_________________________________
Comments on suggestion that tax cuts might be confined to growth
income____________________________________________________
Effect on petroleum fuel product prices of oil depletion allowance
recommendations___________________________________________
Effect on Soviet oil dumping of President’s tax recommendation on
oil depletion allowances_____________________________________
Export promotion expenditures and their relation to increased export
sales______________________________________________________
Multiplier principles and the accelerator principles and their effects __
Number of workers retrained under Area Redevelopment Act who
are on the payroll__________________________________________
Treatment of accelerated payments by foreign debtors in computing
balance of payments_____________________ ___________________
Jacoby, Neil H., dean, Graduate School of Business Administration,
University of California at Los Angeles____________________________
Lintner, John, Harvard Graduate School of Business Administration____
Government receipts and gross national product in the last two
recoveries_________________________________________________
Letter to chairman re interest rate differentials___________________
Personal incomes, taxes, and consumers expenditures on goods and
services, 1935-56___________________________________________
Selected data on long-term debts, incomes, and revenue base of the
American Telephone & Telegraph Co. (consolidated) and the U.S.
Government_______________________________________________
Martin, William McChesney, Jr., chairman, Board of Governors of the
Federal Reserve System; accompanied by Ralph A. Young, secretary,
Federal Market Committee, and Director, Division of Market Finance;
Guy E. Noyes, Director of Division of Research and Statistics, Federal
Reserve_______________________________________________________
Meltzer, Allan H., Carnegie Institute of Technology__________________
Actual and predicted net national product, 1910-40 and 1951-58___
Percentage changes in seasonally adjusted money supply, December
1956 to December 1962_____________________________________
Mitchell, George W., member, Board of Governors of the Federal Reserve
System________________________________________________________
Government restrictions on the outflow of private capital employed by
the principal capital exporting countries_______________________
Swan, Eliot J., president, Federal Reserve Bank of San Francisco, San
Francisco, Calif________________________________________________
Wirtz, W. Willard, Secretary of Labor; accompanied by Seymour L.
Wolfbein, Director, Office of Manpower, Automation, and Training and
Stanley Ruttenberg, Special Assistant for Economic Affairs, U.S. Depart
ment of Labor_________________________________________________
Change in the age of entry into the labor force, 1900-60___________
Changes in the age of retirement, 1900-60_______________________
Disabling work injuries related to employment, 1940-61___________
Distribution of the total labor force, by age, 1900-75______________
Employed civilians absent from work on an average day, owing to
illness_____________________________________________________
Extent of training in the United States________ _____ _____ _____
Increase in education, 1900-60_________________________________
V
Pw
25
42
17
523
535
236
271
269
267
266
262
246
268
267
537
543
558
586
559
559
337
595
597
599
379
401
387
173
202
202
223
203
224
211
203
VI
CONTENTS
ADDITIONAL INFORMATION
Wirtz, W . Willard, Secretary of Labor— Continued
Injury-frequency rates in manufacturing, 1938-61__________________
Manpower report__________________________________________________
Number of unemployed youth who were not in school in October 1962.
Percent distribution of total labor force, by sex and age, 1900-75____
“ Recent Growth of Paid Leisure for U.S. Workers,” article in the
Monthly Labor Review, March 1962_____________________________
The changing age and sex composition of the labor force, 1900-75____
Annual rates of change of reserves and money___________________________
Hypothetical changes in total tax liability_______________________________
Hypothetical example of economic stimulation in both induced consump
tion and investment from a tax cut___________________________________
Hypothetical increase in consumption demand from 1-year tax cut_______19,
Hypothetical increases in GNP from permanent tax reduction___________
Interest arbitrage for German commercial banks_________________________
Interest arbitrage, New York/London----------------------------------------------------Interest arbitrage, United States/Canada________________________________
Letter of George W. Ball, Under Secretary of State, to chairman________
Market ratios, average of daily figures for the third month of each quarter.
Market rates, short-term and long-term_________________________________
Maturity distribution of marketable U.S. governments outstanding, held
by Federal Reserve banks and other investors_________________________
Short-term bill rate differential with forward exchange cover_____________
Short-term interest rates________________________________________________
Short-term interest rates, selected countries______________________________
Total Federal Reserve credit and net free reserves by class of bank______
Yields on U.S. Government securities___________________________________
Pas*
222
189
186
204
224
203
371
324
23
21
22
378
376
377
327
372
371
371
375
374
375
370
373
JAN U AR Y
1963
E C O N O M IC
REPORT
OP
TH E
P R E S ID E N T
MONDAY, JANUARY 28, 1963
C ongress of t h e U nited S tates ,
J o in t E conom ic C o m m ittee ,
W ash in gton , D .C .
The committee met at 10 a.m., pursuant to call, in room A E -1 , the
Capitol, Senator Paul H . Douglas (chairman o f the Joint Econom ic
Committee) presiding.
Present: Senators Douglas, Sparkman, Proxmire, and P ell; R ep
resentatives Patman, Reuss, Griffiths, Curtis, and Kilburn.
A lso present: W illiam Summers Johnson, executive director; John
R. Stark, clerk; James W . Knowles, senior economist; W illiam H .
M oore? R o y E . M oor, and D onald A . Webster, economists.
Chairman D o u g la s. The committee w ill be in order.
The committee has decided that radio and television w ill be per
mitted, with the consent o f the witnesses.
Gentlemen, we are very glad, indeed, to welcome you. W e are all
very much interested in the report o f the President and we are very
happy to have both you, M r. Heller, and you, Mr. Ackley, with us
this morning.
I understand you, Mr. H eller, w ill present the testimony. W hen
w ill you be joined by Mr. Lewis ?
STATEMENT OP WALTER W . HELLER, CHAIRMAN, COUNCIL OF
ECONOMIC ADVISERS; ACCOMPANIED BY GARDNER ACKLEY,
MEMBER
Mr. H e lle r . Mr. Lewis w ill be coming in in about 2 to 3 months.
H e has to finish off his obligations at Indiana.
Chairman D o u g la s. W ill you proceed, then, Mr. H eller ?
Mr. H e lle r . Mr. Chairman, i f I may, I would like to begin by
presenting the prepared statement that you see before you.
I t is a pleasure to appear again before the Joint Econom ic Com
mittee and a privilege to open your hearings on the 1963 economic
report. In a sense, our testimony today is a sequel to our appearance
before your committee last August during your summer hearings on
the economy. A t that time, while acknowledging the impressive
advances that had been made in the first 18 months o f recovery, we
said the fo llo w in g :
We are examining the economic outlook today because the current expansion
has not been as vigorous as all of us hoped and most of us expected. The ex
pansion has slowed down in 1962 and we must be alert to the danger that the
current recovery, like its immediate predecessor, will not carry us to full
employment.
1
2
ECONOMIC REPORT OF THE PRESIDENT
W e examined the record o f the 1961-62 expansion against the back
ground o f “ our unsatisfactory economic experience o f the past 5 years”
and explored with you “ the basic case fo r easing the net drain on the
economy,” exerted by our individual and corporate income taxes.
W e concluded our statement by stressing—
the need far forethought on the tax adjustments which are needed to remove
barriers to the expansion and fuU utilization of the great potential of the
American economy.
Essentially, then, our testimony today takes up where we left off last
summer; namely, to consider how the economy can consolidate its gains
o f the past 2 years and not only continue, but accelerate, its advance—*
in other words, to examine the policies which could help the economy
achieve its fu ll potential fo r production and progress, and thereby not
only loosen but break the grip o f the economic lethargy which took
hold o f the economy 5y2 years ago.
A lthough the Econom ic Beport, in accord with the dictates o f the
Em ploym ent A ct o f 1946, deals at length with the economic record,
the outlook, and the President’s economic program fo r 1963, it may
be helpful to the committee to summarize the discussion in the perspec
tive o f the m ajor lines o f U .S. economic policy today.
In pursuit o f the multiple goal o f fu ll employment o f our resources,
faster grow th o f our economic potential, continued stability o f prices,
and progress toward balance-of-payments equilibrium— always within
the fram ework o f the free market and greater equality o f opportu
nity— economic policy today is channeled into three m ajor lines o f
action :
1. Measures to stimulate and generate more rapid growth o f pro
ductivity through investment in modern and expanded plant capacity,
in research and development to speed the advance o f technology, and
in education to upgrade skills and knowledge.
2. Measures to stimulate and generate higher levels o f demand,
stronger markets fo r both consumer goods and investment goods.
3. Measures to readapt manpower and other productive resources to
the demands o f a dynamic econom y; that is, measures to build a bridge
between grow ing productivity, which releases manpower, and grow ing
demand, which absorbs manpower.
These are, o f course, not independent but interlocking lines o f ac
tion ; measures that provide the incentive and initiative fo r investment
also add to demand; measures that bolster markets add incentives fo r
investment; measures that readapt manpower add to its productivity.
But each o f the three categories serves as a focus fo r a variety o f policy
measures and also serves, therefore, as a useful focus fo r discussion.
I N V E S T M E N T A N D PRODUCTIVITY
T o attain several o f our key economic objectives— faster growth in
productive potential, long-term price stability, and sustained improve
ment in our balance-of-payments position— requires a high rate o f
investment, prim arily in equipment and plant, but also in technology
and research and in the mental equipment o f human beings. P rovid
ing the strong incentives and markets which motivate risk-taking and
effort— which, in turn, underlie high rates o f investment and produc
tivity grow th—is a prime concern o f economic policy today.
ECONOMIC REPORT OF THE PRESIDENT
3
In the early postwar period, stimulants to capital spending
abounded: great shortages in the Nation’s supply o f capital equip
ment had grow n out o f depression and w ar; great advances in tech
nology were waiting to be converted into productive process, plant,
and equipment; greatly expanded consumer markets had to be matched
with greatly expanded plant capacity.
A n d in the face o f world dollar shortages and reconstruction needs,
the balance-of-payments deficit served as an instrument o f foreign
economic policy^ not as a restraint on domestic policy. Rising prices
and labor costs, while disturbing domestically, did not seem to stem
w orld demand fo r U .S. products. The setting, in short, was one o f
strong pressures fo r capital spending— especially fo r expansion— and
limited concern fo r the international competitive impact o f domestic
cost and price developments.
But the past 5
years have seen a great change. Investment has
lagged, growth has slowed down, and rising foreign competition and
currency convertibility have exposed our international flank. The
importance and urgency o f measures to stimulate modernization,
mechanization, improved technology, innovation— in a word, to raise
productivity and lower unit costs— have increased correspondingly.
From 1947 to 1957, U.S. growth averaged nearly 4 percent a year
in terms o f total gross national product and 2.1 percent in gross na
tional product per capita, in constant prices. From 1957 to 1962, these
growth rates dropped to 3.0 percent and 1.2 percent. Even the growth
o f potential output has been lower in the past 5 years than the growth
o f actual output in the previous decade: since 1957 potential has
grown at 3.5 percent per year fo r total gross national product and 1.7
percent fo r gross national product per capita. A n d growth in private
gross national product per manhour— one o f the most inclusive defini
tions o f productivity— slowed from 3.6 percent per year in the earlier
period to 2.7 percent per year in the recent period.
This slowdown is clearly associated with a drop in business fixed
investment from 10 to 11 percent o f gross national product in the
earlier period to only 9 percent in the later period. Even though
such investment increased from an annual rate o f $45.2 billion in
the first quarter o f 1961 to $50.8 billion in the fourth quarter o f 1962—
both in 1962 prices—the 1962 level barely matched that o f 1957, al
though real gross national product was 16 percent larger.
Increased productivity and faster growth are, o f course, grounded
not only in physical investment, but in the less tangible— yet no less
real— investment in research and development and education. Out
o f these grow the technological advances and the higher skills and
knowledge which are basic to the long-run growth process.
Thus, the President’s programs in the field o f education represent
an investment which w ill yield rich returns in more productive and
creative manpower. The productivity objective w ill also be served
by new measures to encourage civilian research and development and
to make the byproducts o f military and space research more readily
accessible to civilian industry- In addition to direct support o f in
dustrial research and technical inform ation services— including a pro
posed Federal-State Engineering Extension Service— the President’s
proposals include a provision permitting the fu ll cost o f new ma
chinery and equipment devoted to research and development to be
4
ECONOMIC REPORT OF THE PRESIDENT
charged off as a current expense fo r tax purposes. B y stimulating a
grow ing number o f firms and industries to develop and apply modern
technology to their civilian production, these measures w ill lead to
better products and services at lower prices.
T o translate new knowledge and new technology into greater p ro
ductivity and output requires increased business investment in plant
and equipment, fo r higher productivity is realized, in the main, as new
equipment replaces old, as new machines and plant substitute new
processes and techniques fo r old.
A central purpose o f the President’s fiscal program is to strengthen
the financial base and increase the incentives fo r private investors and
businesses to enlarge their outlays fo r plant, equipment, and inven
tories. Part o f this favorable climate must be found in monetary
policy— in maintaining monetary and credit conditions favorable to
the flow o f savings into long-term investment. But most o f the posi
tive spur to modernization and expansion is to be realized through tax
policy.
W e discuss here fou r steps in the President’s tax program in 1962
and 1963 which contribute to this goal.
1. The Congress and the administration in 1962 provided important
new tax incentives fo r productive investment in the form o f the in
vestment tax credit and revised depreciation guidelines. These meas
ures provide more than $2 billion o f tax savings directly related to
plant and equipment investment.
2. The President’s 1963 tax program would further lift investment
incentives by reducing the corporate tax rate from 52 percent to 47
percent. Small business w ill receive a special inducement through
the reduction o f the normal tax rate from 30 to 22 percent— a reduc
tion o f nearly 27 percent in the tax liability o f corporations with in
comes below $25,000.
These rate revisions represent an additional $2.6 billion cut in cor
porate tax liabilities. Combined with the 1962 changes, they w ill re
duce corporate liabilities by over 17 percent, thus providing not only
a large increase in the after-tax rate o f return on new investment, but
also a large addition to internal funds, a factor o f special importance
to the investment program s o f smaller and more rapidly growing
businesses.
3. A number o f other provisions o f the tax program are also de
signed to remove barriers to the free flow o f investment funds, to
sharpen the incentives fo r risk-taking, and to remove distortions in
resource flow. Reduction o f the top-bracket rate from 91 to 65 per
cent, combined with significant reductions in middle-bracket rates,
w ill be particularly effective in freeing venture capital fo r new in
vestment. Provisions relating to capital gains, to taxation o f natural
resources, and to the expensing o f research and development costs
w ill also have beneficial effects on investment flow.
4. A pa rt from the various direct measures to encourage investments,
the tax program will greatly strengthen the ultimate incentive fo r in
creased investment; namely, the markets fo r the products o f industry.
A s high and rising sales induce higher operating rates, profits rise
sharply even at stable prices. W hen plant capacity is fu lly utilized
and prospects are good fo r continued high utilization, the incentive
effects o f the 1962 measures and the lower corporate tax rates w ill come
fu lly into play.
E C O N O M IC
REPORT
OF
TH E
P R E S ID E N T
5
This leads us directly into the second m ajor channel o f economic
p o lic y : measures to strengthen total demand.
DEMAND AND OUTPUT
T o gain the fu ll benefit o f increased productivity, to assure con
tinued growth o f our productive potential, and to create the jobs
needed to absorb both new workers and workers released by advancing
technology requires that measures to increase productivity be coupled
with measures to stimulate demand. Thus, the second main line o f
economic policy is to strengthen markets fo r the output o f our fa c
tories, mines, shops, and farms—the products o f our workers, man
agers, farmers, nurses, teachers.
Over the past 2 years— from the first quarter o f 1961 to the fourth
quarter o f 1962— total demand, and hence total output, has grown
from $501 to $562 billion, a rise o f 12 percent in dollar terms, 10
percent in constant prices, at annual rates.
Public policy contributed to this growth in demand in several ways.
The sharply restrictive swing in the Federal budget which slowed the
1958-60 recovery was avoided. In contrast with the $19 billion swing
at that time, from an $11 billion deficit— annual rate, national accounts
basis—in the third quarter o f 1958 to a surplus o f $8 billion six
quarters later, the deficit in the current recovery moved from $6.3
billion in the first quarter o f 1961 to $0.7 billion in the second quarter
o f 1962, a net change o f less than $6 billion. Even in mid-1962, how
ever, a surplus o f about $7 billion would have have been produced
at 4-percent unemployment.
Monetary policies have remained m ildly expansionary. In fact, in
contrast with the 1958-60 expansion, when long-term interest rates on
U.S. Government bonds rose by more than one-third, such rates
changed little or actually declined during the 1961-62 recovery. A nd
the money supply grew by an annual rate o f 2.3 percent in this
recovery, against 1.2 percent in the earlier recovery.
W ith the aid o f these facilitative policies, recovery moved at a swift
pace in 1961, and there was reason to hope that the economy would
break out o f the sluggishness which had characterized its perform
ance since 1957. But the pace o f expansion slowed in 1962, as the rise
in total demand averaged only $6 billion per quarter in contrast with
over $12 billion per quarter in 1961. A t the end o f 1962, total demand
still fell short o f potential output by $30 to $40 billion and unemploy
ment remained at 5.6 percent.
F o r 1963, a rate o f increase in demand similar to that in 1962 is
foreseen— a gain that would bring G N P fo r the year to $578 billion—
viewed as the m idpoint o f a $10 billion range-----Chairman D ouglas. M ay I interrupt a minute, D r. H eller ?
Mr. H eller. Yes.
Chairman D ouglas. Does that assume a tax reduction, or does it
assume that there would be an increase in the absence o f a tax
reduction ?
Mr. H eller. This assumes that a tax reduction would take place in
the latter h a lf o f the year, and the impact o f that, while not a m ajor
factor in terms o f the actual addition to the forecast, would be felt
to some extent in anticipation.
6
ECONOMIC EEPORT OF THE PRESIDENT
O f this gain, State and local governments w ill contribute about
one-sixth and the Federal Government another one-sixth, largely fo r
space and defense; small gains should be registered, particularly in
the second h alf o f the year, by business investment; residential con
struction is expected to hold roughly steady; consumer incomes and
thus consumer purchases will rise modestly.
But this prospect, which includes some stimulus from tax reduction
later in 1963, w ill not appreciably reduce unemployment and narrow
the demand gap by the end o f the year— only in 1964 and 1965 w ill the
impact o f the proposed tax program be reflected in large increases in
demand and consequent reduction in unemployment.
A part from tax reduction, one finds no prospect o f a sustained rise
in demand which might carry the economy within striking distance
o f its productive potential. A lthough consumers are not “ saturated”
with durable goods, they have been spending their slowly grow ing
incomes in a normal manner and have built up no abnormal backlog
either o f needs or financial resources. Housing has held up unusually
well, but offers little added stimulus until the later sixties, when a
wave o f new families should provide the basis fo r a sustained boom
in residential construction.
State and local governments have had to strain their resources
to maintain the rapid and steady growth o f their expenditures, and
little change o f pace is in prospect. The business investment situation
has already been reviewed. There is no shortage o f opportunities
fo r modernization and cost cutting, but the spur o f fuller use o f exist
ing capacity is essential i f these opportunities are to be exploited more
rapidly than in the past few years. A n d investment fo r expansion
awaits evidence o f grow ing markets, and the promise o f their con
tinued growth.
Under these circumstances, it is clear that a m ajor new stimulus
to consumers and investment demand is needed. Removal o f the ex
cess fiscal burden imposed by our tax system— a burden born o f war
and bred in an environment o f postwar inflation— is the core o f the
President’s tax program.
Most o f the impact o f tax reduction on demand w ill be felt in two
stages, the first— o f over $5 billion— effective July 1, 1963, and most
o f the remaining $3 billion effective July 1, 1964—after taking into
account the reform s to go into effect January 1,1964. In other words,
under the President’s program, individual income taxpayers would
find their annual stream o f disposable income enlarged by between
$7 and $8 billion within the next 18 months— or, i f Congress were to
act by Ju ly 1, within 12 months o f the enactment o f the program.
Their totai reduction would be $8.6 billion, excluding capital gains
revisions. Net corporate tax reductions totaling $2.4 billion— exclud
ing capital gains revisions— would be put into effect in stages between
January 1,1963, and January .1,1965.
These are permanent reductions in tax rates. Every weekly pay
roll, every monthly salary bill, every quarterly dividend disbursement
w ill add more than before to consumer purchasing power. Another
way to put it would be to say that less would be taken out o f every
paycheck, less would be taken out o f every salary, less would be taken
out o f every dividend fo r Federal income tax purposes.
ECONOMIC REPORT OF THE PRESIDENT
7
Some consumers w ill spend it all as they live from paycheck to pay
check. Others may even overspend it as they use it to take on larger
installment payments to buy new durable goods. Some w ill save it
all, or at least use it fo r a time to repay existing debts. Some w ill
save it fo r a vacation trip or a college education fo r their children.
I m ight say to Mrs. Griffiths that that may sound like the answer
to her questionnaire that she put to her constituents last summer.
Thus, what any individual consumer w ill do with this tax saving is
difficult to predict. But what consumers in the aggregate will do is
clearly predictable* Consumer spending o f disposable income is one
o f the most regular and predictable relationships that our economic
records supply. Since 1950, the saving rate— on an annual basis—
has varied within the narrow range from 6.0 to 7.9 percent o f dis
posable incom e; consumption has varied from 92.1 to 94.0 percent.
Thus, i f tax reduction adds a billion dollars to consumer disposable
incomes, we can predict what w ill happen to the great bulk o f that
billion dollars: I t will be spent on consumer goods and services.
The rise in disposable income resulting from the President’s tax
program w ill have two parts— the direct reduction in individual in
come tax liabilities, and the enlarged flow o f dividends resulting from
corporate income tax reduction. F or purpose o f illustration, we take
these two parts as $8 billion and $0.5 billion.
The actual amounts in the President’s program are slightly larger,
but these are convenient numbers fo r illustrative purposes. O f this
increment o f $8.5 billion o f disposable incomes, about $8 billion will
be added to the flow o f consumer spending.
This additional $8 billion o f consumption is not something that
happens just once. It is repeated period after period. Thus, before
long, the rate o f production o f consumer goods will be stepped up by
at least $8 billion to meet the expanded flow o f demand. Thus, G N P
rises above what it would otherwise have been by $8 billion o f addi
tional output. But the increase in demand does not stop there.
This $8 billion o f expanded G N P creates $8 billion o f expanded gross
receipts by business. Some part o f it is immediately claimed by Fed
eral, State, and local governments as higher excise, sales, income, and
payroll taxes.
Part goes to corporate profits, and some o f that is re
tained in enlarged corporate saving.
These parts typically add up to about 46 cents o f every added dollar
o f G N P, leaving about 54 cents in the hands o f consumers in the form
o f wages, salaries, farm and professional income, earnings o f unin
corporated businesses, rents, interest, dividends.
Since consumers will save a small fraction o f the increment, roughly
50 cents o f each added dollar o f G N P gets respent on added con
sumer goods and services. Thus, the $8 billion o f initial additions
to G N P creates a further flow o f about $4 billion o f added purchases
o f consumer goods, and again o f added G N P. This, in turn, leads
to a further increase o f spending o f about $2 billion, another round
o f about $1 billion, and so on.
The cumulative total o f all o f these increases is a permanent en
largement o f G N P amounting to roughly $16 billion. This is the
pure “ consumption m ultiplier” effect o f tax reduction. I t measures
what would happen i f nothing changed except consumption ex
penditures.
8
ECONOMIC REPORT OF THE PRESIDENT
But, as we have already indicated, investment w ill be affected, too,
in several w ays: B y the direct effect on incentives and the flow o f
investment funds; through the effect o f the tax reforms in removing
artificial barriers to investment; and through the enlargement 01
markets and the resulting pressures to build inventories and expand
capacity. I t is difficult to estimate the amount o f the investment
increment and its timing. But this much is entirely clear from in
spection and analysis o f long-standing economic interrelationships:
T he effect is positive, and it is substantial.
F inally, the added investment, whatever its amount, also brings
a chain o f further increases in consumption. T he higher incomes
earned in producing capital goods are also respent, and generate
incomes in producing consumer goods which are, in turn, respent.
U ltim ately, each added billion dollars o f investment will bring along
w ith it an addition o f another billion o f consumer demand.
The ultimate effect o f the proposed tax reductions is thus fa r more
than the $16 billion o f added consumption that we started with.
Precisely how much more we hesitate to estimate. But it is reasonable
to expect that the combined effects o f added consumption and invest
ment can close, or nearly close, the gap between potential and actual
output, and restore high levels o f employment— not at once, but
witnin a year or so from the time when the fu ll impact o f the tax
program is felt.
T his process o f demand expansion which we have briefly described
is set forth in some detail on pages 45-51 o f our report. In addition,
we have prepared tw o charts which present this process in a more
graphic way, and which we would be glad to explain i f the committee
should wish.
M r. Chairman, I suggest we do that after completion o f the state
ment, i f that is in accord with your wishes.
Chairman D o u g l a s . That will be fine.
R E A D A P T IN G
RESOU RCES
TO
C H A N G IN G
DEMAND
M r. H e l l e r . A n economy that is rapidly growing, an economy in
which individuals and businesses keenly pursue their economic ad
vantage wherever it may lead, an economy which responds dynami
cally to new technological and marketing opportunities and to new
currents in w orld trade; such an economy is continuously destroying
as well as creating job and profit opportunities.
M any o f us have, perhaps, come to take continuous economic change
fo r granted. But a brief look to history shows what startling changes
have occurred and are occurring.
In 1940, 17 percent o f our civilian labor force was in agriculture;
in 1962 only 7 percent. In 1940, about 55 percent o f our workers were
engaged in the production o f goods as opposed to services; in 1962,
only 40 percent were so engaged. In 1940, women were only 25 per
cent o f the labor fo r c e ; in 1962, 34 percent. In 1940, the unskilled
and semiskilled manual and service workers were almost one-half o f
all workers; in 1962, such workers made up about two-fifths o f those
employed.
B y way o f contrast, the professional and technical category has in
creased from about 7y 2 to 12 percent, and is still increasing in im por
tance, and w ill continue to do so.
ECONOMIC REPORT OF THE PRESIDENT
9
This look at the facts should remind us not only that change does
occur, but that adaptation does proceed. O ur principal engine fo r
adaptation is a labor market in which workers are free to move from
place to place and shift from one occupation to another, and in which
workers and their employers are free to adapt the nature o f work and
the nature o f workers’ skills to market needs. Such adaptation is
facilitated by high levels o f basic training and b y the flexibility o f
youth. In this connection, one should note that our labor force is
grow ing and w ill grow at such a rate that a fu ll one-third o f our labor
force in 1970 w ill consist o f persons who w ill have entered it since 1960.
But not all o f this process o f readaptation can be left to the workers
and their employers. W e must expand our ability to readapt our
human and physical resources to accelerating change.
The Congress has already pointed the way fo r such readaptation by
the Area Redevelopment A ct, the M anpower Development and Train
ing A ct, and the retraining and relocation provisions o f the Trade
Expansion A ct o f 1962. These beginnings should be follow ed by
vigorous administration and appropriately enlarged efforts which
experience may indicate are needed. They should be accompanied by
new programs to improve the flow o f inform ation about existing and
prospective job opportunities, and by the passage o f a Y outh E m ploy
ment Opportunities A ct to foster methods fo r developing the potential
o f untrained and inexperienced youth and to provide useful work
experience.
A lon g the same lines, the President’s tax program proposes a more
liberal treatment o f m oving expenses designed to promote mobility.
Proposals with respect to capital gains taxation, stock options, and
the reduction o f top bracket rates all promote m obility o f capital and
management.
A more effective system o f adaptation and readaptation in the labor
market w ill mean that the expanded demand which flows from the
tax program w ill be less likely to run into manpower bottlenecks and
thus less likely to cause any inflationary pressures in the Nation’s labor
markets. It w ill mean an easier transition from the high levels o f
unemployment o f recent years to more satisfactory levels.
Successful readaptation o f labor and the expansion o f employment
opportunities will, m turn, remove much o f the pressure fo r restrictive
practices by labor and employer groups and thereby contribute to
expansion o f capacity to produce.
A s we point out in our report on pages 23 to 25, careful study does
not suggest that the current level o f unemployment can be explained
by any recent decrease in the adaptability o f our labor force, nor by
any unusual acceleration in the rate o f worker displacement. The
evidence is to the contrary. The problem o f structural adaptation
would not be crucial i f we were content to stay where we are— with a
large margin o f involuntarily idle manpower and excess capacity
running to waste. But to do so would run counter not only to the dic
tates o f the Employment A ct o f 1946, but to the spirit and traditions
o f the American people.
Hence, we must pursue vigorously all three channels o f policy—
expansion o f productivity, expansion o f demand, and improvement o f
our system ox readaptation. This balanced development can set the
stage fo r one o f the most exciting expansionary periods in our eco
10
ECONOMIC REPORT OF THE PRESIDENT
nom ic history. W e have the manpower, we have the technology, we
have the business and farm ing know-how to give a dramatic demon
stration to ourselves and to the world o f our free economy’s produc
tive power and its efficiency and ability to promote the general welfare.
P R IC E S A N D I N T E R N A T I O N A L
C O M P E T IT IV E N E S S
Emphasis on policies fo r expansion implies n o lack o f attention to
the goals o f price stability and the balance-of-payments equilibrium.
Indeed, built into the three main lines o f policy we have discussed are
important contributions to these goals.
The setting fo r expansionary action is now unusually favorable from
the standpoint o f prices and costs. F ive years o f virtual stability o f
wholesale prices and o f virtually constant unit labor costs have dissi
pated the inflationary psychology o f earlier postwar years. Competi
tion— including international competition— is keen. W orld raw ma
terial supplies are abundant and prices steady or declining.
Nevertheless, it has to be recognized that expanding demand, as it
pushes the economy toward fu ll utilization o f resources, may begin
to encounter bottlenecks and shortages which could cause wage costs
and prices to edge upward. This might threaten our hard-won balance-of-payments gains. . But the administration’s program couples
expansion o f demand with increased incentives fo r modernization, cost
cutting, and innovation; in a word, fo r higher productivity and lower
costs. In doing so, it enables the economy to push closer to fu ll utiliza
tion while preserving price stability and prom oting our international
competitiveness.
The President’s tax program is phased in a deliberate effort to avoid
any possibility that too rapid expansion o f demand m ight create
bottlenecks or speculation which would im pair our price stability.
Moreover, our flexible monetary policy instruments are readily at hand
to meet any unexpected threat that might appear. B ut once we
achieve high employment, one cannot gainsay the fact that our con
tinuing problem o f maintaining reasonable price stability w ill be more
difficult than it has been in the past 5 years.
I t is fo r this reason that the President has reaffirmed the importance
o f sound wage and price policies and that the Council has again sum
marized its wage-price “ guideposts” and renewed its invitation fo r
continuing widespread public discussion o f the issues which they
present.
C O N C L U S IO N
W e conclude this statement by reminding ourselves and the com
mittee that the year 1963 offers to the Nation an unmatched oppor
tunity to act wisely and decisively to apply the mandate o f the
Em ploym ent A ct. Rarely has the choice fo r economic policy been
so clearly posed as between—
A policy o f inertia which can at best perpetuate the unsatis
factory performance o f the past 5 years and increasingly expose
us to the risk o f another in the “ melancholy series o f recessions”
that have repeatedly interrupted our prosperity and g row th ; and
A policy o f action to expand our employment and output
toward the goals so clearly stated in the Em ploym ent A ct.
ECONOMIC REPORT OF THE PRESIDENT
11
The President’s tax program would assure these objectives in a
way which places maximum reliance on private initiative and free
competitive enterprise. Rather than em ploying idle resources through
expanded Government purchases, the tax program encourages private
business to employ today’s idle resources and tom orrow’s new influx
o f resources in responding to the expanded wants o f consumers and
investors.
Structural tax reforms and sharpened individual incentives w ill
create a new interest in innovation, in cost cutting, in efficiency, thus
strengthening competition. Small business and large business, con
sumers and investors, workers and farmers can harness private gain
to public good.
A s so frequently in the past, we are sure that the Joint Economic
Committee, through its hearings and reports, and through the leader
ship which its members exercise in the Congress and in the Nation,
w ill play a m ajor role in insuring that the great tax debate o f 1963
will be an intelligent and constructive one.
Chairman D ouglas. Thank you very much, Mr. Heller.
I want to commend you fo r the very excellent description which
you give o f the effect o f the so-called multiplier, and in which you
point out that a tax cut, by adding total monetary purchasing power,
w ill result in a much greater increase in the gross national product
than the amount o f the cut.
This theory was first launched, or at least the arithmetic o f this
theory was first launched, by M r. R. F. Kahn, years ago, in an article
which he wrote fo r the Econom ic Journal in June 1931.
I notice you have some charts, which apparently have just been
unveiled, describing this. I wonder i f you would explain the arith
metic o f the multiplier.
Mr. H eller. Mr. Chairman, may I ask Mr. Ackley, who has worked
with these charts, indeed they are his conception, to explain them?
Chairman D ouglas. Certainly.
Mr. A c k le y . Perhaps it would be easier i f I can get over here where
I can point to them.
Chairman D ouglas. I hope this w ill be considered as part o f your
presentation and the time w ill not be deducted from members o f the
committee or from the chairman.
Mr. H eller. A s you note, M r. Chairman, there is a three-page
appendix, so to speak, to the statement, which covers this explanation.
12
E C O N O M IC
REPORT
OF
T H E
P R E S ID E N T
(The explanation and Chart No. 1 fo llo w :)
E
x p l a n a t io n of
Ch arts
on
E ffects
of
T a x R e d u c t io n
The President’s program would make tax reductions effective in stages between
July 1963 and January 1965. But to simplify matters, the charts assume that
all reductions would become effective at once.
In chart I, the first bar on the left shows the two sources of higher consumer
incomes: An estimated $8 billion from individual tax reduction, and an estimated
one-half billion dollars of added dividends after taxes based on these dividends.
(The additional dividends would undoubtedly begin to be paid only somewhat
more slowly; but to simplify the chart, we assume them paid at once.) The
second bar shows this as an increment of $8.5 billion in disposable income. The
third bar shows this added income divided between added saving—about one-half
billion dollars—and added consumption—about $8 billion. This added con
sumption would be repeated each period so long as the tax reduction was in
effect. In turn, the added consumer buying would generate increased production
of consumer goods, in the amount of $8 billion per period. This, of course, is
an addition to GNP.
Chart II shows what typically happens to every added dollar of GNP—
how it is divided among added taxes, added corporate retained earnings, and
added disposable income. In turn the added disposable income is divided between
consumption and personal saving. On the average in a period of expansion,
each added dollar of GNP typically generates another 50 cents of extra consumer
spending.
Betuming now to chart I, the successive columns shaded in red show the
growth of consumer spending over successive periods of time after the tax re
duction goes into effect.
In the first period, consumer spending and GNP have grown by only the
initial $8 billion. But in the second time period, consumer spending and output
of consumer goods is higher not only by the $8 billion resulting directly from
tax reduction, but also by $4 billion resulting from the previous period’s in
crement of consumer spending. This $4 billion of respending in turn generates
new disposable incomes, and, after a further lag, some $2 billion more of con
sumer spending. Thus, in period 3, consumer spending is $8 billion higher as a
result of tax reduction applied to the base level of GNP, $4 billion respent from
period 2’s $8 billion, and $2 billion respent from period 2’s $4 billion. Thus the
rate of GNP in period 3 will be $14 billion above the base level. In period 4,
it will be $15 billion higher; in period 4 (not shown) $15% billion; and it will
level off at $16 billion higher, as shown in the last column, which gives the
ultimate effect. This is the pure “consumption multiplier” effect of tax reduc
tion. It shows what would happen if nothing changed except consumption.
But investment will be affected, too. To illustrate the investment effect, we
have shown a possible pattern of investment response in green on the upper
part of chart I. The amount of this response is chosen arbitrarily. We have
shown it rising over time, but have not indicated how far or fast it would con
tinue to rise or where it might taper off. This is clearly an additional impact
on GNP. But it is not the end of the matter. The higher incomes earned in
producing capital goods are also respent, and generate incomes earned in
producing consumer goods which are in turn respent. This is indicated by new
bands of red at the top of the chart, representing further consumer goods pro
duction. Ultimately each added billion dollars of investment will bring along
with it an addition of another billion of consumer demand.
Thus the ultimate effect of tax reduction on GNP will be considerably more
than the pure consumption effect. How much more it will be depends on how
large an investment response is obtained.
EFFECT
OF
TAX
REDUCTION
1
ON
CONSUMPTION
Additions to GNP
(Billions of Dollars)
AND
GNP
E C O N O M IC
-2 8 -
-2 4 -
REPORT
-2 0 -
OF
THE
Added
Dividends
(after taxes)
P R E S ID E N T
Chart
Personal
Saving
$ 0 .5 bit.
Individual
Tax
Reduction
Personal
Oisposable
Income
$ 8 .0 bii.
$8.5 bst
I
2
3
TIME PE RIO D S
CO
14
ECONOMIC REPORT OF THE PRESIDENT
Mr. A ckley . Mr. Chairman, chart 1 shows, in the first three bars,
the tax reduction which is the basis fo r the impact on gross national
product and on total demand.
On the left we have shown a bar consisting o f $8 billion worth o f
individual income tax reduction and about a h alf billion dollars worth
o f additional dividends which would result from the reduction in
corporate tax rates and would be received by individuals— after taxes
on these additional dividends.
This becomes, then, in the second bar, an increment o f additional
disposable income to consumers o f $8.5 billion.
In the third bar, we show that increment o f income divided be
tween, roughly, $8 billion o f additional consumer expenditures, and
one-half billion dollars o f additional personal savings.
This $8 billion o f additional consumer expenditure has its continu
ing impact on markets fo r consumer goods, and, obviously, (juickly will
result m the generation o f an increased rate o f production o f con
sumer goods at a rate $8 billion higher than previously. Thus, we
have a flow o f additional consumption expenditures, and additional
output o f consumer goods, directly resulting from the tax reduction,
itself.
(Chart No. 2 fo llo w s:)
Chart 2
DISTRIBUTION
OF AN
DOLLAR OF
ADDITIONAL
G N P
Disposable Income
E C O N O M IC
REPORT
OF
T H E
P R E S ID E N T
15
Mr. A ckley . The effect o f additional production o f consumer goods
is to create additional gross national product. The addition to gross
national product creates additional gross receipts fo r business firms,
which are available both to pay taxes and to pay incomes. O f an addi
tion to gross national product, not o f the existing level o f gross national
product but o f an addition to gross national product, the division is
typically something like th is: About 30 cents o f it is taken by additional
Federal net receipts. This is largely increased taxes, but, to a small
extent, it is reduced transfer payments in the form o f unemployment
insurance and so on. A bout 6 cents goes to increase the revenues o f
State and local governments. A bout 10 cents is added to corporate
retained earnings.
This leaves roughly 54 cents added to personal disposable income.
A p p ly in g the customary saving ratio leaves roughly 50 cents o f addi
tional consumer expenditures generated by an initial increase o f $1
in gross national product.
That brings us back to chart 1, in which we show over a series o f
time periods the impact o f the additional consumer expenditures. In
the first layer we have successive additional consumer expenditures o f
$8 billion, resulting from the additions to consumer disposable income
o f $8.5 billion. But this isn’t the end o f it, as our statement suggested.
Each addition to gross national product creates additional consumer
incomes which are respent. So that each increment o f gross national
product gives rise in the next period to an increment o f $4 billion o f
additional consumer spending. This additional consumer spending o f
$4 billion creates an additional output o f $4 billion additional con
sumer disposable incomes o f about 54 percent o f that, and additional
consumer spending o f $2 billion, o f $1 billion, and so on.
So we have, m oving through time, an increasing stream o f consumer
expenditures and an enlarged flow o f gross national product which
would very quickly level out, as you can easily see, at an increased
level o f gross national product o f $16 billion, exactly twice the initial
increment.
Chairman D ouglas. Mr. Ackley, this works out to the Kahn fo r
mula that the multiplier is equal to the reciprocal o f the percentage
o f leakage; is that right ?
Mr. A ckley . One minus the marginal percentage to consume gross
national product.
Chairman D ouglas. S o with the percentage o f leakage o f 50 percent,
y ou have roughly the recipocal o f one minus five, and you get a
m ultiplier o f 2.
M r. A ckley . That is correct.
Representative C urtis. This is merely a model. Does it have any
relation to an actual situation ?
M r. A ckley . Could I complete the chart ?
Representative C urtis . I would like to have an answer before you
continue. Y ou use a figure o f $8 billion which is conveniently re
lated to something that is being proposed now. B ut this is pure
theory, am I not correct? I want to be sure what we are talking
about.
Mr. A ckley . I t is theory in the sense that it attempts to generalize
from the facts o f economic experience, which is what all theory does.
Representative C urtis. In other words, you could have used a $16
billion figure or a $4 billion equally as well.
16
ECONOMIC REPORT OF THE PRESIDENT
Mr. A ckley . Yes. W e are talking about a tax reduction o f $8 bil
lion. That is why that was used.
Representative C urtis. But as fa r as reality is concerned, that is
false, because you make it happen all at once. That is not the p ro
posal. That is why I want to make it very clear at this point that
this model has no reference to an actual situation. It is merely to
advance a theory.
Chairman D ouglas. I f I may say, the significant part o f the model
is the size o f the multiplier, and Mr. A ckley’s computation o f the
multiplier is equal to approximately 2.
Eepresentative C urtis. A ll I want to do is understand what the
model is. I f we were to apply this model, fo r example, to the Presi
dent’s proposal, it would have to be altered considerably. H is p ro
posal is not an $8 billion figure, but a staggered program over a period
o f time.
I just want to clear the air.
Mr. A ckley . I should have mentioned that in the beginning, that
we have assumed here fo r purposes o f sim plicity that it would all
come into effect at once. A s a matter o f fact, there is another sim
p lifyin g assumption which is made, and that is that the dividends
would be received simultaneously with the reduced individual tax
liabilities.
Mr. H eller. M r. Chairman, may I note in Mr. A ckley’s answer that
when he said it was theory, it was a generalization from experience.
It is grounded in the actual experience o f what consumers do with
additions to their income, from detailed studies o f what they do with
their additions to income.
Eepresentative C urtis. Let me ask you this, Dr. H elle r: In 1930,
was that saving figure 3 percent ?
Mr. H eller. Yes, in the thirties.
Eepresentative C urtis. S o you are assuming something, although
you know it changed, beginning in 1957. W e w ill get into that later.
I just want to get these assumptions out in the open.
Chairman D ouglas. M ay I say to m y good friend that the lower the
percentage o f savings, the smaller the percentage o f leakage, and,
therefore, the larger the multiplier.
M r. H eller. That is correct.
Eepresentative C urtis. The gentleman from Illinois misinterprets
my question. I am not trying to argue one way or another. I am
trying to establish the assumptions. I mentioned the 3 percent rate
o f the 1930’s because it was a very different figure from the rather
constant figure he used since 1950. I understand that one o f the
themes in your Econom ic Eeport is that something unusual has hap
pened since 1957, although not in the savings area.
Mr. H eller. Mr. Chairman ?
Senator P roxmire. I was going to ask a further question on the
chart, Mr. Chairman.
Mr. H eller. I want to make a second point, i f I may, that while it
is true that these reductions in the President’s program o f roughly
$8 billion relating to disposable income are made in stages, this is a
very close approximation o f the final effect on consumer incomes o f the
President’s program, and it is a permanent reduction.
ECONOMIC REPORT OF THE PRESIDENT
17
S o lo o k in g a t th e t o t a l p r o g r a m , it w i l l r e su lt, i f e n a c te d , i n t h is
$ 8 b illio n in c re a se in d isp o sa b le in c o m e , g iv e o r ta k e a f e w h u n d r e d
m illio n .
R e p r e s e n t a t iv e C u r t i s . I w a n t to th a n k y o u , D r . H e ll e r , b eca u se
t h a t is w h a t I w a s t r y i n g t o g e t a t, w h e th e r t h is w a s a c t u a lly g o i n g
t o b e r e la te d t o r e a lity .
N o w y o u h a v e e x p la in e d t h a t y o u t h in k i t
la r g e ly is.
T h a t is s u b je c t t o d e b a te.
B u t I w a n te d t o k n o w w h a t th e c h a r t w a s,
fir st.
C h a ir m a n D o u g l a s . N o w i f I m a y g o b a c k o n m y o w n tim e .
I
w o u ld lik e t o a s k D r . R o y M o o r o f o u r s ta ff to p u t o n th e b o a r d so m e
c h a r ts w h ic h I a sk ed h im t o p r e p a r e .
S e n a t o r P r o x m i r e . C o u ld I a sk a q u e stio n a b o u t th e c h a r t b e fo r e
y o u do th a t?
C h a ir m a n D o u g l a s . Y e s .
S e n a t o r P r o x m i r e . T h e n e t F e d e r a l re c e ip ts o f 3 0 c en ts f o r ea ch
d o lla r o f in c re a se in G N P is f a r h ig h e r t h a n a n y t h i n g I h a v e seen
b e fo r e .
I f w e r e la te t h e size o f F e d e r a l re c e ip ts t o th e G N P , a s I u n d e r sta n d
i t is q u ite a b it s m a lle r t h a n o n e -t h ir d , a b o u t o n e s ix t h w o u ld b e m u c h
c lo se r to it. I a m w o n d e r in g i f y o u c a n s u p p ly th e c o m m itte e w it h
th e w o r k in g p a p e r s o n w h ic h y o u b a se t h is 3 0 c e n ts fig u re .
That
d o es see m t o m e t o b e w a y o u t o f lin e . Y o u c a n d o t h a t a t a la te r d a te.
( T h e f o l l o w i n g w a s la t e r r e c e iv e d f o r t h e r e c o r d :)
The figure of approximately 30 cents of added net Federal revenues for every
dollar of added gross national product (GNP) can be derived by considering the
major components of net Federal revenue that are affected by a change in GNP:
Corporate profits taxes, individual income taxes, indirect business taxes, social
insurance contributions, and transfer payments.
1. Profits taxes.— Perhaps the single most crucial element in the calculation is
the increase in corporate profits (to which corporate profits tax rates apply)
associated with an increase in GNP. All studies show corporate profits to be
highly sensitive to the change as well as the level of GNP. A typical formula
tion embodying these effects is that contained in the model presented to this
committee by Gary Fromm, of Harvard University and United Research, Inc.,
and published by the committee in part IV of Inventory Fluctuations and Eco
nomic Stabilization, May 1962.
It is also clear from these studies that the magnitude of the profits share of
added GNP (and thus of the multiplier) varies somewhat, depending on the
speed and the extent of the change in GNP that is contemplated. Our calcula
tions relate to approximately the kind of movement which would be involved in
going from the expected mid-1963 GNP to the GNP associated with full employ
ment, over a period of roughly 2 y2 years. For a movement of this magnitude and
speed, we estimate the profits share of added GNP as about 30 percent—some
what higher than this at first and somewhat lower during the later stages.
Applying the successively declining corporate tax rates to the added profits
produces an added corporate profits tax of about 12 cents for each added dollar
of GNP.
2. Individual income taxes.—More than 65 percent of added GNP would go to
increase personal income less transfers. This share would be slightly lower at
first, slightly higher later. In turn, this would yield— at new tax rates—8 to
9 cents of increased individual income tax collections for each dollar of added
GNP.
3. Indirect "business taxes.— These would constitute about 2 to 3 cents of each
added dollar of GNP.
4. Social insurance contributions.— These would rise by 3 to 4 cents for each
dollar of added GNP.
5. Reduced transfer payments.— Finally, the reduction in transfer payments
must be added to the increased revenues described above, to obtain the effect on
net Federal revenues. We estimate that each doUar of added GNP in moving
18
ECONOMIC REPORT OF THE PRESIDENT
toward full employment would reduce Federal transfer payments, principally
unemployment insurance, by about 3 cents.
Summing up
6.
.—
Cents
Added profits taxes_______________________________________________________12
Added individual income taxes----------------------------------------------------------------- Sy2
Added indirect business taxes____________________________________________ 2 y2
Added social insurance contributions_____________________________________ 3y2
Reduced transfer payments---------------------------------------------------------------------- 3
T o ta l_______________________________________________________________________ 2 $y2
M r . A c k l e y . I a m su re w e c o u ld , S e n a to r P r o x m ir e .
C o u ld I c o m
m e n t f o r a m o m e n t o n t h a t, h o w e v e r ?
S e n a t o r P r o x m i r e . C e r t a in ly .
M r . A c k l e y . W e a re t a lk in g h ere, a s w e m u s t in th is c o n n e ctio n ,
w it h th e im p a c t o f a n a d d itio n a l d o lla r o f G N P d u r in g a p e r io d o f
e x p a n s io n .
T h e fr a c tio n o f a n a d d itio n t o g r o s s n a tio n a l p r o d u c t w h ic h g o e s
in to F e d e r a l rev en u es in a p e r io d o f e x p a n s io n is m u c h h ig h e r , o f
c o u rse , th a n th e a v e r a g e a t a n y g iv e n tim e , o r t h e a v e r a g e fr a c t io n
t h a t y o u w o u ld g e t o v e r a p e r io d o f g r a d u a l g r o w t h .
W e a re t a lk in g h e r e o f th e m o v e m e n t u p t o w a r d f u l l e m p lo y m e n t.
T h e p r im a r y r ea so n t h is is so h i g h is th a t , in su ch a p e r io d , c o r p o r a te
p r o fits ta k e a la r g e r -th a n -n o r m a l fr a c tio n o f th e in c re m e n t o f g r o s s
n a t io n a l p r o d u c t, a n d th e h i g h r a te o f ta x a t io n a p p lie d to c o r p o r a te
p r o fits is o n e rea so n w h y th is p e rc e n ta g e is a s h i g h a s i t is.
C h a ir m a n D o u g l a s . I a sk ed D r . R o y M o o r to p r e p a r e h is e s tim a te s
o f w h a t t h e m u lt ip lie r w o u ld b e, a n d to d o so w ith o u t c o n s u lta tio n
w it h th e C o u n c il o f E c o n o m ic A d v is e r s .
I a sk e d h im t o w o r k t h is
o u t a r ith m e tic a lly b o th f o r th e m u lt ip lie r , s o f a r a s c o n s u m p tio n is
co n c e rn e d , a n d a ls o c o n s u m p tio n p lu s p r o b a b le a d d e d in v e s tm e n ts o r
t h e s tim u lu s to c o n s u m p tio n f r o m th e a d d it io n a l in v e s tm e n t c r e a te d
b y th e o r ig in a l in crease m c o n s u m p tio n .
I w i l l a sk h i m i f h e w o u ld p u t th e c h a r ts o n th e b o a r d a n d th e n
e x p la in th e m .
M r . H e l l e r . M r . C h a ir m a n , m a y I in te r r u p t t o s a y t h a t t h e h id d e n
Ea r t o f o u r c h a r t d e a ls w it h t h a t seco n d s ta g e o f in v e s tm e n t a n d
a rth er in d u c e d c o n s u m p tio n .
C h a ir m a n D o u g l a s . T h i s c h a r t d e a ls p u r e ly w it h c o n s u m p tio n .
M r . M o o r , w o u ld y o u p u t y o u r fig u re s o n t h e b o a r d , p le a s e ?
M r . M oor. T h i s is a t a b le w e h a v e d o n e t h a t is v e r y s im ila r t o th e
g r a p h ic p r e s e n ta tio n g iv e n b y th e C o u n c il e a r lie r .
L e t m e ju m p
a h e a d im m e d ia te ly t o th e t y p e s o f a s s u m p tio n s w e m a d e . W e s ta r te d
w it h a n o r ig in a l t a x r e d u c tio n o f $ 8 b illio n , a n d w e h a v e a s s u m e d th re e
g e n e r a l t y p e s o f le a k a g e s.
19
ECONOMIC REPORT OF THE PRESIDENT
Hypothetical increase in consumption demand, from 1-year taw cut
[In billions of dollars]
Period
Increase
Increases
Increases
in non
in per Increases in per
personal Increases sonal tax in dispos sonal Increases
in
Tax Re Increases income
able
(20 per
savings in GNP
duction in GNP (15 per personal cent of income (7 percent
of DPI) 3
cent of income personal
GNP) *
income)2
I...............................
II.............................
m ............................
IV............................
V.............................
VL...........................
VH...........................
v m .........................
IX ............................
x .............................
Total (ap
proximate)
7.44
4.71
2.98
1.88
1.19
.75
.47
.30
.19
1.12
.71
.45
.28
.18
.11
.<*7
.05
.03
6.32
4.00
2.53
1.60
1.01
.64
.40
.25
.16
1.26
.80
.51
.32
.20
.13
.08
.05
.03
8.00
5.06
3.20
2.02
1.28
.81
.51
.32
.20
.13
0.56
.35
.22
.14
.09
.06
.04
.02
.01
.01
7.44
4.71
2.98
1.88
1.19
.75
.47
•3(T
.19
.12
20.24
3.04
17.20
3.44
21.76
1.52
20.24
Assumes no change in—
(1) Demand for imports.
(2) Private investment or Government expenditures.
(3) Distribution of income.
(4) Effective tax rates after tax reduction.
1The multiplier analysis only considers increases in personal consumption. Increases in GNP going
into nonpersonal income (such as corporate retained earnings) will not lead to increased consumption and
thus must be subtracted. In 1960 nonpersonal income constituted about 20 percent of GNP. The 15percent figure used in the table assumes that increases in corporate profits will be reflected in substantially
increased dividends, a type of personal income.
* While individuals obtain increases in personal income, part of these increases are lost through increased
individual taxes and therefore are not available for increased consumption. The average increase in per
sonal taxes associated with increases in personal income during the 3 recovery periods, 1954-55, 1958-59,
and 1960-61, was 14 percent.
* To determine final increases in consumption demand from increases in personal income, personal sav
ings must be subtracted from the increases in disposable income. For the 3 recovery periods 1954-55#
1958-59, and 1960-61, the average increase in personal savings associated with increased disposable income
was 6.2 percent.
M r . M o o r . T h e first o f th e se is t h a t a c e r ta in p o r t io n o f th e $ 8 b i l
lio n w it h e a c h tu r n a r o u n d w i l l g o in to in c o m e s o f b u sin e ss r a th e r t h a n
in d iv id u a ls .
T h a t is, la r g e ly in to c o r p o r a te r e ta in e d e a r n in g s . W e
h a v e a s s u m e d 1 5 p e rc e n t. T h a t m a y b e a l i t t l e lo w , a lth o u g h i t is
i n te r e s tin g t o n o te t h a t in th e 1 9 6 0 -6 1 p e r io d th e in c re a se s in p e r s o n a l
in c o m e w e r e a c t u a lly g r e a t e r in a g g r e g a te t e r m s t h a n t h e in c re a se s
in G N P .
T h e sec o n d le a k a g e w e h a v e a ssu m e d is t h e le a k a g e t o p e r s o n a l
t a x e s . T h e r e w e h a v e a ssu m e d a la r g e r fig u r e t h a n th e C o u n c il h a s
a s s u m e d , 2 0 p e r c e n t o f p e r s o n a l in c o m e .
S in c e t h is w o u ld g o in to
in d i v i d u a l ta x e s , i t w o u ld n o t b e a v a ila b le f o r c o n s u m p tio n .
T h e t h ir d le a k a g e is in t o p e r s o n a l s a v in g s , a n d h e r e o u r a s s u m p tio n
is v e r y s im ila r t o t h e C o u n c il’s. W e h a v e a ssu m e d 7 p e r c e n t.
F o l l o w i n g t h is o u t, t h e r e fo r e , th e $ 8 b i lli o n t a x r e d u c tio n g o e s t o
i n d iv id u a ls in t h e fir st in sta n c e . T h i s is o u r a s s u m p tio n , w it h so m e
p a r t o f t h a t ta k e n o u t in p e r s o n a l s a v in g s , a n d t h e i n it ia l in cre a se
in G N P , a c c o r d in g t o t h is a p p r o a c h , is $ 7 .4 b illio n . B u t t h a t $ 7 .4
b i lli o n b e c o m e s in c re a se d in c o m e . S o m e o f t h a t in c re a se d in c o m e is
in n o n p e r s o n a l f o r m . T h e r e f o r e , in t e r m s o f p e r s o n a l c o n s u m p tio n ,
t h is s h o u ld b e s u b tr a c te d o u t.
20
ECONOMIC REPORT OF THE PRESIDENT
T h e n s o m e p o r t io n o f t h e in c re a se in p e r s o n a l in c o m e g o e s in t o t a x e s ,
a n d o f t h e d is p o s a b le in c o m e l e f t a f t e r t a x e s , s o m e p o r t io n g o e s t o
p e r s o n a l s a v in g s .
T h e r e m a in in g a m o u n t is reflec ted i n in c re a se d
c o n s u m p tio n .
T h i s t a b le , lik e t h e c h a r t, ta k e s n o a cc o u n t o f t h e e ffe c ts o f in
cre a se d c o n s u m p tio n i n s t im u la t in g in v e stm e n t.
C h a ir m a n D o u g l a s . T h e t o t a l in c re a se in c o n s u m p tio n is a p p r o x i
m a t e ly $ 2 0 b illio n ?
M r. M oor. W h ich w ould be about 2 % tim es.
C h a ir m a n D o u g l a s . In ste a d o f tw o . W h a t abo u t th e secon d ary
e ffe c t?
A la r g e p o r tio n , o f co u rse, o f t h is in c re a se in c o n s u m p t io n
w i l l b e p r o d u c e d w it h e x is t in g in v e ste d c a p ita l, b u t p a r t o f t h e i n
c re a se d c o n s u m p tio n w i l l r e q u ir e a d d it io n a l c a p ita l.
D o y o u h a v e a n e s tim a te o f t h a t ?
M r. M oor. T h i s is m o r e d ifficu lt t o p r e d ic t. T h e lo w e r p a r t o f
c h a r t 3 is v e r y s im ila r t o th e C o u n c il’s c h a r t, t h e p a r t r e p r e s e n tin g
in d u c e d c o n s u m p tio n , o r t h e a m o u n t o f in c re a se s in c o n s u m p tio n
c o m i n g a b o u t f r o m th e t a x r e d u c tio n , a m o u n tin g t o a li t t le o v e r $ 2 0
b illio n , o n ce t h e t o t a l flo w h a s w o r k e d i t s e lf o u t.
W e t h e n f u r t h e r a ssu m e d t h a t a fe e d b a c k in to in v e s tm e n t o f a b o u t
fiv e -e ig h t h s o f t h e in c re a se d c o n s u m p tio n , w it h a la g .
So i f you have
a n in c re a se d c o n s u m p tio n o f $ 7 .5 b illio n , r o u g h ly , w e a ssu m e d t h a t
i n t h e sec o n d p e r io d a t le a s t so m e b u sin e ss fir m s w o u ld h a v e t o r e a c t
b y o r d e r in g a d d it io n a l c a p it a l e q u ip m e n t.
“ G u e s s e s t im a t in g ” a t
t h a t , w e s a id i t w o u ld b e a b o u t fiv e -e ig h th s o f t h e in i t i a l in c re a se i n
c o n s u m p tio n .
C o n t i n u in g t h a t , th e a g g r e g a te in c re a se in c o n s u m p tio n i n t h e sec
o n d p e r io d is a li t t l e o v e r $ 1 2 b illio n , so w e t o o k fiv e -e ig h t s o f t h a t ,
a n d so o n .
O u r t o t a l e stim a te c a m e o u t w it h a n in c re a se in a g g r e g a t e
d e m a n d , b o t h f r o m c o n s u m p t io n a n d in v e s tm e n t, o f a r o u n d $ 3 3 b i l
lio n .
C h a ir m a n D o u g l a s . W h a t y o u c a ll th e seco n d fa c t o r i s g e n e r a lly
k n o w n a s th e a c c e le r a to r fa c t o r as d is tin g u is h e d f r o m t h e m u lt ip li e r
fa c t o r , a n d t h e c la s s ic a r tic le o n t h is w a s w r it te n in 1 9 1 7 , b y J . M .
C la r k , “ B u s in e s s A c c e le r a t io n a n d t h e L a w o f D e m a n d ,” i n th e
J o u r n a l o f P o li t i c a l E c o n o m y , I b e lie v e , in M a r c h .
M r. M oor. I was told that by the Senator. I didn’t know.
I f o n e w a n t e d t o p u s h t h is o n e ste p f u r t h e r , th e r e p r e s u m a b ly
w o u ld b e s o m e s t im u la t iv e effe ct f r o m th e se in c re a se s in in v e s tm e n t, a
p la y b a c k o n t h e m u lt ip lie r .
C h a ir m a n D o u g l a s . Y o u g e t a t o t a l m u lt ip lie r , t h e r e fo r e , o f a p
p r o x im a t e ly 4 ?
M r. M oor. T he total increase in GNP from both the consum ption
and investm ent side m ight be 3.5 or near 4.
M r . H e l l e r . M r . C h a ir m a n , m a y M r . A c k l e y n o w g o t o o u r t h ir d
c h a r t w h ic h d o e s t h e sa m e t h in g a s y o u r seco n d c h a r t ?
S e n a t o r S p a r k m a n . M r . C h a ir m a n , b e fo r e th ese c h a r ts a re d isp o se d
o f , I h a v e a q u e s tio n . M a y I a s k : T h o s e p e r io d s , 1 , 2 , 3 , a n d o n o u t t o
12 , d o t h e y c o r r e s p o n d t o y e a r s ?
Y o u u sed t h a t in b o t h c h a r ts .
M r . M o o r . T h e in it ia l p r o b le m , as M r . C u r t is in d ic a te d a f e w m in
u te s asro, is h o w th is $ 8 b illio n i n i t i a l ly b e g in s t o p u m p i t s e l f o u t.
T h e C o u n c il h a s m a d e a n e s tim a te , I b e lie v e , t h a t 5 0 p e rc e n t o f th e
s tim u lu s w o u ld reflect i t s e lf in 1 y e a r .
ECONOMIC REPORT OF THE PRESIDENT
21
C h art 1
H y p o th e tic a l
fr o m
I n c r e a s e in C o n s u m p t i o n D e m a n d
I-Y e a r T ax C ut
Billions
of Dollars
Q----- -------------
Increases in Non-Personal Income
Increases in Personal Taxes
Increases in Personal Savings
II
III
IV
V
VI
VII
VIII
IX
X
22
ECONOMIC REPORT OS' THE PRESIDENT
Ch art 2
H y p o th e tic a l
fr o m
In crea ses
P erm a n en t Tax
Billions of Dollars
in G N P
R e d u c tio n
ECONOMIC REPORT OF THE PRESIDENT
C h art 3
H y p o t h e t ic a l E x a m p le o f E c o n o m ic S t im u la t io n
in b o t h I n d u c e d
fr o m
C o n s u m p tio n
and
a Tax Cut
Billions of Dollars
3 5 — -------- -- —
* Assumes 5/8 response of Investment to increased consumption, with one period lag.
In v e stm e n t
23
24
ECONOMIC REPORT OF THE PRESIDENT
A n o t h e r w a y t o d o t h is is to a ssu m e t h a t th e se p e r io d s a r e q u a r te r y e a r s , a t a n n u a l r a te s. T h a t is, o f th e $ 8 b illio n , e v e r y d a y th e r e w ill
be in c re a se s in in c o m e a n d in creases in c o n s u m p tio n t h a t , i f t o t a le d
t h r o u g h a y e a r , w o u ld a m o u n t t o $ 8 b illio n , a n d b u sin e ssm e n b e g in
t o r e a c t a n d so o n .
T h e s e p e r io d s m i g h t b e v ie w e d as q u a rte rs o f y e a r s a t a n n u a l r a t e s ,
a lt h o u g h t h a t m a y b e a lit t le o p t im is t ic in t e r m s o f h o w f a s t i t g e t s
o u t.
S e n a t o r S p a r k m a n . I t w o u ld seem t o m e t h a t th e r e w o u ld h a v e t o
b e a d e fin ite t im e t h a t y o u w o u ld a ssu m e t h a t t h e w h o le im p a c t w o u ld
b e f e lt , t h a t y o u c o u ld n ’t ju s t a ssu m e o n e o f th o s e p e r io d s t o b e a q u a r
t e r a n d t h a t t h e im p a c t is f e l t th e r e , i f y o u a re g o i n g t o h a v e c o n
t in u i t y o n y o u r c h a r t.
M r. M oor. I f one were to start w ith our in itial assum ptions o f an $8
billion tax reduction all at once, and this is, as was pointed out, not
the adm inistration’s program , i f th at were true you m ight expect
that the fu ll effects w ould be fe lt in , say, 3 or 4 years.
C h a ir m a n D o u g l a s . M r . A c k l e y , y o u m a y p r o c e e d w it h y o u r o t h e r
c h a r t.
M r . A c k l e y . C h a r t 3 is b a se d o n C h a r t 1 , M r . C h a ir m a n . W e h a v e
b e e n s o m e w h a t le ss b o ld th a n M r . M o o r in o u r w illin g n e s s t o a tt e m p t
t o e s tim a te q u a n t it a tiv e ly th e in v e stm e n t effects o f th e e x p a n s io n o f
d e m a n d , b u t w e h a v e t r ie d t o in d ic a te in a n illu s t r a t iv e w a y th e f a c t
t h a t r is in g d e m a n d w o u ld a lso le a d t o a n in c re a se in in v e s tm e n t. W e
h a v e s u p e r im p o s e d o n th e p r e v io u s c h a r t so m e b a r s in d ic a t in g a p o s
s ib le d e v e lo p m e n t o f in v e s tm e n t e x p e n d itu r e s.
W e h a v e a ls o s h o w n s o m e th in g w h ic h M r . M o o r o n ly r e fe r r e d t o ,
b u t w h ic h w a s n o t o n h is c h a r t, a n d t h a t is th e f a c t t h a t w h a t e v e r i n
c r e m e n t o cc u rs o f in v e s tm e n t s p e n d in g i t s e lf h a s a m u lt ip li e r effe c t.
T h e a d d it io n a l in c o m e s ea r n e d in p r o d u c in g a d d it io n a l c a p ita l g o o d s
w i l l b e r e c e iv e d b y c o n su m e r s a n d re sp e n t in t h e sa m e w a y a s th e a d
d it io n a l in c o m e s ea r n e d in th e p r o d u c tio n o f c o n su m e r g o o d s.
S o ea ch in c r e m e n t o f in v e s tm e n t m i g h t b e e x p e c te d to g e n e r a te a d
d it io n a l c o n s u m p tio n , a n d ea ch in c re m e n t o f c o n s u m p tio n s t ill f u r
th e r a d d it io n a l c o n s u m p tio n , a n d so o n . T h e s e in c r e m e n ts a re s h o w n
o n th e t o p s o f th e o th e r b a r s, b e g in n in g in p e r io d 3.
T h u s th e t o t a l im p a c t o f G N P , w h o se size w e d id n o t v e n tu r e to
e s tim a te p r e c is e ly , is s u r e ly m u c h la r g e r t h a n th e p u r e c o n s u m p tio n
m u lt ip li e r effe c t a lo n e .
C h a ir m a n D o u g l a s . C o n g r e s s m a n C u r tis .
R e p r e s e n t a t iv e C u r t i s . F i r s t , le t m e jo in in th e r e m a r k s t h a t th e
C h a ir m a n o f t h e C o u n c il m a d e as h e c lo se d h is sta te m e n t. I , to o , h o p e
th e J o i n t E c o n o m ic C o m m itt e e w ill p l a y a m a jo r r o le in a s s u r in g t h a t
th e g r e a t t a x d e b a te o f 1 9 6 3 w ill b e a n in te llig e n t a n d c o n s tr u c tiv e one.
B u t w h a t I w a n t t o p o in t o u t is t h a t u n til n o w th e a ffirm a tiv e is
s t ill m a k i n g it s case. T h i s is th e first 1 0 m in u te s th e l o y a l o p p o s itio n
h a s b een g iv e n .
W e h a v e h a d a series, a lm o s t an a v a la n c h e , o f th re e P r e s id e n tia l
m e s s a g e s : O n th e s ta te o f th e N a t io n , th e b u d g e t, a n d th e t a x p r o g r a m .
A l l s in g th e s a m e th e m e . N o w w e h a v e th e P r e s id e n t ’s E c o n o m i c R e
p o r t. W e r e c e iv e d th e b u d g e t o n J a n u a r y 1 7 , th e E c o n o m ic R e p o r t
on J a n u a ry 21 , an d ta x m essage on J a n u a ry 24.
EFFECT
OF TAX REDUCTION
INCLUDING
ON CONSUMPTION
STIMULUS
TO
AND
GNP
INVESTMENT
Additions to GNP
(Billions of Dollars)
ECONOMIC
REPORT
Consumption
OF
THE
Investment
P R E S ID E N T
Chart 3
Consumption
2
3
TIME PERIODS
4
ECONOMIC REPORT OF THE PRE^IDEl^T
F r a n k ly , i t is a h a r d jo b t o g o t h r o u g h a ll o f t h is m a t e r ia l. B u t I a m
t r y i n g . T h e lo y a l o p p o s itio n la c k s su fficien t s ta ff to s t u d y t h is c a r e
fu lly .
I a m h o p i n g t h a t o u r sid e w i ll g e t so m e t im e , e v e n i n th e p r e ss. T h e
p e o p le m u s t b e m a d e a w a re o f th e o th e r o p in io n s . I h a v e p r e p a r e d a
sp e ech t h a t I a m p u t t in g in to th e R e c o r d t o d a y w h ic h is a p r e lim in a r y
s ta te m e n t o f a n o p p o s in g p o s itio n . I h o p e t o ta k e t h e flo o r T h u r s d a y
t o p r o v id e a n o p p o r t u n ity f o r th o se t o d e b a te t h a t o p e n in g sta te m e n t.
I th in k i t is im p o r t a n t t h a t w e h a v e d e b a te b ec a u se so m e o f th e
b a sic p r e m is e s u p o n w h ic h t h is w h o le e c o n o m ic t h e o r y is b a se d a r e in
d is p u t e .
W e m u s t r e v ie w th e se p r e m ise s i f w e a re g o i n g t o d isc u ss th e n eces
s it y o f a t a x c u t a n d its u lt im a t e effect o n th e e c o n o m y .
M r . H e ll e r , is n ’t i t t r u e t h a t o u r g r o w t h r a t e f o r t h e p a s t 1 0 0
y e a r s h a s a v e r a g e d a lit t le le ss t h a n 3 p e rc e n t ? I t is so m e w h e r e a r o u n d
2 .9 p e rc e n t, d e p e n d in g o n h o w y o u m e a su re it.
M r . H eller . M r . C u r t is , th e fig u re sin c e 1 9 0 0 is a b o u t 3 p e rc e n t.
R e p r e s e n ta tiv e C u r tis . I t h o u g h t i t w a s f r o m 1 8 6 0 . D o y o u k n o w
w h e th e r th e r e a re fig u re s b a c k to 1 8 6 0 ?
M r . H eller . I t h in k so m e fr a g m e n t a r y e stim a te s h a v e g o n e b a c k
b e y o n d 1 9 0 0 , b u t t h e y a re n o t o ft e n u sed .
R e p r e s e n ta tiv e C u rits . T h e rea so n I ra ise t h e p o in t is t h a t th e
b a s e o f y o u r t h e o r y , a s w e ll as th e P r e s id e n t ’s is th e e c o n o m ic g a p .
Y o u a ssu m e t h a t o u r e c o n o m y is n ’t g r o w i n g as f a s t as i t c o u ld , a n d
t h a t th e g r o w t h r a te sh o u ld b e a r o u n d 4 .5 p e rc e n t.
I s t h a t r ig h t ?
M r . H eller . M r . C u r t is , th e b a c k g r o u n d is o n ly p a r t ly t h e m a t t e r
o f th e s lo w d o w n in o u r r a te o f g r o w t h . W e h a d a r a te o f g r o w t h
in t h e e a r ly p o s t w a r p e r io d o f a b o u t 4 .3 p e rc e n t. O u r a c tu a l r a te o f
g r o w t h in th e p a s t 5 y e a r s h a s b een a b o u t 3 p e r c e n t; o u r p o t e n tia l
a b o u t 3 .5 p e rc e n t.
T h e o th e r p a r t o f it , t h o u g h , is s im p ly th e u n d e r e m p lo y m e n t o f o u r
e x i s t i n g m a n p o w e r a n d in d u s t r ia l c a p a c ity .
Representative C u rtis . Y ou are begging the question.
M r . H eller . I d id n ’t m e a n t o .
R e p r e s e n ta tiv e C u rtis . I a m t r y i n g to g e t t h is in to c o n te x t. I f th e
1 8 6 0 to 1 9 6 0 fig u r e is a b o u t t h a t , a n d I t h in k i t is , w e h a v e e x p a n d e d
e c o n o m ic a lly . W e h a v e p r o b a b ly g r o w n m o r e r a p id ly th a n a n y o th e r
econ om y.
I f th e a v e r a g e r a te tu r n s o u t t o b e a r o u n d 3 p e r c e n t, i t b e c o m e s a
s e r io u s q u e stio n a s t o w h y y o u t h in k th e r a te s h o u ld s u d d e n ly b e c o m e
d iffe r e n t f o r th e six tie s . A r e y o u p o s s ib ly s u g g e s t in g t h a t y o u r g a p
th e o r y is in e r r o r .
A s I h a v e s u g g e s te d b e fo r e , w h a t y o u i d e n t i f y a s t ir e d b lo o d I c o n
s id e r a s g r o w i n g p a in s .
L e t m e a s k y o u t h is q u e s t io n : W h y h a v e y o u p ic k e d th e y e a r 1 9 5 7 as
& s e p a r a tio n p o i n t ? Y o u r e stim a te s g o f r o m 1 9 4 7 t o 1 9 5 7 , a n d 1 9 5 7
to 1962.
W h y is 1 9 5 7 ch osen ?
M r . H eller . T h e y e a r o f 1 9 5 7 w a s a c le a r c u t t u r n i n g p o in t in w h ic h
a g a p o p e n e d u p i n o u r u t iliz a t io n o f reso u rces t h a t h a s s im p ly n e v e r
b e e n c lo se d .
R e p r e s e n ta tiv e C u rtis . B u t , D r . H e ll e r , y o u b e g th e q u e stio n .
I am
t r y i n g t o fin d o u t i f th e r e r e a lly is a g a p .
I w i l l t e ll y o u w h a t is
p e c u lia r a b o u t 1 9 5 7 , a n d I t h in k y o u w i l l a g ree.
I t w as a peak.
ECONOMIC REPORT OF THE PRESIDENT
27
I f y o u h a d ta k e n 1 9 5 8 , y o u w o u ld h a v e a d iffe r e n t p ic tu r e .
W hy
d i d n ’t y o u u se 1 9 4 6 t o 1 9 5 6 ?
Y o u w o u ld h a v e a n e n t ir e ly d iffe re n t
p ic tu r e , w o u ld y o u n o t ?
M r . H eller . I n o u r c o m p a r iso n s— n o t a ll o f w h ic h h a v e , b y th e
w a y , b een ce n te re d o n 1 9 5 7 b u t so m e o f th e m o n 1 9 5 3 , so m e o f t h e m
o n 1 9 5 5 , so m e o f t h e m o n 1 9 5 7 . W e h a v e b een c a r e fu l t o ta k e c o m
p a r a b le sta g e s , u s u a lly p e a k s, in th e b u sin e ss cy c le .
W e h a v e n o t m a d e c o m p a r iso n s fr o m , s a y , th e t r o u g h o f o n e c y c le
t o th e p e a k o f th e n e x t , o r th e p e a k o f one to th e t r o u g h o f th e n e x t,
b eca u se t h a t w o u ld b e m a n ip u la t io n .
Y o u h a v e t o ta k e s im ila r p o s i
t io n s in th e b u sin e ss c y c le a n d t h a t is w h a t w e h a v e d o n e.
R e p r e s e n ta tiv e C u r tis . T h a t is th e q u estio n .
H a v e y o u , r e a lly ?
I s 1 9 6 2 a c o m p a r a b le c y c lic a l p e r io d to th a t o f 1 9 5 7 ?
P r e v io u s ly , th e
C o u n c il u sed 1 9 5 3 as th e t a k e -o ff p o in t.
I p o in te d o u t t h a t t h a t w a s a w a r y e a r , a n d c e r t a in ly n o t a n a c c u
r a te s t a r t in g -o ff p o in t.
I n t h is sense I t h in k th e r e h a s b een m a n ip u la
t io n o f th e b a se p e r io d s ch osen .
W h a t n e e d s to b e d o n e is to e sta b lish w h y y o u t h in k 1 9 5 7 is a f a i r
ta k e o ff p o in t.
M a y b e y o u c a n , b u t d o n ’t d o it b y a r g u in g th a t t h is
is w h e n th e g a p s ta r te a .
W e a re t r y i n g to fin d o u t i f it d id o ccu r.
I k n o w y o u a re f a m i li a r w it h D r . A r t h u r B u r n s ’ p a p e r , in w h ic h h e
Eo in te d o u t t h a t , u s i n g y o u r m o d e l to e sta b lish th e g a p b u t a d iffe re n t
ase o f a 4 -p e r c e n t u n e m p lo y m e n t, y o u w o u ld rea ch d iffe re n t c o n c lu
s io n s.
M r . H eller . H o w e v e r , i t is f r o m D r . B u r n s ’ N a t io n a l B u r e a u o f
E c o n o m ic R e s e a r c h t h a t w e ta k e o u r c o m p a r a b le p o in ts in th e b u sin e ss
c y c le . L a s t y e a r w e m a d e o u r c o m p a r iso n s b e tw e e n th e p o s tw a r p e
r io d u p to 1 9 5 5 , M r . C u r t is , a n d th e n fr o m 1 9 5 5 o n to th e n e x t p e a k .
A t t h e p r e s e n t t im e , t h e re a so n w e a re u s in g th e 1 9 6 2 c o m p a r is o n
w it h th e 1 9 5 7 p e a k is t h a t w e h a d a r e c o v e r y th a t , a s y o u k n o w , w e n t
v e r y f a s t in 1 9 6 1 a n d th e n ta p e r e d o ff in 1 9 6 2 in to w h a t w e m a y
c a ll a r is i n g p la te a u .
W e h a v e b een c o m p a r in g t h a t p la te a u w ith
th e v e r y s im ila r 1 9 5 7 s itu a tio n , w h ic h seem s lik e a rea so n a b le c o m
p a r is o n .
R e p r e s e n ta tiv e C u r tis . B u t 1 9 5 7 w a s n o t a p la te a u .
M r . H eller . A b r i e f p la te a u b e fo r e i t tu r n e d d o w n in to th e r e
cessio n o f 1 9 5 7 -5 8 .
R e p r e s e n ta tiv e C u r tis . T h i s is a n a re a in w h ic h I t h in k y o u m u s t
b r i n g f o r w a r d y o u r w o r k in g p a p e r s so t h a t w e c a n d e b a te , r a th e r
t h a n b e g th e q u e stio n .
I n a ll o f th ese d o c u m e n ts, th e u se o f th e
p e r io d s 1 9 5 7 to 1 9 6 2 a n d 1 9 4 7 t o 1 9 5 7 h a s n o t b e e n ju s tifie d .
I n th e
p a s t I q u e stio n e d t h e u se o f 1 9 5 3 .
A t t h a t t im e , e v e r y a r g u m e n t p o in te d o u t t h a t it w a s in e r r o r .
L e t m e a sk o n e q u e stio n a b o u t d is p o s a b le in c o m e sin c e m y t im e is
r a p id ly r u n n in g o u t.
A t h ig h e r le v e ls o f d isp o sa b le in c o m e , as a n tic ip a te d w it h a t a x c u t,
d o e s th e p e rc e n t o f in c o m e sa v e d in c re a se ?
O r , t o p u t i t a n o th e r
w a y , d o es th e m a r g in a l p r o p e n s it y t o sa v e in c re a se as in c o m e in
c reases ?
I f so , d o es th e 9 3 p e r c e n t a v e r a g e s p e n d in g p a t te r n h o ld tru e f o r
th e in c re a se in d is p o s a b le in c o m e r e s u lt in g f r o m a t a x c u t ?
I h a v e b een t r y i n g to fin d o u t w h a t th e s a v in g s r a te w a s d u r in g
t h e 1 9 2 0 ’s o r o th e r p r e v io u s p e r io d s.
I k n o w t h e 1 9 3 0 ’s w o u ld b e u n
9 3 7 6 2 — 63— p t. 1-------- 3
ECONOMIC REPORT OF THE PRESIDENT
28
fa ir .
I t w a s a r o u n d 3 p e rc e n t th e n . W h a t m a k e s y o u t h in k t h e 1 9 5 0
p e r io d is n o r m a l ? H a v e y o u c o m p a r e d it w it h o th e r p e r io d s in o u r
e c o n o m ic a d v a n c e m e n t?
T o th e 1 9 2 0 ’s ?
T o t h e 1 9 1 0 ’s ?
T h i s is im p o r t a n t .
Y o u u se t h is a s a v e r y b a s ic a s s u m p tio n .
( T h e f o ll o w i n g w a s la te r re c e iv e d f o r th e r e c o r d :)
It is apparent from almost any index we choose that the rate of U.S.
economic growth was considerably higher in the earlier years than it has
been in the later years of the postwar period. This change obviously did
mot occur aU at once at a single point in time, but developed in the mid-1950’s.
Choice of a single year for the “turning point” can hardly be avoided when
making comparisons between the earlier and the later years.
In selecting some single dividing year, we must obviously take account of
purely cyclical considerations. Clearly, we do not wish to use a recession year,
and this eliminates 1954 and 1958. This leaves 1953, 1955, 1956, and 1957. As
the table below shows, it does not make a great deal of difference which of these
years we choose as the dividing point—in any case the growth rate in the earlier
period is substantially above that in the latter.
[In percent]
Period
1947-53—
- .
1953-62.
____
1947-55............... ..............
1955-62 .
Average annual rate of
growth
GNP in
constant
prices
Total em
ployment
4.8
2.7
4.3
2.7
1.6
.9
1.3
1.2
Period
Average annual rate of
growth
GNP in
constant
prices
1947-56.............................
1956-62................ ............
1947-57.........— ...............
1957-62. ________ _____
4.1
2.8
3.9
3.0
Total em
ployment
1.4
.8
1.3
.9
The year 1953 might be eliminated on the ground that it was a year of very
high, perhaps over-full employment (unemployment rate 2.9 percent). This
leaves 1955,1956, and 1957. Choosing 1957 as the breaking point is conservative,
and minimizes the extent of the divergence between the earlier and later years.
Choice of 1955 or 1956 would be equally defensible, and would make the contrast
between the early years of rapid growth and the later years of slow growth
even more dramatic.
It is clear that, choosing any of these years as a dividing point, the economy
lias not been growing as fast in recent years as it did earlier. Choice of 1957
as the dividing point is quite independent of any “gap” analysis.
M r . H eller . A s to th e first p a r t o f y o u r q u e stio n , one o f t h e t h in g s
w e h a v e tr ie d to d o in th e r e p o r t, M r . C u r t is , w a s t o p o in t o u t th a t
w h e n in c o m e ro se a n d f e l l in th e p o s t w a r y e a r s , i t seem ed t o h a v e
n o im p a c t o n th e s a v in g r a te .
I n o th e r w o r d s , i t seem ed t o b e a
v e r y s te a d y k in d o f s a v in g r a te , w h e th e r i t ro se o r f e l l in r esp o n se
to t a x c h a n g e s , f o r e x a m p le .
R e p r e s e n ta tiv e C u r tis . B u t in r e la tio n t o g r o s s n a t io n a l p r o d u c t
in 1 9 6 1 -6 2 , w e h a d a n in c re a se , d id n ’t w e ?
M r . H eller . I n 1 9 6 1 -6 2 a c tu a lly w e h a d a s lig h t d e cre ase in th e
s a v in g r a te o u t o f in c o m e .
R e p r e s e n ta tiv e C urtis . I w a s r e la tin g i t to G N P .
M r . H eller . I n a r e c o v e r y p e r io d p e o p le t r y t o s p e n d a h ig h e r
p r o p o r t io n o f t h e ir in c o m e a n d th e s a v in g r a te t y p i c a lly d r o p s o ff
in su c h a p e r io d .
T h e s a v in g r a te d id s h r in k a b i t in t h is r e c o v e r y
p e r io d as w e ll a s in e a r lie r o n es.
R e p r e s e n t a t iv e C u rtis . I w a s stru c k b y th e f a c t t h a t e v e n d u r i n g
th ese p o s t - W o r l d W a r I I recessio n s d is p o s a b le p e r s o n a l in c o m e c o n
tin u e d t o in cre a se .
ECONOMIC REPORT OF THE PRESIDENT
29
T h e s a v in g s r a te d i d flu c tu a te a b it.
B u t t h a t b e a rs d ir e c t ly o n th e
q u e s tio n o f w h e th e r w e a re c o r r e c t in i d e n t i f y i n g w e a k c o n su m e r
p u r c h a s in g p o w e r a n d d e m a n d a s th e b a sis o f a n a lle g e d w e a k n e ss in
our econom y.
M r . H eller . P e r h a p s th e o th e r c o m m e n t t h a t sh o u ld b e m a d e ,
a p r o p o s o f t h e c o m p a r is o n o f th e p o s tw a r p e r io d w i t h t h e p r e w a r
p e r io d s , is t h a t b a sic in s titu tio n s i n t h e e c o n o m y h a v e c h a n g e d .
T h a t is t o s a y , w e h a v e , f o r e x a m p le , in tr o d u c e d a v e r y w id e s p r e a d
s o c ia l s e c u r ity s y s t e m ; G o v e r n m e n t e x p e n d itu r e s as a w h o le a re a
c o n s id e r a b ly la r g e r p e r c e n ta g e o f g ro ss n a t io n a l p r o d u c t ; w e h a v e
b u ilt in c e r ta in s ta b iliz e r s in th e ec o n o m y .
A s a r e s u lt, t h e e x p e rie n c e o f t h e p r e - W o r l d W a r I I p e r io d m u st
b e r e in te r p r e te d , so t o sp e a k , b e f o r e w e w o u ld r e g a r d it a s a p p lic a b le
to a p o s t w a r p e r io d in w h ic h o u r b a sic e c o n o m ic in s titu tio n s h a v e b een
v e r y s u b s ta n tia lly a lte r e d t o su sta in h ig h e r le v e ls o f d e m a n d , to
s u s ta in a n e c o n o m y w h ic h , i f n o t im m u n e f r o m r ec essio n , is a t le a st
im m u n e f r o m t h e s h a t t e r in g k in d o f d e p r e ssio n t h a t w e h a d in th e
1 9 3 0 ’s.
R e p r e s e n ta tiv e C u rtis . T h a t ex ercise m i g h t b e v e r y v a lu a b le in
i d e n t i f y i n g w h a t is h a p p e n in g .
I d o n ’t t h in k w e w o u ld w a n t to
r e tu r n t o th o s e d a y s , b u t m a y b e w e w o u ld i f w e lo o k e d a t t h e m c lo s e ly .
C h a ir m a n D ouglas. M r . P a tm a n .
R e p r e s e n ta tiv e P a t m a n . D r . H e ll e r , I , to o , c o n g r a t u la t e y o u a n d
th e C o u n c il o n a v e r y in fo r m a t iv e r e p o r t a n d th e in te r e s tin g w a y in
w h ic h y o u h a v e p r e se n te d i t h ere th is m o r n in g .
M r . H eller . T h a n k y o u , M r . P a tm a n .
R e p r e s e n ta tiv e P a t m a n . H o w e v e r , th e r e is a p o i n t o n w h ic h y o u r
r e p o r t le a v e s m e c o n fu se d .
I n m o s t p la c e s w h e re y o u t a lk a b o u t t a x cu ts, w h ic h i m p ly an
in c re a se in p u b lic d e b t, y o u t a lk in te r m s o f s t im u la t in g e m p lo y m e n t
a n d p r o d u c tio n .
B u t on p a g e 5 4 o f y o u r r e p o r t, w h e re y o u t a lk a b o u t
th e p o s s ib ilit y o f th e b a n k in g sy s te m p u r c h a s in g so m e o f t h is p u b lic
d e b t, y o u t a lk in t e r m s o f in fla tio n .
I h a d b een u n d e r th e im p r e ssio n th a t w h a t te n d s to cau se in fla tio n
is a c o n d itio n o f f u l l e m p lo y m e n t , o r n e a r f u l l e m p lo y m e n t , a n d n o t
th e m e th o d b y w h ic h y o u rea ch t h a t c o n d itio n .
A m I w r o n g in t h is a n a ly s is o f in fla tio n , D r . H e ll e r ?
M r . H eller . L e t m e p u t it t h is w a y : th e fu n d a m e n t a l a s s u m p tio n
w h ic h u n d e rlie s y o u r q u e stio n , n a m e ly , th a t w h e n y o u h a v e u n u tiliz e d
reso u rces, u n u tiliz e d m a n p o w e r , u n u tiliz e d in d u s t r ia l c a p a c it y , th e
f o r c e o f e x p a n s io n a r y fisca l a n d m o n e ta r y p o lic y e x p r e sse s i t s e lf in
h ig h e r o u t p u t a n d m o r e jo b s r a th e r th a n in h ig h e r p r ic e s is q u ite
c o rre c t.
T h e sp e ed w it h w h ic h a n y e x p a n s io n a r y a c tio n is t a k e n , o f co u rse,
is o n e fa c t o r in w h e th e r y o u in c u r in fla tio n a r y d a n g e r s ; t h a t is to s a y ,
i f y o u w e re t o p u t a n e n o rm o u s c h a r g e in to th e e c o n o m y a ll a t o n ce,
y o u m i g h t r u n in to b o ttle n e c k s ev e n a t le ss t h a n f u l l e m p lo y m e n t
le v e ls .
H o w e v e r , fu n d a m e n t a lly , I w o u ld a g r e e t h a t e x p a n s io n a r y a c tio n
c o m in g f r o m m o n e ta r y p o lic y a n d e x p a n s io n a r y a c tio n c o m in g f r o m
fisca l p o lic y , in s o f a r a s th e d o m e s tic e c o n o m y is c o n c e rn e d , s h o u ld h a v e
n o d iffe re n ce in t h e ir in fla t io n a r y o r e x p a n s io n a r y im p a c t .
R e p r e s e n ta tiv e P a t m a n . T h a n k y o u , sir.
30
ECONOMIC REPORT OF THE PRESIDENT
L a s t J u l y b e f o r e t h e H o u s e B a n k i n g C o m m itt e e , a n d a g a in la s t
A u g u s t b e fo r e t h is c o m m itte e , C h a ir m a n M a r t i n , o f th e F e d e r a l R e
s erv e B o a r d s a id t h a t i f th e r e w e re a n y in c re a se in t h e d e fic it, h e
w o u ld ta k e th e p o s itio n t h a t th e d e ficit w o u ld h a v e to b e fin a n c e d
o u t o f s a v in g s , n o t o u t o f b a n k -c r e a te d m o n e y .
O v e r la s t y e a r , t h e F e d h a s h a d t h e b a n k s in a p o s itio n w h e r e th e y
h a v e $ 3 0 0 t o $ 4 0 0 m i llio n o f n e t -fr e e r eserv es, f o r th e m o s t p a r t .
M y q u e s tio n is t h i s : I f M r . M a r t i n d id c a r r y o u t h is t h r e a t to
p r e v e n t th e b a n k s f r o m in c r e a s in g t h e ir h o ld in g s o f g o v e r n m e n ts , h e
w o u ld h a v e to p u t t h e m in a p o s itio n w h e re t h e y w o u ld h a v e t o h a v e
v ir t u a ll y n o n e t -fr e e reserv es, w o u ld h e n o t. D r . H e l l e r ?
M r . H eller . T h e im p a c t o f th e fin a n c in g o f a d e fic it t h a t w o u ld
g r o w o u t o f th e p r e se n t e c o n o m ic s itu a tio n , p lu s th e t a x p r o g r a m , w i l l
d e p e n d in c o n s id e r a b le p a r t , o n w h a t th e F e d e r a l R e s e r v e S y s t e m d o e s
t o t h e re se rv e s o f t h e b a n k in g sy ste m .
W h e n w e lo o k a t th e r e la tio n
s h ip b e tw e e n m o n e ta r y p o lic y a n d fisca l p o lic y in t h is p e r io d , w e h a v e
t o lo o k a t i t i n te r m s v e r y la r g e ly o f th e im p a c t o n reserv es. I f th e
re se r v e p o s itio n is k e p t e a sy , th e n th e b a n k in g s y s te m c a n a b so rb p a r t
o f th e G o v e r n m e n t d e b t. I t m a y n o t n e c e ssa r ily p u r c h a se t h is d e b t d i
r e c t ly — i t d id n o t d o so in 1 9 6 2 — b u t it m a y m a k e i t ea sier f o r o th e r s to
d o so.
I f th e r eserv e p o s itio n is t ig h te n e d u p , o f co u rse, th e b a n k in g s y s te m
w o u ld b e in a v e r y t ig h t p o s itio n a n d n o t in a g o o d p o s itio n t o a b so rb
t h e F e d e r a l d e b t t h a t w o u ld a rise o u t o f th e p r o g r a m .
R e p r e s e n t a t iv e P a t m a n . I w is h y o u w o u ld a n s w e r m o r e c le a r ly th e
la t t e r p a r t o f m y q u estio n . I n o r d e r f o r h i m t o c a r r y o u t t h is s ta te
m e n t , i f h e a c t u a lly e x p e c ts to c a r r y it o u t, a n d I a m a f r a i d h e m i g h t ,
w o u ld h e n o t h a v e to re d u c e t h a t $ 3 0 0 o r $ 4 0 0 m i lli o n d o w n t o p r a c
t i c a lly n o t h i n g ?
M r . H eller . W h a t I w a s t r y i n g to s a y w a s t h a t I d o n ’t w a n t t o p u t
a sp e cific r e d u c tio n in th e w o r k s h e re in a n s w e r in g y o u r q u e stio n . B u t
h e w o u ld h a v e t o tig h te n th o se reserv es, y o u a r e q u ite r ig h t , in o r d e r
t o c a r r y o u t th a t . I d o n ’t k n o w w h e th e r M r . A c k l e y w ish e s to c o m
m e n t fu r t h e r o n t h a t p o i n t .
R e p r e s e n t a t iv e P a t m a n . W o u l d y o u lik e t o , M r . A c k l e y ?
M r . A c k l e y . I w o u ld o n ly a d d t h a t i f th e r e w e r e n o e x p a n s io n in
t h e t o t a l v o lu m e o f reserv es a v a ila b le to th e c o m m e r c ia l b a n k in g s y s
te m , th e n , o b v io u s ly , th e in c re a se d fin a n c ia l d e m a n d s t h a t a c c o m p a n ie d
a n e x p a n d in g e c o n o m y w o u ld h a v e to b e m e t w it h a c o n sta n t s u p p ly o f
m o n e y , a n d t h is w o u ld h a v e so m e effe c t in t ig h t e n i n g in te r e st r a te s a n d
t i g h t e n i n g th e a v a ila b ilit y o f c r e d it— n o t n e c e ssa r ily a la r g e effe c t,
b u t, n e c e s s a r ily , so m e effe ct.
T o avoid such tightening there would have to be some expansion in
reserves at the same tim e that the expansion o f demand occurred.
R e p r e s e n ta tiv e P a t m a n . I b e lie v e t h a t th e F e d e r a l R e s e r v e p e o p le
h a v e b een t r y i n g t o re a ch so m e u n d e r s ta n d in g w it h fo r e ig n c e n tra l
b a n k e r s c o n c e r n in g c o o r d in a tio n o f m o n e ta r y p o lic ie s a n d a v o id in g u n
d u e r u n s o n t h e d o lla r .
W o u l d i t b e im p r o p e r f o r y o u to s a y w h e th e r o r n o t th e r e is a n y
u n d e r s t a n d in g b etw e en th e F e d e r a l R e s e r v e a n d th e a d m in is t r a t io n
w h ic h w o u ld a ssu re y o u t h a t th e F e d e r a l R e s e r v e w i l l n o t w ip e o u t
t h e e ffe c ts o f th e t a x c u ts ?
ECONOMIC REPORT OF THE PRESIDENT
31
M r . H e l l e r . M r . P a t m a n , th e r e h a s b e e n q u ite c lo se c o n s u lta tio n
w it h M r . M a r t i n o n th e p a r t o f b o t h t h e P r e s id e n t a n d t h e S e c r e ta r y
o f th e T r e a s u r y , th e D ir e c t o r o f th e B u d g e t , a n d t h e C h a ir m a n o f
th e C o u n c il.
I b e lie v e t h a t th e d a n g e r s in h e r e n t in a n u n d u ly r e str ic
tiv e m o n e ta r y p o lic y , th e d a n g e r s in h e r e n t in t e r m s o f o ffs e tt in g th e
im p a c t o f a t a x r e d u c tio n , f o r e x a m p le , a re v e r y t h o r o u g h ly u n d e r
s to o d .
I th in k t h a t t h e a c tio n s o f th e F e d e r a l R e s e r v e in t h e p a s t y e a r a n d
a h a l f o r 2 y e a r s in m a in t a in in g a t le a st a m i l d l y e x p a n s io n a r y m o n e
t a r y p o lic y t h r o u g h o u t th e r e c o v e r y , a re a re fle c tio n o f th e u n d e r
s t a n d in g w it h in th e a d m in is t r a t io n c o n c e r n in g th e n e c e ssity f o r a
b a la n c e d a n d c o h e re n t e x p a n s io n a r y p o lic y .
I f y o u p u t i t in te r m s
o f a n e x p lic it a g r e e m e n t t o d o e x p lic it t h in g s , n o su c h u n d e r s ta n d
i n g e x is ts .
B u t I b e lie v e t h a t th e issu es a re w e ll u n d e r s to o d a n d h a v e
b een d isc u sse d b etw e en M r . M a r t i n a n d o th e r m e m b e r s o f th e
a d m in is tr a tio n .
R e p r e s e n ta tiv e P a t m a n . T h e r e is n o w in k o r n o d , o r a n y t h in g lik e
th a t , th e n , in v o lv e d in i t ?
Y o u ju s t d o n ’t k n o w w h a t w i l l h a p p e n ?
O r a n u n c o n v e r s a tio n a l u n d e r s t a n d in g ?
M r . H elle r . W e l l , th e F e d e r a l R e s e r v e is a r e la tiv e ly in d e p e n d e n t
a g e n c y , a n d it is d ifficu lt t o p r e d ic t a t a n y g iv e n t im e w h a t th e y w ill
do.
H o w e v e r , t h e y a re o p e r a t in g , it see m s t o m e , w it h in a g e n e r a l
u n d e r s t a n d in g o f th e r e q u ir e m e n ts o f th e e c o n o m ic situ a tio n .
R e p r e s e n ta tiv e P a t m a n . W o u l d y o u co n c e d e t h a t , i f M r . M a r t i n
d id c a r r y o u t h is th r e a t, i f i t w a s a t h r e a t, t o w ip e o u t th e e ffe cts o f
a t a x r e d u c tio n , it w o u ld b e d e v a s ta t in g t o th e a d m in is t r a t io n ’s p l a n ?
M r . H elle r . In d e e d , i f su c h a m o n e ta r y p o lic y w e r e c a r r ie d th r o u g h ,
it w o u ld b e d e v a s ta t in g .
T h a t is a g o o d p a r t o f th e s u b je c t m a t t e r
o f o u r e x p lo r a t io n in c h a p te r 2 o f o u r a n n u a l r e p o r t, o n m e th o d s o f
fin a n c in g th e c u r r e n t d e fic it, w h ic h discu sses th e v a r io u s w a y s in w h ic h
th e m o n e ta r y p o lic y c o u ld fa c ilit a t e o r t h w a r t fisca l p o lic y .
R e p r e s e n ta tiv e P a t m a n . I a m v e r y a n x io u s t o see t h e F e d e r a l
R e s e r v e w o r k w it h th e a d m in is t r a t io n a s i t d i d y e a r s a g o w h e n w e
k e p t o u r in te re s t r a te s o n th e n a t io n a l d e b t d o w n t o 2 p e rc e n t o v e r
1 2 o f th e h a r d e s t y e a r s in h is to r y .
I t n e v e r w e n t a b o v e 2 p e rc e n t
o n G o v e r n m e n t b o n d s a n d n o G o v e r n m e n t b o n d s w e n t b e lo w p a r ,
w h ic h I t h in k w a s a p r e t t y g o o d r e c o r d .
I t h in k , i f w e h a d m a in t a in e d th e R o o s e v e lt a n d T r u m a n rates—
a n d I w a n t M r . C u r t is t o h e a r t h is — i f w e h a d k e p t th e R o o s e v e lt
a n d th e T r u m a n ra te s, w e w o u ld b e p a y i n g $ 5 b illio n a y e a r o n th e
n a t io n a l d e b t in s te a d o f $ 1 0 b illio n th is y e a r .
C h a ir m a n D o u glas . S e n a t o r S p a r k m a n .
S e n a t o r S p a r k m a n . D r . H e ll e r , I w a n t t o a d d m y w o r d o f c o m
m e n d a tio n t o y o u f o r a v e r y fin e sta te m e n t w h ic h y o u h a v e p r e se n te d .
I t h in k i t is a s g o o d a sta te m e n t as c o u ld b e p r e p a r e d o n t h is su b je c t.
M r . H eller . T h a n k y o u .
S e n a t o r S p a r k m a n . I t is v e r y e x p la n a to r y a n d I c o m m e n d y o u f o r
it. T h e r e a re s o m e q u e stio n s in m y m in d , a n d th e r e h a v e b een e v er
sin ce t h e p r o p o s e d t a x r e d u c tio n w a s a n n o u n c e d . I n a t u r a lly w o u ld
lik e to see a t a x r e d u c tio n , a n d I t h in k t h a t w o u ld b e tr u e o f p e o p le
g e n e r a lly t h r o u g h o u t th e c o u n tr y . B u t I t h in k th e r e is a g e n u in e c o n
cern as t o w h e th e r o r n o t th e t a x r e d u c tio n w i l l w o r k in t h e m a n n e r
p r e d ic te d .
32
ECONOMIC REPORT OF THE PRESIDENT
Y o u r s ta te m e n t h a s w e ll e x p la in e d w h y t h e p r e d ic tio n s w e r e m a d e
a n d o n w h a t b a s is t h e y a re n o w m a d e . I r e c a ll t h a t , in 1 9 5 4 , w e g a v e
a t a x r e d u c tio n a n d , a lso , i f I r e m e m b e r c o r r e c tly , th e t a x in c e n tiv e
f o r th e p u r c h a s e o f n e w p la n t a n d n e w e q u ip m e n t. I t h in k t h a t w a s
i n th e a c t o f 1 9 5 4 .
M r . H eller . A c c e le r a t e d d e p r e c ia t io n ; y e s , sir.
S e n a t o r S p a r k m a n . Y e s ; a n d w e h a d a c o n sid e r a b le u p t u r n in th e
e c o n o m y th e f o ll o w i n g y e a r a n d th e y e a r a f t e r t h a t . T h e n , a s I u n
d e r s ta n d y o u r s ta te m e n t, th e r e w a s a b r i e f p la t e a u in 1 9 5 7 , f o ll o w i n g
w h ic h w e h a d a recessio n , a d ip t h a t I p r e s u m e c o u ld b e a cc o u n ta b le
i n la r g e p a r t f o r th e la r g e s t s in g le d e fic it w e h a v e e v e r h a d in p e a c e
t im e in t h is c o u n tr y , $ 1 3 b illio n , I b e lie v e , o r $ 1 2 .8 b illio n .
M r . H eller . $ 1 2 .4 b illio n o n a n a d m in is t r a t iv e b u d g e t b a sis a n d
$ 1 3 .1 b illio n o n a c a sh b a sis in fisca l 1 9 5 9 .
S e n a t o r S p a r k m a n . W e l l , w e s h a ll s a y $ 1 3 b illio n . I h a v e h e a r d
th e s ta te m e n t m a d e m a n y tim e s t h a t t h a t w a s t h e o u t g r o w t h o f th e t a x
r e d u c tio n o f 1 9 5 4 .
I s t h e r e a n y m e r it in t h a t sta te m e n t ?
M r . H eller . T h a t th e recessio n w a s th e r e s u lt ?
S e n a t o r S p a r k m a n . Y e s , t h a t w h a t w e d id w a s t o o v e r b u ild , a n d w e
n o w h a v e a g r e a t d e a l o f id le c a p a c ity in t h is c o u n tr y a s a r e s u lt o f
h a v i n g o v e r b u ilt f o ll o w i n g t h a t p r o g r a m in 1 9 5 4 .
I s t h a t tr u e ?
M r . H eller . T h e r e is n o q u e stio n b u t t h a t in 1 9 5 5 to 1 9 5 7 th e r e w a s
a v e r y c o n s id e r a b le in v e s tm e n t b o o m .
T h e r e is a lso a g r e e m e n t, I
b e lie v e , t h a t so m e o f t h a t b o o m , b y n o m e a n s a ll o f i t , c o u ld b e a t
t r ib u te d t o th e a cc e le r a te d d e p r e c ia tio n p r o v is io n s .
H o w e v e r , a v e r y la r g e p a r t o f it w a s a ttr ib u ta b le t o t h e f a c t t h a t
w e h a d n o t y e t c lo se d t h e g a p s t h a t h a d b een o p e n e d u p in o u r c a p it a l
e q u ip m e n t b y d e p r e ssio n a n d b y w a r .
W e s t ill h a d v e r y la r g e
b a c k lo g s o f d e m a n d f o r p la n t a n d e q u ip m e n t, f o r n e w c a p a c it y , w h ic h
h a d t o b e sa tisfie d in t h a t first p o s t w a r d e c a d e .
S o m e p e o p le t u r n it t h e o th e r w a y a r o u n d , S e n a t o r .
T h e y sa y
t h a t p a r t o f o u r p r o b le m is t h a t w e d id n o t p u t in a n o th e r t a x r e d u c
t io n a r o u n d 1 9 5 7 .
G a b r ie l H a u g e , th e o th e r d a y , in a s y m p o s iu m
w e h a d in N e w Y o r k , sa id t h a t h e r e g r e tte d t h a t th e E is e n h o w e r
a d m in is t r a t io n h a d n o t p u t in a fu r t h e r t a x r e d u c tio n “ 6 y e a r s a g o .”
T h e 1 9 5 4 r e d u c tio n s h a d b een su c c e ssfu l in s t im u la t in g th e e c o n o m y .
S e n a t o r S p a r k m a n . I s n ’t i t tr u e t h a t sin c e 1 9 5 7 w e h a v e h a d ex cess
p la n t c a p a c it y ?
M r . H eller . Y e s ; w e h a v e .
S e n a t o r S p a r k m a n . O r a t le a st u n u sed p la n t c a p a c ity .
M r . H eller . U n u s e d p l a n t c a p a c it y b eca u se w e h a v e h a d in a d e
q u a te m a r k e ts f o r th e p r o d u c ts o f th o s e p la n t s .
S e n a t o r S p a r k m a n . A n d is t h is a la r g e p a r t o f t h e t h e o r y b e h in d
t h is p r o p o s e d t a x c u t, t h a t i t w i l l ste p u p c o n su m e r p u r c h a s e t o th e
e x te n t t h a t t h is ex cess c a p a c it y w i l l b e u t iliz e d ?
M r . H eller . T h a t is a v e r y s u b s ta n tia l p a r t o f i t , j u s t a s t h e s tim u lu s
to in v e s tm e n t in t h e r e d u c tio n s in c o r p o r a te r a te s a n d t o p b r a c k e t
r a te s a re a n im p o r t a n t p a r t o f t h e p r o g r a m . I n v e s t m e n t in c e n tiv e s
h a v e a lr e a d y h a d th e b e n e fit o f 1 9 6 2 a c tio n s o n t h e in v e s tm e n t t a x
c r e d it a n d r e v is io n o f d e p r e c ia tio n g u id e lin e s .
ECONOMIC REPORT OF THE PRESIDENT
33
T h e m a j o r e m p h a s is in th e p r o g r a m th is y e a r , in d o lla r t e r m s , a n d
in th e d is t r ib u t io n o f t a x r e d u c tio n b e tw e e n c o r p o r a te a n d i n d iv id u a l
t a x e s is o n th e s tr e n g th e n in g o f c o n su m e r m a r k e ts f o r t h e o u tp u t
o f n e w p la n t a n d e q u ip m e n t.
S e n a t o r S p a r k m a n . I t h o u g h t t h a t c o n sid e r a b le e m p h a s is w a s b e in g
p la c e d o n p l a n t in v e s tm e n t in th e c h a r ts.
M r . H eller . T h a t is a r e su lt o f th e fa c t t h a t a t t h e sa m e t im e t h a t
y o u re e n g a g e y o u r u n u su e d reso u rces, y o u , o f cou rse-------S e n a t o r S p a r k m a n . S t a r t n e e d in g m o r e ?
M r . H eller . T h a t is o n e o f th e c h a r a c te r istic s o f g e t t i n g to f u l l
e m p lo y m e n t , t h a t y o u p u s h a g a in s t y o u r e x is tin g c a p a c it y a n d s tim u
la te y o u r r a te o f g r o w t h b y b r i n g in g m o r e c a p a c ity in to p r o d u c tio n .
S e n a t o r S p a r k m a n . D o y o u t h in k t h a t it is d e s ig n e d in su ch a w a y
a s t o a v o id a b o o m in p la n t in v e s tm e n t o r a n o v e r b u ild in g o f n e w
p la n t , n e w e q u ip m e n t, so as t o a v o id a n excess c a p a c it y ?
M r . H eller . I t h in k e c o n o m ists a re w e ll a d v is e d n o t t o p r e te n d
o m n isc ie n c e in th e se m a tte r s , S e n a to r .
S e n a t o r S p a r k m a n . I re a liz e th a t .
M r . H eller . B u t as f a r a s t h e b a la n c e o f th e p r o g r a m is co n c e rn e d ,
t h is u n d e r ly in g $ 8 .5 b illio n , w h ic h is a c lo se a p p r o x im a t io n o f th e
fin a l e ffe ct o f th e p r o g r a m , p r o v id e s a fo u n d a tio n o f in c re a se d m a r k e t
d e m a n d t h a t c a n s u p p o r t a v e r y s u b s ta n tia l in c re a se in c a p a c ity o v e r
t h e y e a r s , g iv e n th e se c o n d a ry a n d th e t e r tia r y e ffe c ts a n d th e n o r m a l
g r o w t h in e c o n o m ic d e m a n d .
S e n a to r S p a r k m a n . A s I r e c a ll i n y o u r sta te m e n t, y o u b r o u g h t o u t
th e f a c t t h a t w e h a v e h a d r e la tiv e s t a b ility , p r ic e w is e , f o r t h e la s t 4
o r 5 y e a r s.
M r . H eller . T h a t is correct^ sir.
S e n a t o r S p a r k m a n . C a n t h is p r o g r a m b e h a n d le d so a s t o p r e se rv e
t h a t s t a b ility , o r is in fla tio n a r e a l t h r e a t a s a r e s u lt o f t h is ?
M r . H eller . A s w e n o te d i n o u r s ta te m e n t, S e n a t o r S p a r k m a n , w e
b e lie v e , a n d w e t h in k t h a t th e f a c t s s u p p o r t u s, t h a t t h e p r o g r a m t h a t
th e P r e s id e n t h a s p r o p o s e d c o u ld b e in tr o d u c e d w it h o u t d a n g e r o f
in fla tio n .
T h i s is b a s e d o n tw o fu n d a m e n t a l p r o p o s i t i o n s : O n e is t h a t th e r e
a re so m a n y u n u se d reso u rces a t t h e p r e se n t t im e t h a t th e im p a c t o f
t h is p r o g r a m w ill g o in to m o r e jo b s , m o r e p r o d u c tio n , a n d m o r e i n
c o m e a n d n o t in to h ig h e r p r ic e s.
T h e seco n d p r o p o s it io n is t h a t th e r e a r e m a n y fo r c e s c o n t in u in g
to m a k e f o r p r ic e s t a b ility .
F o r e x a m p le , w o r ld r a w m a t e r ia l p r ic e s
a r e fa v o r a b le , in c re a se d c o m p e titio n in w o r ld m a r k e ts p r o m o te s p r ic e
s t a b ilit y , a n d w e m i g h t a d d , as a t h ir d fa c t o r , t h a t t h e p r o g r a m , i t s e lf ,
w i l l s tim u la te c o st c u tt in g .
I n o th e r w o r d s , i t w i l l s tim u la t e a
b e tte r c o s t b a s is f o r c o n tin u e d p r ic e s t a b ility a n d in te r n a tio n a l c o m
p e titiv e n e s s .
S e n a t o r S p a r k m a n . I h a v e ju s t 1 m o r e m in u te , D r . H e ll e r .
I have
s e v e r a l q u e stio n s, b u t h e r e is on e t h a t I w i l l a sk , w h ic h I t h in k y o u
c a n a n s w e r im m e d ia te ly .
W h e n is it p r o je c te d t h a t w e s h a ll r e a c h a b a la n c e d b u d g e t u n d e r
t h is p r o g r a m ?
M r . H eller . T h e ju d g m e n t t h a t S e c r e ta r y D i l lo n g a v e w a s esse n
t i a l l y th e o n e t h a t w e w o u ld a g r e e w it h , n a m e ly , t h a t it w i l l b e o n in to
th e fisca l y e a r 1 9 6 6 o r 1 9 6 7 b e fo r e th e r ev en u e lin e is lik e ly t o c ro ss th e
34
ECONOMIC REPORT OF THE PRESIDENT
e x p e n d itu r e lin e . W e t h in k t h a t t h a t p o in t w i l l c o m e e a r lie r w it h th e
t a x c u t t h a n w it h o u t i t , b eca u se o f it s s t im u la t iv e effe c t o n th e
econom y.
S e n a t o r S p a r k m a n . T h a n k y o u , M r . C h a ir m a n .
C h a ir m a n D ouglas. S e n a t o r P r o x m ir e .
S e n a t o r P roxm ire . I w o u ld lik e t o j o i n a t le a s t m y D e m o c r a t ic c o l
le a g u e s in c o m m e n d in g y o u o n th e m e ssa g e .
T h e r e a re a c o u p le o f
t h in g s in i t t h a t I t h in k a re p a r tic u la r ly g o o d .
I lik e y o u r e m p h a s is
o n d e v e lo p in g h u m a n s k ills , a n d str e ssin g th e n ec e ssity f o r p r o v i d i n g
t h e c a p a c it y t o a d a p t t o o u r r a p id ly d e v e lo p in g a n d c h a n g in g
t e c h n o lo g y .
M r . H eller . T h a n k y o u , S e n a to r .
S e n a t o r P roxm ire . I a lso lik e th e id e a o f c h a n g in g th e c o r p o r a te
t a x stru c tu re a n d t u r n in g i t u p s id e d o w n so t h a t th e b a sic t a x is 2 2
p e r c e n t in s te a d o f 3 0 .
T h i s is m i g h t y h e l p f u l t o s m a ll b u sin e ss.
I t is o n e t h i n g t h a t a lo t o f u s in C o n g r e s s h a v e s u p p o r te d f o r a l o n g
t im e . A s y o u h a v e p o in te d o u t, t h is is s o m e th in g t h a t I t h in k i s g o i n g
t o s t im u la t e th e s m a ll b u sin e ss section o f o u r e c o n o m y a g r e a t d e a l.
T h e r e a r e a c o u p le o f t h in g s t h a t d is t u r b m e q u ite a b it . I a m i n
c lin e d t o s h a r e C o n g r e s s m a n C u r t is ’ a la r m in t e r m s o f t h is a n a ly s is
o f t h e g a p in o u r reso u rces.
I t h in k C o n g r e s s m a n C u r t is ’ s k i l l f u l
q u e s tio n in g d i d b r i n g o u t t h e fa c t t h a t y o u a r e b a s in g t h is n o t s o
m u c h o n h is to r ic a l r e c o r d s o f g r o w t h , th e p e r c e n ta g e g r o w t h , a n d I
t h in k y o u a re w is e in n o t d o in g i t , b u t o n t h e f a c t t h a t w e h a v e 4
m i lli o n p e o p le o u t o f w o r k , a n d w e h a v e o u r fa c t o r y c a p a c it y a b o u t
8 3 p e r c e n t u tiliz e d .
M y q u e stio n i s : W h y d o n ’t w e ev er h a v e a n y e m p h a s is o n r e c o g n iz
i n g t h e p o s s ib ilit y o f d im in is h in g th e s u p p ly sid e o f o u r e m p lo y m e n t
e q u a tio n ? T h e f a c t is t h a t i f w e d i d n o t h a v e so c ia l s e c u r ity t o d a y ,
w e w o u ld h a v e 1 6 m illio n p e o p le o u t o f w o r k , b ec a u se p e o p le o n so c ia l
s e c u r ity w o u ld a ll b e lo o k in g f o r jo b s . E i t h e r t h a t o r o n r e li e f . T h e y
w o u ld n ee d so m e m o r e in c o m e t o k e e p a liv e .
S o c ia l se c u r ity h a s
re d u c e d o u r u n e m p lo y m e n t g r e a t ly .
W h y c a n ’t w e a t le a s t t h in k o f th e p o s s ib ilit y o f e a r lie r r e t ir e m e n t?
L a b o r u n io n s , w it h c o n sid e r a b le fo r c e , h a v e a r g u e d f o r a 3 5 -h o u r w e ek ,
w h ic h h a s a lm o s t n o s u p p o r t i n C o n g r e s s , a n d w h ic h I c a n see h a s a
lo t o f d ifficu ltie s in t e r m s o f c o st a n d so fo r t h .
W h y is n ’t th e r e a n y c o n s id e r a tio n , e ith e r in t h is r e p o r t o r v e r y
m u c h e m p h a s is in th e P r e s id e n t ’s r e p o r t, o n t h e o p p o r t u n it y f o r
e a r lie r r e tir e m e n t, N o . 1 , a n d N o . 2 , t r y i n g t o p e r s u a d e o u r y o u n g
p e o p le t o s t a y in sc h o o l lo n g e r , p e r h a p s b y m a n d a t o r y s c h o o l-le a v in g
a g e a t a h i g h e r ra te , 1 7 y e a r s in s te a d o f 1 4 , 1 5 , o r 1 6 y e a r s , w h ic h i t
is n o w ?
M r . H eller . S e n a t o r P r o x m ir e -------S e n a t o r P roxm ire . T h i s , in c id e n t a lly , w o u ld g r e a t ly re d u c e a lso
a t th e o th e r e n d o f th e sca le th e u n e m p lo y m e n t p o o l.
M r . H eller . S e n a to r P r o x m ir e , I t h in k t h is h a s t o b e a n sw e r e d
in t w o p a r ts , o n e a p p l y i n g p a r tic u la r ly t o e a r ly r e tir e m e n t, a n d to*
a r tific ia l r e d u c tio n s o f t h e w o r k w e e k , w h ic h is a ls o im p li c i t in y o u r
q u e s tio n .
T h e o th e r is t o th e p r o p o s a l t o le n g t h e n th e p e r io d o f
s c h o o lin g , a n d so o n .
A s a g e n e r a l p r o p o s it io n o n th e h u m a n sid e , t h e o b je c tiv e is t o
p r o v id e jo b s f o r th o se w h o a re a b le a n d w i l li n g t o w o r k , w h o a r e
ECONOMIC REPORT OF THE PRESIDENT
35
s e e k in g w o r k , s im p ly in t e r m s o f h u m a n fu lfillm e n t.
A n d m any
s u r v e y s , b o t h in t h is c o u n tr y a n d in C a n a d a o v e r t h e y e a r s , h a v e
s h o w n t h a t p e o p le p r e fe r — in t e r m s o f th e ir o w n p s y c h o lo g ic a l d r iv e ,
le t a lo n e t h e ir e c o n o m ic d r iv e s— t o w o r k , r a th e r th a n n o t t o w o r k .
S e n a t o r P roxm ire . T h e o p tio n is n o t a v a ila b le t o o u r o ld e r p e o p le .
I t h in k I h a v e s h a k e n a m illio n a n d a h a l f h a n d s in W i s c o n s i n , m o s t ly
a t p l a n t g a te s . T h e t h in g t h a t o u r w o r k in g p e o p le w a n t v e r y m u c h is
t h e o p p o r t u n ity t o r e t ir e e a r lie r . I c a n see th e difficu lties in p r o v i d i n g
a n im m e d ia te 6 0 -y e a r r e tir e m e n t w it h f u l l so c ia l se c u r ity b en efits. I
t h in k w e h a v e to w o r k a t t h is g r a d u a lly . B u t w h y is n ’t th e r e so m e
c o n s id e r a tio n t o t h is ?
I t seem s t o m e t h a t th e r e is r e a l w is d o m in th e w o r k in g m a n ’s a r g u
m e n t , N o . 1 , t h a t t h e y w o u ld lik e t o r e tir e w h ile s t il l y o u n g e n o u g h
t o e n jo y it , a n d i f t h e y d o r e tir e t h e y o p e n a jo b f o r so m e o n e else. B u t
i f y o u a re 6 0 y e a r s ox a g e , a n d y o u h a v e b een w o r k in g a t a jo b f o r 4 0
y e a r s , y o u d o n ’t h a v e th e o p t io n to r e tir e a n d y o u h a v e t o w a it u n til
6 5 , o r 6 2 w it h re d u c e d b en efits.
M r . H eller . T h i s fig u re w a s r e d u c e d in C o n g r e s s t h e y e a r b e fo r e
la s t , t o 6 2 .
I t h in k t h a t th e g e n e r a l p r in c ip le o f o p tio n a n d fr e e
o h o ic e , w h ic h is fu n d a m e n t a l t o o u r m a r k e t s y s te m , is a g o o d o n e.
A t th e s a m e t im e , a n y t h in g t h a t w o u ld a r tific ia lly in d u c e p e o p le to
"w ith d ra w th e m s e lv e s f r o m th e la b o r m a r k e t, m o r e o r le ss a g a in s t th e ir
w is h e s , o r t h a t w o u ld a r t ific a lly c u t h o u r s b e lo w th o se w h ic h t h e y
w o u ld lik e t o w o r k , w o u ld d e p r iv e t h e m o f fr e e d o m o f c h o ic e a n d , a t
t h e sa m e t im e , d e p r iv e th e c o u n tr y o f a m a jo r r eso u rc e t h a t w e n ee d
i n te r m s o f e c o n o m ic g r o w t h , in te r m s o f n a t io n a l s e c u r ity , in te r m s
o f le a d e r s h ip in th e fr e e w o r ld .
W e a re v e r y lo a t h to see m ea su re s ta k e n t h a t w o u ld d e p r iv e u s o f
t h i s so u rce o f g r o w t h in o u r e c o n o m ic s tr e n g th .
S e n a t o r P roxm ire . B u t is n ’t t h e p r in c ip a l b a sis f o r g r o w t h , r e a l
g r o w t h t h a t w e n e e d , n o t a m a t t e r s i m p ly o f r e d u c in g co n su m e rs’
ta x e s so t h e y c a n g o o u t a n d b u y m o r e a u to m o b ile s, t e le v is io n sets,
r e fr ig e r a t o r s , o r m a y b e a n o th e r h o u se , b u t is n ’t t h e r e a l b a sis f o r
g r o w t h th e d e v e lo p m e n t o f h u m a n s k ills , so t h a t p e o p le w ill d e v o te
m o r e t im e t o e d u c a tio n , a n d m o r e e ffo r t t o e d u c a tio n ?
T h i s is g e n
e r a lly a p u b lic e ffo r t.
I t is tr u e t h a t w e c a n p r o v id e in c e n tiv e s f o r i n d iv id u a l e d u c a tio n ,
b u t i f w e a re g o i n g to r e a lly m a k e th is e c o n o m y o f o u r s g r o w , w e h a v e
t o b u ild i t o n t h e basis o f in c re a se d h u m a n s k ills , n o t o n t h e b a sis o f
j u s t h a v i n g p e o p le h a v e a f e w m o r e c o n su m e r s a tis fa c tio n s .
M r . H eller . T h a t is w h y I w a s d iv i d i n g m y a n sw e r in to t w o p a r ts .
I t h o u g h t w h e n y o u su g g e s te d th e lo n g e r p e r io d o f s c h o o lin g f o r p e o p le
a t th e lo w e r e n d o f th e a g e g r o u p s , t h a t t h is w o r k s v e r y m u c h in th e
r i g h t d ir e c tio n as f a r as t h e t a p r o o t o f e c o n o m ic g r o w t h is con ce rn e d .
S e n a t o r P roxm ire . I t w o r k s b o th w a y s . I t d im in is h e s th e u n e m
p lo y m e n t , a n d w e h a v e a m illio n d r o p o u ts e v e r y y e a r , m a n y o f w h o m
c a n n o t fin d w o r k . T h e s in g le la r g e s t g r o u p o t u n e m p lo y e d is th e
a g e g r o u p 1 4 t o 1 9 y e a r s , a n d i t h a s b een la r g e s t f o r y e a r s , a n d i t w ill
b e a m illio n a n d a h a l f in a f e w y e a r s.
W e c a n d r a s tic a lly d im in is h t h a t a n d g iv e th e m c o n str u c tiv e t r a in
in g .
T h e r e s u lts w h e re t h a t is t r ie d is s t r ik in g .
In
M il
w a u k e e , w e s p e n d 4 % m i lli o n f o r v o c a tio n a l e d u c a tio n .
P h ila d e lp h ia ,
t h r e e t im e s a s b i g , s p e n d s o n e -se v e n te e n th o f w h a t w e sp e n d .
W e
36
ECONOMIC REPORT OF THE PRESIDENT
h a v e 5 -p e r c e n t d r o p o u t s in M ilw a u k e e , th e b e st r e c o r d o f a n y b i g c ity
in th e c o u n t r y , a n d th e n a t io n a l a v e r a g e o n h i g h sc h o o l d r o p o u ts is
4 0 p e rc e n t.
I t see m s t o m e t h a t h e r e is a g o o d w a y , a c o n str u c tiv e a n d e c o n o m ic a l
w a y o f r e d u c in g u n e m p lo y m e n t, a n d p r o v i d i n g t h e b a sis f o r g r o w t h ,
w it h o u t t h is k in d o f e n d le ss deficit fin a n c in g , w h ic h is v e r y h a r d f o r
m e to a cc e p t o n th e b a s is o f m y t r a d it io n a l b ia s.
M r . H eller . I w o u ld lik e t o s a y , S e n a t o r , t h a t I a g r e e e n tir e ly t h a t
th e in v e s tm e n t i n t h e e d u c a tio n a n d t r a in in g o f y o u t h o ffe r s a v e r y
la r g e p a y o ff , a n d t h is is s o m e th in g t h a t is n o t s im p ly a n a s s u m p tio n .
Y e r y c a r e fu l s tu d ie s o f t h e p a y o ff o n e d u c a tio n sh o w t h a t i t is o n e o f
th e b e s t in v e s tm e n ts w e c a n m a k e , a n d t h a t i t m a k e s t h e k i n d o f c o n t r i
b u tio n t h a t y o u s u g g e s t t o th e u n e m p lo y m e n t p r o b le m .
I a m n o t su re i t m a k e s th e c o n tr ib u tio n to th e G o v e r n m e n t s p e n d in g
p r o b le m t h a t y o u s u g g e s t.
I n o th e r w o r d s , e d u c a tio n a n d t r a i n in g t o
u p g r a d e la b o r s k ills , k n o w le d g e , a n d w is d o m is a v e r y e x p e n s iv e
p r o ce ss.
S e n a t o r P roxm ire . T h e r e is a b i g p a y o ff , t h o u g h , to o .
A lo t o f u s
a r g u e d t h a t th e G I b i l l o f r ig h t s r e su lte d in in c re a se d G o v e r n m e n t
r e v e n u e s f r o m th e p e o p le w h o re c e iv e d th e a d d it io n a l e d u c a tio n , w h o
e a r n m o r e m o n e y a n d p a y m o r e ta x e s.
M r . H eller . I w o u ld a g r e e , b u t in th e in te r m e d ia te p e r io d , o f c o u rse ,
y o u h a v e t o in c u r a n in c re a se i n G o v e r n m e n t e x p e n d itu r e s .
S e n a t o r P roxm ire . I t seem s t o m e t h a t t h is is th e so rt o f c o n s tr u c
t iv e d e fic it w h ic h is m o r e h o p e f u l th a n th e d e fic it o f ju s t d e c r e a s in g
in c o m e ta x e s .
M r . H eller . I a m n o t in c lin e d t o d isa g r e e w it h th e o b je c tiv e t h a t
y o u sta te.
I n f a c t , I v e r y m u c h a g r e e w it h it.
A t th e sa m e t im e ,
u n le ss w e h a v e th e c o n s u m p tio n t h a t p u sh e s a g a in s t o u r p r o d u c tiv e
c a p a c it y , w e a re n o t g o i n g t o g e t th e g r o w t h in o u r o v e r a ll p r o d u c tiv e
p o t e n tia l t h a t w e o th e r w ise w o u ld h a v e .
S o it is n ’t ju s t c o n s u m p tio n ,
p e r se.
I t is c o n s u m p tio n f o r g r o w t h , i f y o u w ill.
S e n a t o r P roxm ire . I h a v e o n e m o r e q u estio n .
A y e a r a g o P r e s id e n t K e n n e d y , in a d d r e s s in g th e C o n g r e s s , t a lk e d
a b o u t th e p e r io d o f 1 0 m o n th s o f g r o w t h t h a t w e h a d , w h ic h w a s le ss
th a n w e h a v e n o w , an d s a id :
To plan a deficit under such circumstances would increase the risk of infla
tionary pressures, damaging alike to our domestic economy and our international
balance of payments.
I f t h a t w a s a tr u e a n d a cc u ra te sta te m e n t a t t h a t t im e , w h y is i t n o t
a n e v e n t r u e r a n d m o r e a cc u ra te s ta te m e n t n o w , sin c e w e h a v e h a d ,
a s h e s a id t h is y e a r , 2 2 m o n t h s o f u n in te r r u p t e d r e c o v e r y , w e
h a v e a le sse r u n e m p lo y m e n t p r o b le m , w e h a v e a b e tte r u t iliz a t io n
o f r e so u r c e s, s o m e w h a t b e t te r ?
W h y t h is s u d d e n a n d d r a m a tic a n d
d r a s tic s h i f t , j u s t t u r n in g a r o u n d h is p o s itio n e n t ir e ly ?
M r . H eller . I a m h a p p y t o c o m m e n t o n t h a t , a lt h o u g h so m e w h a t
u n h a p p y a s t o i t s im p lic a t io n s c o n c e r n in g o u r e c o n o m ic fo r e c a s t o f
a year ago.
T h e P r e s id e n t ’s s ta te m e n t la s t y e a r w a s m a d e i n t h e li g h t
o f th e a d m in is t r a t io n ’ s fo r e c a s t o f a c o n tin u e d , b r is k r e c o v e r y i n 1 9 6 2 ,
o n e w h ic h w o u ld b e c a r r y in g u s o n th e p a t h t o w a r d f u l l e m p lo y m e n t
b y m i d -1 9 6 3 .
T o h a v e s u p e r im p o s e d o n t h a t p a t h a su b s ta n tia l G o v e r n m e n t d e f
ic it w o u ld h a v e o ffe red so m e t h r e a t o f in fla tio n a lo n g th e lin e s t h a t
ECONOMIC REPORT OF THE PRESIDENT
37
t h e P r e s id e n t w a s m e n t io n in g .
I t h a s tu r n e d o u t t h a t t h e e c o n o m y
d i d n o t e x p a n d a t t h a t r a te , a n d b o t h t h e b u d g e t m e s s a g e a n d t h e
E c o n o m ic R e p o r t o f a y e a r a g o s a id t h a t i f i t d i d n o t e x p a n d v i g o r
o u s ly , t h e n a d e fic it w o u ld b e c o m e a c u s h io n in g f a c t o r t o u n d e r e m
p lo y m e n t o f o u r reso u rces.
S o th e s ta te m e n t c a n b e r e a d ily r e c o n
c ile d .
T h e a n t ic ip a t e d d e v e lo p m e n ts w h ic h u n d e r la y t h a t s ta te m e n t
d i d n o t in f a c t m a te r ia liz e .
G iv e n th e u n d e r u t iliz a t io n o f reso u rces, a n d th e fa c t th a t o u r g a p ,
b e tw e e n a c tu a l a n d p o t e n tia l o u t p u t h a s n o t n a r r o w e d in t h is p a s t
y e a r , i t is e n t ir e ly a p p r o p r ia te t o h a v e e x p a n s io n a r y p o lic y in t h e
f o r m o f a t a x c u t, a t a x c u t w h ic h is d e s ig n e d to p r o v id e a n e x p a n
s io n a r y p u s h .
T h e d e fic it is n ’t t h e o b je c t o f t h e e x erc ise.
I t is th e
r e d u c tio n o f th e d r a g o n p e o p le ’ s in c o m e s a n d p e o p le ’ s in c e n tiv e s.
S e n a t o r P r o x m ir e . M y t im e is u p , M r . C h a ir m a n .
C h a ir m a n D o u glas . M r . R e u ss.
R e p r e s e n ta tiv e R eu ss . M r . H e ll e r a n d M r . A c k l e y , I , t o o , w a n t t o
jo i n w it h m y c o lle a g u e s in p r a is in g y o u r e x c e lle n t r e p o r t, a n d p a r
t ic u la r ly th e fin a l e x h o r ta tio n t o th e m e m b e r s o f t h e J o i n t E c o n o m ic
C o m m itt e e w h o a re in a g r e e m e n t w it h it s g e n e r a l a n a ly s is t o g o o u t
a n d t r y t o c o n v in c e t h e ir c o lle a g u e s in C o n g r e s s t o c a r r y o u t its
r e c o m m e n d a tio n s .
M r . H e lle r . T h a n k y o u .
R e p r e s e n ta tiv e R eu ss . M y fir st q u e stio n i s : S u p p o s e w e d o t h a t , a n d
su p p o se , a r m e d w it h th e se c h a r ts a n d th e g e n e r a l a n a ly s is , w e a re
e x tr e m e ly p e r s u a s iv e , a n d s u p p o se C o n g r e s s c o n c lu d e s t h a t a n y t h in g
w o r th d o in g a t a ll is w o r th d o in g w e ll, a n d n o te s t h a t th e t a x r e d u c
tio n p r o g r a m d e s ig n e d t o c a r r y o u t t h is a n a ly s is w i l l p r o d u c e a n
$ 1 1 .9 b illio n d e fic it i n th e u p c o m in g fisca l y e a r , b u t w i l l n o t red u ce
a t a ll th e v e r y serio u s 5 .6 p e r c e n t u n e m p lo y m e n t w e h a v e ; su p p o se
C o n g r e s s , t h e r e fo r e , c o n c lu d e s t h a t in s te a d o f th e t a x c u t r e c o m
m e n d e d , i t is g o i n g t o p u t in to effe c t a t a x c u t a s o f J a n u a r y 1 9 6 3
w h ic h w i ll h a v e a m o r e im m e d ia te im p a c t , a n d s p e c ific a lly w h ic h w i l l
b r in g u n e m p lo y m e n t d o w n t o a r o u n d 5 p e r c e n t, o r p o s s ib ly ev en
b e tte r, b y t h e e n d o f 1 9 6 3 , a n d w h ic h w o u ld , b y so d o in g , h a ste n th e
h a p p y d a y o f a b a la n c e d b u d g e t f r o m 1 9 6 6 o r 1 9 6 7 t o a n e a r lie r y e a r ?
W h a t w o u ld b e b a d a b o u t t h a t ?
M r . H e l le r . M r . R e u s s , w h a t y o u a re t a lk i n g a b o u t is m o r e o r
le s s p u s h b u tto n t a x le g is la tio n w h ic h , o f c o u rse , h a s n e v e r b e e n
c h a r a c te r is tic o f th e c o n g r e s s io n a l p r o ce ss, a n d u n d e r s ta n d a b ly so.
R e p r e s e n ta tiv e R eu ss . W e c o u ld m a k e t h e t a x d e c re a se r e tr o a c tiv e
to J a n u a r y 1 ,1 9 6 3 .
M r . H elle r . I n a sen se, o f co u rse, th e P r e s id e n t ’ s p r o g r a m d o es p r o
v id e f o r t a x c u ts r e tr o a c tiv e t o J a n u a r y 1, b o th e x p lic i t ly in t h a t
c o r p o r a te t a x c h a n g e , a n d i m p li c i t l y in th e i n d iv id u a l in c o m e t a x
c h a n g e in t h a t th e c u t w i ll b e reflec ted in a r e d u c tio n o f lia b ilit ie s f o r
th e y e a r a s a w h o le .
I n o th e r w o r d s , w h e n y o u fill o u t y o u r 1 9 6 3 in c o m e t a x r e tu r n , i t
w ill b e a r e d u c tio n in t a x lia b ilit ie s f o r th e y e a r a s a w h o le .
R e p r e s e n ta tiv e R eu ss . B u t th e w h o le t h in g , i f i t is d o n e , w i l l s t ill
r e s u lt in as la r g e a p e r c e n ta g e o f u n e m p lo y m e n t n e x t D e c e m b e r a s w e
h ave now .
M r . H elle r . Y ou are p o s in g , r e a lly , a d iffe re n t q u e stio n , a n d t h a t
is, W h y n o t h a v e a la r g e r p a r t o f th e p r o g r a m g o in to effe c t o n J a n u a r y
38
ECONOMIC REPORT OF THE PRESIDENT
1 , c r e a tin g , a t le a s t t e m p o r a r ily , a la r g e r d e fic it?
T h e a n sw e r t o t h a t
i s in p a r t e c o n o m ic , in p a r t p s y c h o lo g ic a l, w h ic h c a n b e , I su p p o se ,
b r o k e n d o w n in to b o t h e c o n o m ic a n d p o lit ic a l a sp ec ts.
T h e e c o n o m ic p a r t o f th e a n sw e r is t h a t th e r e a re m a n y p e o p le , a s
w e a re w e ll a w a r e , w h o f e a r t h e size o f t h e d e fic it, p e r se, e v e n t h o u g h
e c o n o m ic lo g i c a n d p a s t e x p e rie n c e in d ic a te t h a t th e d e fic it c a n be
m a n a g e d w it h o u t in fla tio n .
T h e s e p e o p le , in t e r m s o f th e p s y c h o
lo g i c a l fa c t o r o f b u sin e ss c on fid en ce , m te r m s o f c o n su m e r co n fid e n c e ,
w i l l in flu e n c e th e im p a c t t a x r e d u c tio n w i l l h a v e o n th e e c o n o m y .
L i k e w i s e , th e r e a re th o s e a b r o a d w h o — a lt h o u g h n o t in th e m a j o r i t y ,
•as e v id e n c e d b y t h e f a c t t h a t w e h a v e b een u r g e d b y o u r c o lle a g u e s in
t h e O E C D t o u n d e r ta k e e x p a n s io n a r y p o lic y in t h e ir in te r e st as w e ll a s
o u r s — th e r e a re m a n y w h o w o u ld fe a r a n e x c e ssiv e d e fic it a n d t h is
m i g h t h a v e im p lic a t io n s f o r o u r b a la n c e -o f -p a y m e n t s p o s itio n .
I
t h i n k t h is is p a r t o f t h e e x p la n a tio n o f th e r a th e r m o d e r a te sc h e d u le
o f t a x r e d u c tio n s .
A l s o — a lth o u g h y o u h a v e p a r t ly c u t th e g r o u n d o u t f r o m u n d e r t h is
s e c o n d p a r t o f m y a n s w e r b y s u g g e s t in g t h a t w e m i g h t a im a t 5 p e r
c e n t u n e m p lo y m e n t b y th e e n d o f th e y e a r — i f w e w e r e t o t r y t o d o i t
a ll a t o n ce, to m o v e , s a y , to 4 p e rc e n t u n e m p lo y m e n t w it h in a y e a r , t h is
w o u ld c a ll f o r a n in c re a se in G N P t h a t w e h a v e e x p e rie n c e d in o n l y 1
y e a r in th e w h o le p o s t w a r p e r io d .
I t w o u ld in v o lv e so m e r is k o f th e sp e e d o f e x p a n s io n , so m e r is k o f
r u n n in g in t o b o ttle n e c k s, a n d so m e r is k o f in fla tio n t h a t w e d o n o t
in c u r u n d e r t h is p r e se n t sc h e d u le .
T h i r d , I s h o u ld fin a lly s a y t h a t i f th e r e w e r e a b s o lu te ly n o su c h
p s y c h o lo g ic a l p r o b le m s as m e n tio n e d in th e fir st p la c e , a n d i f th e r e
w e r e t h e p o s s ib ilit y o f in s ta n ta n e o u s a c tio n , I t h in k i t w o u ld b e tr u e
t h a t o n e w o u ld a d v o c a te a la r g e r p a r t o f th e t a x in c re a se t o g o in to
e ffe c t im m e d ia te ly o r a t a n e a r lie r d a te .
R e p r e s e n t a t iv e R eu ss . L e t m e a d d r e ss m y s e l f , th e n , t o t h e t w o
p r o n g s o f y o u r a n sw e r .
F i r s t , I g a t h e r t h a t y o u a re n o t r e a lly p r e s s in g t h e se c o n d p r o n g ,
w h e n I s a y , “ D o n ’t se ttle f o r 5 .6 p e r c e n t u n e m p lo y m e n t, t r y f o r 5 p e r
c e n t u n e m p lo y m e n t,” y o u a re n o t s u g g e s t in g t o t h is c o m m itte e t h a t
o u r e c o n o m y w o u ld in e v it a b ly su ffe r in fla tio n i f w e d o a n y t h i n g a b o u t
u n e m p lo y m e n t a t a ll t h is y e a r ?
M r . H el le r . I a m n o t.
R e p r e s e n t a t iv e R eu ss . S o y o u a re l e f t w it h o n e p r o n g , th e p s y c h o
lo g i c a l o n e , a r e n ’t y o u ?
M r . H e l l e r . I t h in k th e t h ir d tin e o f t h is f o r k is n o t t o b e ig n o r e d
e ith e r .
T h a t is th e p r o b le m o f th e c o n g re ssio n a l p r o c e ss, h o w f a s t y o u
c a n m o v e in t h a t p ro ce ss.
T h a t is o n e t h a t in e v it a b ly c o n d itio n s th e
r e c o m m e n d a tio n t h a t th e P r e s id e n t m a k e s.
N o P r e s id e n t liv e s b y
e c o n o m ic s a lo n e , a n d n o C h a ir m a n o f t h e C o u n c il, o r C o u n c il m e m b e r
w h o is r e a lis tic a b o u t h is r o le in th e se m a tte r s , w o u ld s u g g e s t t h a t h e
s h o u ld liv e o n ly b y th e e c o n o m ic d ic ta te s.
T h e s e h a v e t o b e b le n d e d
w it h th e in s tit u tio n a l a n d p s y c h o lo g ic a l r e a litie s o f th e situ a tio n .
R e p r e s e n t a t iv e R eu ss . T h e n le t ’s g e t b a c k to t in e 1 , w h ic h is t h e
p o i n t a b o u t t h e siz e o f th e d e fic it. W a s th e r e a c t u a lly a v a lu e j u d g
m e n t m a d e b y y o u a n d y o u r a sso c ia tes t h a t p e o p le in t h is c o u n t r y a n d
a b r o a d c o u ld s to m a c h a n $ 1 1 .9 b illio n d e fic it w it h o u t g e t t i n g u p s e t, y e t
w o u ld s o m e h o w h a v e a n u p se t p o in t a t, s a y , a $ 1 3 b illio n b u d g e t d e fic it.
ECONOMIC REPORT OF THE PRESIDENT
39
e v e n t h o u g h t h a t $ 1 3 b illio n d e fic it w o u ld , b y t h e t a x r e d u c tio n w h ic h
c a u se d i t , o r in g a b o u t a r e d u c tio n in u n e m p lo y m e n t t o th e o r d e r o f 5
p e rc e n t ?
M r . H eller . I n e v i t a b ly , in th e p r o c e ss o f fix in g o n a p r o g r a m w h ic h
w o u ld y ie ld r o u g h ly a $ 1 2 b illio n a d m in is t r a t iv e d e fic it— a n d I m i g h t
n o te o n ly a b o u t a $ 1 0 b illio n ca sh deficitr— ju d g m e n t s o f t h is k in d h a v e
to b e m a d e .
T h e p rec ise lim it s o f t h a t ju d g m e n t in v o lv e , o f cou rse, a
g r e a t m a n y c h o ic es a n d a g r e a t m a n y c o n sid e r a tio n s t h a t w e n t in to th e
fin a l d e cisio n .
E e p r e s e n t a t iv e R euss . L e t m e a sk a n o th e r q u e stio n .
O n p a g e 5 9 o f y o u r r e p o r t, o n m o n e ta r y p o li c y , t h e sec o n d p a r a
g r a p h , th e la s t th r e e sen ten ces, y o u h a v e th r e e v e r y in te r e s tin g sen
ten ces w h ic h I w i l l r e a d :
No country can permanently balance its international accounts by interest rates
so high that its productive potential is kept underutilized and its labor force
underemployed. Nevertheless, defense of the currency may require vigorous use
of monetary instruments, and there can be no doubt that the U.S. authorities are
prepared to take whatever steps are necessary to defend the dollar. An expan
sionary fiscal policy will give them greater freedom to do what has to be done.
T h i s s o u n d s t o m e as i f y o u a re a c q u ie sc in g in w h a t t h is w e e k ’s
B u s in e s s W e e k s a y s th e F e d e r a l R e s e r v e is d o in g .
T h ey have an
im p o r t a n t s t o r y s a y in g t h a t th e F e d h a s m a d e t h e fir st b a sic s h i f t
in F e d e r a l E e s e r v e m o n e ta r y p o lic y in 2 y2 y e a r s , a n d is t ig h t e n in g
c r e d it.
I w o n d e r w h e th e r i t w o u ld n ’t b e b e tte r n a tio n a l p o lic y , in ste a d o f
le t t in g th e s o -c a lle d c o n s tr a in ts o f t h e b a la n c e o f p a y m e n ts u n d e r
w r ite a t ig h t e n i n g o f c r e d it, w h ic h is in e v it a b ly g o i n g t o h u r t g r o w t h ,
t o d o w h a t t h e J o i n t E c o n o m ic C o m m itt e e in its r e p o r ts f o r t h e
la s t y e a r a n d a h a l f h a s been u r g i n g , t h a t w e a sk o u r E u r o p e a n
p a r tn e r s t o f o r m a n a d e q u a te p a y m e n ts a r r a n g e m e n t so th a t n o r m a l
c a p ita l flo w s b e tw e e n c o u n trie s d o n o t ca u se u s to h a v e t o a d o p t r e
s tr ic tiv e m o n e ta r y p o lic ie s.
I w o n d e r i f t h a t w o u ld n ’t b e a b e tte r a p p r o a c h .
Y e t I n o te w it h
r e g r e t t h a t y o u d o n ’t sa y a n y t h in g a b o u t t h a t , a n d , in s te a d , y o u seem
to a d o p t th e lin e t h a t th e w a y t o d e fe n d th e d o lla r is t o r a ise in te r e st
r a te s.
M r . H eller . L e t m e r e sp o n d to th e se v e r a l p a r t s o f t h a t q u e stio n .
F i r s t , I s h o u ld sa y t h a t w e fe e l t h a t b a la n c e -o f -p a y m e n t s c o n sid
e r a tio n s a n d g o ld o u tflo w c o n sid e r a tio n s d o p la c e a flo o r , in a sen se,
u n d e r w h a t e x p a n s io n a r y m o n e ta r y p o lic y c a n d o .
W e h a v e stre sse d ,
h o w e v e r , b o th in o u r a n n u a l r e p o r t a n d in t e s t im o n y b e fo r e t h is
c o m m itte e o n r e p e a te d o cc a sio n s t h a t w e d o n ’t b e lie v e t h a t in te re st
r a te s s h o u ld b e o n e io t a a b o v e t h a t flo o r set b y th ese in te r n a tio n a l
e c o n o m ic c o n s id e r a tio n s, b ecau se o f th e d e le te r io u s effe c t t h a t t h a t
w o u ld h a v e o n d o m e stic e x p a n s io n .
Y e t i f w e d id e n c o u n te r a n u n e x p e c te d r u n o n th e d o lla r , s u r e ly
o n e o f th e in s tr u m e n ts t h a t w e h a v e m o s t r e a d ily a v a ila b le is s h o r t
te r m s h i f t s in th e in te re st ra te .
W e w o u ld be e x tr e m e ly r e lu c ta n t t o
see t h a t u se d , b u t i f i t in v o lv e d a c h oice b e tw e e n d e fe n d in g th e d o lla r
o r n o t d e fe n d i n g th e d o lla r , o f cou rse i t w o u ld h a v e t o b e u sed .
A s t o th e se c o n d p a r t o f th e q u e stio n , is n ’t i t a b e tte r s o lu tio n t o
im p r o v e o u r in te r n a tio n a l m o n e ta r y m e c h a n is m t o p r o v id e p r o te c t io n
f o r su ch s itu a tio n s ? W e w o u ld a g r e e t h a t o n e h a s t o p r o ce e d o n t h a t
f r o n t s im u lta n e o u s ly w it h s t r e n g t h e n in g th e d o m e s tic e c o n o m y .
W e
40
ECONOMIC REPORT OF THE PRESIDENT
h a v e , o f c o u rse, a lr e a d y m a d e a n u m b e r o f im p r o v e m e n t s , b o th th r o u g h
th e a r r a n g e m e n ts m a d e f o r sw a p s w it h o th e r c o u n tr ie s ’ c u rren c ies,
t h r o u g h th e s t a n d b y c r e d it o f th e I M F , a n d so fo r t h , b u t w e w o u ld
a g r e e t h a t t h is p r o b le m n ee d s c o n t in u in g a tte n tio n .
I n c h a p te r 4 o f o u r a n n u a l r e p o r t b e g in n in g o n p a g e 1 2 7 , w e h a v e
e x p lo r e d t h is s u b je c t u n d e r th e h e a d in g “ S t r e n g t h e n in g th e I n t e r n a
t io n a l M o n e t a r y S y s t e m . I t is tr u e t h a t w e r e a c h a s o m e w h a t c a u tio u s
c o n c lu s io n w h e n w e s a y th a t “ so m e in c o m p le t e ly r e so lv e d p r o b le m s
s t ill fa c e u s ,” b u t t h a t p h r a s e is m e a n t to c o v e r ju s t th e v e r y k i n d o f
c o n c e rn t h a t y o u a re e x p r e s s in g , t h a t w e s h o u ld co n tin u e to e x p lo r e
o v e r t h e lo n g e r r u n t h e a d a p ta t io n o f th e in te r n a tio n a l m o n e ta r y s y s
t e m to g r o w i n g w o r ld t r a d e a n d t o th e t e m p o r a r y im b a la n c e s t h a t
o c c u r a m o n g c o u n trie s in t h e ir g o ld a n d b a la n c e -o f -p a y m e n t s s it u a
t io n . I n t h a t re sp e c t, w e a re e n tir e ly in a g r e e m e n t.
R e p r e s e n t a t iv e R eu ss . M y tim e is u p , b u t I w o u ld e x p r e ss th e
h o p e t h a t y o u w o u ld u se th e p o w e r o f th e C o u n c il o f E c o n o m ic A d
v is e r s t o m a k e in te r im r e p o r ts to th e C o n g r e s s , w h ic h y o u h a v e so w e ll
u s e d so f a r in th e la s t 2 y e a r s , v e r y so o n , to g iv e a lit tle m o r e c o n te n t
t o t h e p r e s e n t la n g u a g e o n p a g e 1 2 9 in w h ic h y o u sa y th a t th e r e a re
s o m e p r o b le m s l e f t a n d “ c o n sta n t a tte n tio n ” a n d “ c o n t in u in g s t u d y ”
are necessary.
I t h in k y o u c o u ld w e ll c o m e f o r t h w it h s o m e th in g a li t t le m o r e
p o in te d o n th a t . W e w ill h o p e th a t y o u w i ll. T h a n k y o u .
C h a ir m a n D ouglas. S e n a t o r P e ll ?
S e n a t o r P ell . I , to o , w o u ld lik e to t h a n k y o u , D r . H e lle r , f o r a c le a r
a n d w e ll p r e s e n te d r e p o r t.
M r . H eller . T h a n k you.
S e n a t o r P ell . I t h in k w e a re a ll f o r t a x r e f o r m . T h e b est id e a , I
s u p p o s e , w o u ld b e to lo w e r in c o m e ta x e s e v e n f u r t h e r a n d h a v e n o
d e d u c tio n s e x c e p t f o r c a la m ity . T h e r e w o u ld b e o n e t a x d e d u c tio n
a n d w e w o u ld a ll k n o w w h e re w e sto o d . I t h in k th e p r o g r a m w h ic h
h a s b een p r e s e n te d is a g o o d ste p in t h is d ir e c tio n .
I m u s t s a y , ev e n as a lib e r a l D e m o c r a t , I h a v e d o u b ts a b o u t w h e th e r
it is s o u n d p o lic y to a cc e p t t h is c o n t in u in g series o f d e fic its. I t h in k
w e w o u ld lik e t o see a b a la n c e d b u d g e t. T h i s w o r r y , I t h in k , is fe lt
t h r o u g h o u t th e c o u n tr y a s w e ll.
I w a s w o n d e r in g w h y in p r e s e n tin g th e t a x p a c k a g e y o u d i d n o t g o
f u r t h e r in t h e a re a o f t a x r e f o r m s , w h y y o u d id n o t p r o p o s e to step
u p t h e e s ta te t a x , f o r in sta n c e , w h ic h w o u ld n o t d ir e c t ly re la te to
c o n s u m e r s p e n d in g , w h ic h is w h a t y o u a re a ft e r . W h y y o u d id n o t
a g a in seek t o e sta b lish th e “ a n tic h e a t” d iv id e n d a n d in te r e s t w i t h h o ld
in g ta x .
M r . H eller . I t h in k S e c r e ta r y D i l lo n o n T h u r s d a y w i l l b e a b le to
g iv e y o u m o r e s a t i s f y i n g a n sw e rs to t h a t q u estio n t h a n I . I w i l l m a k e
t w o c o m m e n t s : ( 1 ) T h a t t h e in te re st o f th e c o u n tr y in t a x r e d u c tio n
is so g r e a t t h a t to o v e r b u r d e n th e t a x r e d u c tio n w i t h fu ll-s c a le t a x
r e f o r m w o u ld p e r h a p s h a v e le ssen ed its ch an ces a n d d e la y e d its e n a c t
m e n t v e r y c o n s id e r a b ly .
I t h in k t h a t e x p e rie n c e o v e r th e p a s t d o zen y e a r s , i f n o t lo n g e r , h a s
d e m o n s tr a te d t h a t r e f o r m c o m e s h a r d , t h a t th e d r e a m o f a t h o r o u g h ly
c o m p r e h e n s iv e r e f o r m t o re sto re th e t a x b a se o ffse t b y t a x r e d u c tio n s
is ju s t t h a t — a d r e a m , i f y o u t h in k o f d o in g i t a ll a t once. I m a k e th a t
a s th e fir s t c o m m e n t.
ECONOMIC REPORT OF THE PRESIDENT
41
A s t o th e se c o n d c o m m e n t, S e c r e ta r y D i l l o n ’s a n sw e r , as h e g a v e
it y e s t e r d a y o n te le v is io n , w a s t h a t th e in te re st a n d d iv id e n d w i t h
h o ld i n g w a s r e je c te d b y C o n g r e s s , t h a t th e r e w a s a s u b s titu tio n o f
a m o r e r ig o r o u s re q u ir e m e n t o f in fo r m a t io n r e tu r n s, a n d h e f e l t it
w a s in a p p r o p r ia te to co m e b a c k w it h a r e c o m m e n d a tio n f o r in te re st
a n d d iv id e n d w it h h o ld in g u n t il th e r e h a d b een so m e e x p e rie n c e u n d e r
t h is a lte r n a t iv e a p p r o a c h , p a r tic u la r ly w it h th e u se o f m a c h in e te c h
n iq u e s , a n d so o n .
I t h in k I s h o u ld r e st o n t h a t a n sw er.
S e n a t o r P ell . I w o u ld lik e t o e s ta b lish t o m y s a tis fa c tio n th e so u n d
b a s is f o r th e t h e o r y t h a t t h e t a x r e d u c tio n w o u ld p r o d u c e e n o u g h i n
crease in G N P so t h a t th e t a x rev en u e w i ll c o m e u p to s n u ff b y t a k in g
a lo o k a t p a s t e x p e rie n c e o r h is to r y .
W h a t o th e r n a t io n s h a v e t r ie d t h is s e e m in g ly r a th e r f u l l y g r o w n
e x p e r im e n t t h a t I h a d n o t e v e n h e a r d o f 2 y e a r s a g o , b u t w h ic h I
g a t h e r h a s lo n g e x is te d in t h e o r y ?
W h a t o th e r n a tio n s h a v e tr ie d
t o red u ce ta x e s a n d th e r e b y h o p e d t o in c re a se th e t a x re v e n u e in th e
lo n g h a u l, a n d w h a t h a v e b een th e r e su lts ?
M r . H eller . T h e r e a re so m e r a th e r g o o d p a r a lle ls t o th e p r o p o s e d
t a x p r o g r a m h e r e in th e e x p e rie n c e s o f G e r m a n y , o f A u s t r i a , a n d o f
J a p a n . N a t u r a lly , in o th e r c o u n trie s, g iv e n th e d iffe re n ce s in c ir c u m
s ta n c es, t h e y w i l l n o t b e e x a c t ly c o m p a r a b le w it h th e p r e se n t s itu a tio n
in t h is c o u n tr y , b u t I d o th in k i t is q u ite in p o i n t t o n o te t h a t G e r m a n y
h a d su ccessive t a x r e d u c tio n s th r o u g h o u t th e 1 9 5 0 ’s , in c lu d in g a m a jo r
t a x re d u c tio n in 1 9 5 7 -1 9 5 8 , in th e fa c e o f b u d g e t d e fic its, a t le a st
b u d g e t d e ficits in te r m s o f o u r m e th o d s o f b u d g e t a r y a c c o u n tin g . T a k e
t h e ir J u ly 1 9 5 8 m a jo r t a x r e v isio n , f o r e x a m p le , in w h ic h t h e y h a d a
s u b s ta n tia l r e d u c tio n a p p r o x im a t in g D M 2 .2 b illio n o f t a x r e d u c tio n .
T h i s w a s in th e m id d le o f a series o f d e fic its o f s o m e w h a t u n d e r D M 3
b illio n in 1 9 5 7 ,1 9 5 8 , a n d 1 9 5 9 — a n d t h e y c u t b a c k t h e ir r ev en u es a n d
in c re a se d th e ir d e fic it a n d , o f cou rse, e n jo y e d c o n tin u e d , v e r y m a r k e d
e x p a n s io n , a s w e ll a s r e a c h ie v in g a b u d g e t a r y s u r p lu s in 1 9 6 1 .
S e n a t o r P ell . W a s n ’t t h is th e p e r io d w h e n th e C o m m o n M a r k e t
w a s r a p id ly t a k in g sh a p e , a n d m i g h t t h a t n o t h a v e ca u se d th e e x p a n
sio n d u r in g th e y e a r s y o u m e n tio n e d ?
M r . H eller . P le a s e d o n ’t m is u n d e r s ta n d m e . I a m n o t s a y in g t h a t
w e c a n p u t o u r fin g e r p r e c is e ly o n t h a t t a x r e d u c tio n a n d s a y t h a t th is
w a s th e c a u se a n d a ll o f th e ir e x p a n s io n w a s effe ct. B u t t h e y d id h a v e
c u ts in 1 9 5 3 , 1 9 5 5 , 1 9 5 7 , a n d 1 9 5 8 .
T h i s c e r ta in ly h a d a s t im u la
tiv e e ffe ct o n th e e c o n o m y .
S e n a t o r P ell . T a k i n g in to a cc o u n t th e f a c t t h a t th e w h o le e c o n o m y
o f E u r o p e w a s b o o m in g in t h o s e y e a r s , I w o n d e r i f y o u c a n ta k e a n
e x a m p le p e r h a p s fu r t h e r b a c k in h is to r y , a t im e w h e n c o n d itio n s
r e m a in e d g e n e r a lly s ta tic , p e r h a p s e v en in a n o th e r p a r t o f th e w o r ld .
M r . H eller . I d o n ’t h a v e o n e a t m y fin g e r tip s .
I h a v e lo o k e d o n ly
a t th e p o s t w a r p e r io d .
I t is tru e , h o w e v e r , t h a t in t h e 1 9 5 7 p e r io d
G e r m a n y h a d h a d a slo w d o w n in its g r o w t h r a t e , i n i t s g r o w t h o f
n a t io n a l in c o m e , a n d t h a t t h is p ic k e d u p a g a in a f t e r t h e t a x re d u c tio n .
T h e A u s t r i a n case is e v en m o r e s p e c ta c u la r i n a w a y b ec a u se t h e y
h a v e r e d u c e d t h e ir ta x e s v e r y d r a s tic a lly , a g a in a n d a g a in , in c u r r in g
d e fic its in th e p r o c e ss, a n d v e r y s u b s ta n tia lly e x p a n d in g t h e ir g r o s s
n a tio n a l p r o d u c t.
42
ECONOMIC REPORT OF THE PRESIDENT
S e n a t o r P ell . I w o n d e r i f I c o u ld a sk u n a n im o u s c o n se n t to h a v e
in s e r te d , in to th e r e c o r d , a s ta te m e n t b y t h e s ta ff o f D r . H e ll e r , c o n
t a i n i n g th e fig u re s t h a t t h e y h a v e d r a w n u p o n .
C h a i r m a n D ouglas. W i t h o u t o b j e c tio n , t h a t m a y b e d o n e.
( T h e s ta te m e n t r e fe r r e d t o f o l l o w s :)
RECENT
TAX
R E D U C T IO N S
IN
OTHER
C O U N T R IE S
There are many examples of recent tax reductions in other industrial countries.
Three countries— West Germany, Austria, and Japan—have had a series of
significant tax reductions during the last decade. In each of these countries
reductions in tax rates have been followed by steady increases in tax revenues.
Moreover, each of these countries has been characterized throughout the period
by rapid rates of economic growth and low or falling rates of unemployment.
Although the degree to which tax reduction contributed to prosperity in these
nations is uncertain, reduction of the drain of the increased tax revenues as a
result of economic expansion has unquestionably had a generally stimulative
impact on these economies.
TH E
F E D E R A L R E P U B L IC
OF
GERM ANY
Significant tax reductions were put into effect in West Germany in 1953, 1955,
1957, and 1958. The 1955 reduction was a major one, which included a cut in
the top-bracket income tax rate from 70 to 55 percent, other cuts down
the line in the personal income tax, and a sharp reduction in the corporate tax
rate. The 1953 and 1955 tax cuts together represented a gross reduction of DM
8 billion in tax liabilities at then-existing levels of output and income. This
represented about one-third of Federal Government receipts in that period and
roughly 5 percent of GNP. Yet, the continued rapid expansion of the German
economy led to revenues in 1956 well above their 1955 levels.
The 1957-58 tax reduction was also a major one, incorporating such features
as the establishment of joint returns and more Uberal deduction provisions
in the personal income tax, and a small increase in the corporate tax rate ac
companied by a cut of over 50 percent in the tax on distributed profits. The
gross annual reduction was estimated to be DM2.2 billion—about 7 percent of
Federal receipts and over 1 percent of GNP. This reduction was put into effect
at a time when the pace of economic activity had slackened in Germany, and
in the face of substantial cash deficits of somewhat less than DM3 billion each in
1957, 1958, and 1959. However, the pace of activity picked up and the German
cash budget had moved back into surplus by 1961.
A U S T R IA
Austrian tax pottcy has been very flexible, with reductions in 1954, 1955, 1958,
and 1962 far overshadowing earlier increases in 1952 and 1953. In spite of the
series of tax reductions, there has been a continuous secular increase in budget
receipts—which more than doubled from 1952 through 1960—reflecting rapid and
steady economic expansion. Moreover, while budget deficits were registered in
every year from 1952 through 1961 with the exception of 1953 and 1954, actual
deficits have consistently faUen short of estimated deficits.
JAPAN
With the single exception of 1960, tax reductions have been put into effect in
Japan in every year from 1951 through 1962. The estimated gross reduction
averaged just over 50 billion yen from 1951 through 1961— or approximately 5
percent of average annual tax revenues.
During 7 of these 11 years, the Japanese ran a cash budget surplus. While
Japanese Government expenditures approximately tripled from 1951 to 1961,
rapid Japanese economic growth raised revenues— even after tax reduction—
enough to cover these expenditure increases.
S e n a t o r P ell . A s th e g r o s s n a t io n a l p r o d u c t g o e s u p , w o u ld n ’t t h e
co s t o f G o v e r n m e n t g o u p a s w e ll, e x c e p tin g f o r d e fe n se , b ecau se
p e o p le w i l l d e m a n d m o r e se r v ic e s a n d b e tte r r o a d s , c o m p a r a t iv e b e n e
fits f o r v e te r a n s a n d r e tir e d p e o p le ?
I w o n d e r i f i t w o u ld n ’t b e a
ECONOMIC REPORT OF THE PRESIDENT
43
li t t le fa lla c io u s to t h in k t h a t G o v e r n m e n t s p e n d in g w o u ld s t a y s ta tic as
th e g r o s s n a t io n a l p r o d u c t g o e s u p . H a v e y o u c o n sid e r e d t h a t ?
M r . H eller . Y e s .
W e h a v e m a d e n o a s s u m p tio n t h a t th e r e w o u ld
b e n o in c re a se in F e d e r a l e x p e n d itu r e s.
T h o s e in c re a se s u n d e r th e
p r e s s u r e s o f d e fe n s e a n d sp a c e w i l l, o f cou rse, t a p e r o ff.
S e n a t o r P ell . I a m n o t t a lk in g a b o u t d e fe n se .
M r . H e l le r . A n d b ecau se o f t h e in c re a se in p o p u la t io n a n d p r o s
p e r i t y , w h e n p e o p le a re m o r e p r o s p e r o u s , t h e y d e m a n d m o r e se r v ic e s
f r o m G o v e r n m e n t.
T h e r e w i ll b e so m e in c re a se s in th e F e d e r a l
b u d g et.
A t th e sa m e tim e , u n d e r n o r m a l g r o w t h c irc u m sta n c e s, th e
rev en u es o f t h e F e d e r a l G o v e r n m e n t in c re a se b y a b o u t $ 5 b illio n a
y e a r w it h o u t a n y in c re a se s in t a x ra tes. A s lo n g a s t h e in c re a se s in
e x p e n d itu r e s a re le ss th a n th o se in c re a se s in t a x re v e n u e s— a n d , o f
co u rse, th e a d d it io n a l s tim u lu s p r o v id e d w o u ld in c re a se t h is r a te o f in
crease in t a x r e v e n u e s m a r k e d ly — u n le ss th e e x p e n d itu r e s w e r e t o e a t
t h a t u p , th e n , o f co u rse, w e s t il l w o u ld m a k e a g a in t o w a r d th e b a l
a n c e d b u d g e t situ a tio n .
S e n a t o r P ell . D o y o u h a v e , D r . H e ll e r , a n y r o u g h e stim a te a s t o
th e id e a l r a t io in a n in d u s tr ia l c o u n tr y b etw e en t h e t o t a l g r o s s n a tio n a l
p r o d u c t a n d t h e p e r so n a l in c o m e ta x .
I n o th e r w o r d s , w h a t i s th e
o p t im u m le v e l o f t a x r e v en u e w h e r e less d o e sn ’t p r o d u c e e n o u g h a n d
w h e r e m o r e w o u ld h a v e its d im in is h in g effe c t ?
M r . H eller . I t is e x t r e m e ly h a r d t o a r r iv e a t t h is o p t im a l fig u re .
I t is tr u e t h a t w e h a v e h a d th e h ig h e s t r a t io o f d ir e c t to in d ir e c t
t a x a t io n . S o m e w h a t o v e r 6 0 p e rc e n t o f t o t a l re v e n u e s— F e d e r a l, S t a te ,
a n d lo c a l— co m e f r o m c o r p o r a te a n d in d iv id u a l a n d e m p lo y m e n t ta x e s .
T h e n e x t h ig h e s t r a t io , I t h in k , is 5 8 , i n G e r m a n y .
T h e n th ey ta il
on dow n.
B u t i t w o u ld b e e x tr e m e ly d ifficu lt t o s a y w h a t is p r e c ise ly th e
o p t im a l ra te . W e a re c o n v in c e d t h a t o u r t o t a l ta k e a s w e ll as o u r
t o p m a r g in a l r a te s, w h ic h a r e h ig h e r th a n i n a n y o th e r in d u s tr ia liz e d
c o u n t r y o f t h e w o r ld , e x c ee d th e r e a so n a b le r a t e i n t e r m s o f i m p a c t
o n th e e c o n o m y .
S e n a t o r P ell . T h a n k y o u v e r y m u c h .
C h a ir m a n D ouglas . M r s . G riffith s.
R e p r e s e n ta tiv e G r if fith s . T h a n k y o u , M r . C h a ir m a n .
I w o u ld lik e t o a d v a n c e S e n a t o r P e l l ’s q u e stio n o n e ste p fu r t h e r ,
O n e o f th e w ittie s t o f A m e r i c a ’ s w r ite r s , E d R a l e y , r e m a r k e d in a
c o lu m n t h a t I s a w t h a t o n e o f th e d ifficu ltie s w it h d e fic it fin a n c in g is
t h a t i t is lik e g e t t i n g m ix e d u p w it h th e m o b .
I t is a li t t le h a r d to
b r e a k a w a y la te r o n .
U n d e r t h e c irc u m sta n c e s o f a c o n tin u e d t a x c u t, m a y I a sk y o u
w h a t w o u ld h a v e t o h a p p e n b e fo r e y o u w o u ld r e c o m m e n d a t a x
in c re a se ?
M r . H eller . I f i t tu r n e d o u t t h a t th e c o m b in a tio n o f fo r c e s i n th e
e c o n o m y w e r e su c h a s to g e n e r a te le v e ls o f d e m a n d t h a t , i n t u r n ,
c a u se d in fla tio n , t h a t ca u se d a r e s u m p tio n o f th e p r ic e -w a g e s p ir a l,
b u t, m o r e im p o r t a n t ly , c a u se d d e m a n d in fla tio n , th e n I sh o u ld t h in k
t h a t a s y m m e tr ic a l fisc a l p o lic y w o u ld h a v e t o c o n sid e r th e p o s s ib ility
o f t a x in creases.
W e see n o su ch p o in t o n th e h o r iz o n in th e li g h t o f th e n a tio n a l
le v e ls o f d e m a n d in th e e c o n o m y , n o r o f th o se le v e ls o f d e m a n d in
c o m b in a tio n w it h t h e t a x r e d u c tio n s t h a t a re p r o p o se d .
9 3 7 6 2 — 63— p t. 1-------- 1
44
ECONOMIC REPORT OP THE PRESIDENT
R e p r e s e n ta tiv e G r i f f i t h s . W h a t w o u ld t h e effe c t o f th e t a x b i ll be
w it h o u t th e t a x in c re a se s ?
M r . H e l l e r . I a m n o t su re I u n d e r s ta n d y o u r q u estio n .
D o you
m e a n th e $ 3 % b illio n ?
R e p r e s e n ta tiv e G r i f f i t h s . W h e r e y o u r e c o m m e n d e d in creases.
M r . H e l l e r . W e l l , th e t o t a l t a x r e d u c tio n , le a v i n g a sid e th e s t r u c t u r a l m ea su re s, w o u ld b e $ 1 3 % b illio n . H o w e v e r , i f y o u ju s t se le c te d
th e s tr u c tu r a l m ea su re s w h ic h r ed u c e t a x lia b ilit ie s a n d le t a lo n e th o se
t h a t in c re a se d t h e m , it w o u ld rise t o o v e r $ 1 4 b illio n .
R e p r e s e n ta tiv e G r i f f i t h s . A n d i t c o u ld b e s u sta in e d ?
M r . H e l l e r . I w a s d ir e c t in g m y c o m m e n t t o t h e n e t r e d u c tio n o f
$ 1 0 .2 b illio n , w h ic h is th e c o m b in a tio n o f $ 8 .6 b illio n o f in d iv id u a l
t a x r e d u c tio n s , $ 2 .4 b illio n o f c o r p o r a te t a x r e d u c tio n s, a n d a n o ffs e t
t i n g o f $ 8 0 0 m illio n f r o m th e c a p ita l g a in s p r o v is io n s .
I w o u ld t h in k th a t f o r th e fo r e se e a b le fu t u r e , w it h in th e n e x t 4 o r
5 o r 6 y e a r s , t h is sh o u ld c e r ta in ly n o t d e v e lo p in to a s itu a tio n c a lli n g
f o r t a x in cre ase s. O f cou rse, t h is b a r s th e p o s s ib ilit y o f in te r n a tio n a l
e m e r g e n c y , w h ic h w o u ld p u t u s b a c k on so m e so r t o f a w a r fo o t i n g .
T h e n , o f co u rse, a ll b ets are o ff.
R e p r e s e n ta tiv e G r i f f i t h s . I t h in k y o u m a d e a v e r y g o o d c a se f o r
th e N a t i o n f o r o u r t a x r e d u c tio n , a n a tio n a l case, b u t I t h in k y o u r p r o b
le m c o m e s in th e w a y it is sta te d . O n p a g e 1 1 , y o u p o in t o u t t h a t th e
t a x d ecrease w o u ld b e b etw een $ 7 a n d $ 8 b illio n , I b e lie v e , th e t o t a l
r e d u c tio n b e in g $ 8 .6 b illio n , e x c lu d in g c a p ita l g a in s r e v isio n s.
You
w e re k in d e n o u g h to m e n tio n a lit tle su r v e y I m a d e . I t h in k t h a t th e
p r o b le m y o u h a v e is t h a t th e in d iv id u a l t a x p a y e r h a s a n e c o n o m ic t h e
o r y o f h is o w n , a n d it d o e sn ’t r e a lly fit in w it h y o u r s . T h e y a re lo o k i n g
a t t a x e s as a p r e t t y p e r s o n a l a ffa ir . T h e m o m e n t y o u sta te t o t h e m in
p la c e o f a n $ 8 .6 b illio n t a x r e d u c tio n , w h ic h to e v e r y A m e r i c a n
w o m a n m u s t m e a n t h a t h e r sh a re is at le a st a m in k sto le o r a d e s ig n e r
lia t, th e m o m e n t y o u a c t u a lly sta te t h a t it tu r n s o u t t o b e t h a t $ 8 .3 3
t h a t h e r h u s b a n d g o t a d d it io n a lly in h is p a y c h e c k la s t w e e k , th e f a r
s te p b etw e en th e d r e a m a n d th e r e a lit y , I t h in k , is th e t h i n g t h a t is
s e l f -d e f e a t in g a n d m ig h t b e d is a p p o in t in g to th e a v e r a g e t a x p a y e r .
M r . H e l l e r . T h i s m a y b e so. I d o n o t d e n y , h o w e v e r , t h a t g o o d
t h in g s o ft e n co m e in s m a ll p a c k a g e s . T h a t is t o s a y , i f i t is $ 8 p e r
p a y c h e c k — a n d I d o n ’t k n o w w h e th e r it is a w e e k ly p a y c h e c k — t h a t
w o u ld b e $ 4 0 0 a y e a r .
R e p r e s e n t a t iv e G r i f f i t h s . B u t i f y o u g iv e it to t h e m o n th e b a sis
o f a p p r o x i m a t e ly $ 2 0 0 a t a x p a y e r , it is $ 8 .3 3 e v e r y 2 w e ek s.
M r . H e l l e r . W e l l , a g a in , $ 8 .3 3 tim e s 25 is $ 2 0 0 in a y e a r . I t h in k
a n in cre ase in t a k e -h o m e p a y o f $ 2 0 0 a y e a r , i f it c a m e in t h e f o r m o f
a w a g e o r a s a la r y in c re a se , w o u ld be cau se e n o u g h f o r a n in c re a se in
th e s t a n d a r d o f li v in g , eith e r c o n sc io u sly o r u n c o n s c io u s ly , b ecau se
m o s t p e o p le d o liv e f r o m p a y c h e c k to p a y c h e c k .
I d o n ’t m e a n to ju s t g e n e r a liz e m y o w n s itu a tio n , b u t I t h in k i t is
f a i r to s a y t h a t t h is m o n e y w i ll fin d its w a y in to th e s p e n d in g stre a m .
O n th e m in k sto le , I h a v e n ’t seen th e q u o ta tio n s o n th e m la t e ly , b u t
p e r h a p s th e m in k sto le c o u ld b e b o u g h t f o r t h a t $ 2 0 0 o n th e in s t a ll
m e n t p la n , u s in g th e $ 8 a w e e k to p a y o ff th e in s ta llm e n t d e b t o n th e
sto le .
I a m n o t a d v o c a t in g t h a t , b u t sin ce y o u b r o u g h t th e e x a m p le u p , I
d o n ’t t h in k it is e n tir e ly p e rsu a siv e .
45
ECONOMIC REPORT OF THE PRESIDENT
R e p r e s e n t a t iv e G r i f f i t h s . O f co u rse, it is v e r y p e r su a siv e w h e n I
a s k e d th e q u e s tio n , “ W h a t w o u ld y o u d o w it h a $ 1 0 0 r e d u c tio n in
ta x e s s p r e a d o v e r a p e r io d o f 1 2 m o n th s ?” a n d I g e t a r e p ly to a q u e s
t io n I d i d n ’t a s k , a n d 6 2 p e r c e n t o f a ll w h o r e p ly w a s, “ D o n ’t c u t th e
t a x e s .” T h a t is v e r y p e rsu a siv e .
M r . H e l l e r . Y e s , t h a t d o es in d ic a te , a n d I t h in k it w e ll w o r th c o m
m e n t in g o n t h a t p a r t o f y o u r q u e stio n , a n e n o rm o u s n e e d f o r p u b lic
e d u c a tio n in t h e fie ld o f e c o n o m ic s, e c o n o m ic p o lic y , t a x p o lic y .
T h e in te rc o n n e c tio n s b e tw e e n t h e in d iv id u a l t a x r e d u c tio n s a n d th e
c r e a tio n o f jo b s a n d th e c r e a tio n o f a m o r e v ib r a n t e c o n o m y a re n o t
n e a r ly w e ll e n o u g h u n d e rsto o d .
M a j o r e ffo r ts h a v e to b e m a d e a lo n g
t h is lin e .
I t h in k i t is q u ite r e m a r k a b le t h a t th e b a s ic p u r ita n e th ic
o f th e A m e r i c a n p e o p le s h o u ld b e su ch t h a t t h e y w a n t to d e n y th e m
se lv e s t a x r e d u c tio n s (a) b ecau se o f th e ir fe a r s o f d e fic its, a n d th e a d d i
tio n s t o th e n a t io n a l d e b t ; a n d (& ) b ecau se t h e y d o n o t u n d e r sta n d
t h a t th e t a x c u ts a n d th e ir s p e n d in g , in e ffe ct, m a k e t h is c o n tr ib u tio n
t o th e n a tio n a l g r o w t h a n d f u l l e m p lo y m e n t , a n d o ffe r u s th e b est o p
p o r tu n ity t o g e t b ack to a b a la n c e d b u d g e t.
R e p r e s e n ta tiv e G r i f f i t h s . I a g r e e w it h y o u , a n d I t h in k e m p h a sis
s h o u ld b e p la c e d a s y o u h a v e p la c e d it , o n t h a t e x a c t ite m .
But I
t h in k it s h o u ld b e b r o u g h t h o m e m o r e c le a r ly t o e v e r y s in g le p e rso n
that- in p la c e o f th is b e in g a n $ 8 b illio n t a x r e d u c tio n , it is “ f o r y o u ,
t h e in d iv id u a l t a x p a y e r , $ 1 0 0 o r $ 2 0 0 sp r e a d o v e r a 1 2 -m o n tli p e r io d .”
W h e n th e y u n d e r s ta n d it e x a c t ly th a t w a y , u n le ss y o u c o u p le w it h it
th e f a c t t h a t t h is is o f g r e a t v a lu e t o th e N a t io n , t o g iv e th e m b a c k th is
m o n e y a n d p e r m it th e m to sp e n d it , y o u a re a p t to r e c eiv e t h e sa m e
resp o n se t h a t I h a v e r e c e iv e d : “ W e l l , i f t h a t is a ll it is g o i n g t o be,
p le a se d o n ’t b o th e r w it h it. W e n e e d t o p a y th e b i lls .”
S o I t h in k it h a s a v e r y d iffe r e n t c o n n o ta tio n to th e t a x p a y e r f r o m
t h a t w h ic h i t h a s t o u s.
T h a n k y ou v ery m uch.
C h a ir m a n D o u g l a s . T h a n k y o u .
I w o u ld lik e to a sk i f th e c o m m itte e w o u ld a p p r o v e o u r r e q u e stin g
D r . H e lle r , i f h e is w i lli n g , t o c o m e b a c k a t 2 :3 0 t h is a fte r n o o n .
M r. H e ller. I w ill b e h a p p y t o d o so.
C h a ir m a n D o u g l a s . I w i ll a sk u n a n im o u s c o n se n t, i f I m a y , t h a t th e
c h a r ts o f M r . A c k l e y , a n d t h e ta b le s a n d c h a r ts o f M r . M o o r , w it h th e
e x p la n a to r y m a t e r ia l? b e in c lu d e d a t th e a p p r o p r ia te p o in ts in th e r e c
o rd .
W i t h o u t o b j e c tio n , it is so o rd e r e d .
W e w i ll recess u n til 2 :30 t h is a fte r n o o n .
(W h e r e u p o n , a t 1 2 :3 0 p .m . t h e c o m m itte e recesse d , t o r e c o n v en e a t
2 :8 0 p .m . th e sa m e d a y .)
a f t e r recess
( T h e jo i n t c o m m itte e rec o n v e n e d a t 2 : 3 0 p .m ., S e n a t o r P a u l H .
D o u g la s , c h a ir m a n o f th e jo i n t c o m m itte e , p r e s id in g .)
C h a ir m a n D o u g l a s . T h e c o m m itte e w i l l c o m e t o o rd e r .
FURTHER STATEMENT OP WALTER W. HELLER, CHAIRMAN,
COUNCIL OP ECONOMIC ADVISERS, ACCOMPANIED BY GARDNER
ACKLEY, MEMBER
C h a ir m a n D o u g l a s . M r s . G riffith s a n d
a p o lo g iz e f o r b e in g a fe w m o m e n ts la te .
M r.
H e ll e r ,
I
want
to
46
ECONOMIC REPORT OF THE PRESIDENT
T h e r e a re t w o o r th re e q u e stio n s I w o u ld lik e t o a sk .
M a n y p e o p le a re s a y i n g t h a t th e y w o u ld f a v o r a t a x c u t o n ly i f it
w e r e c o m p e n s a te d f o r b y a n eq u a l c u t in e x p e n d itu r e s .
T h e q u e s tio n I w o u ld lik e t o a sk is t h i s : I t t h is w e r e d o n e , w o u ld i t
n o t t a k e a w a y m u c h o f th e s t im u la t iv e effe c t u p o n w h ic h y o u c o u n t?
M r . H e l l e r . S e n a t o r , i t w o u ld ta k e a w a y a lm o s t a ll o f t h e s t im u
la t iv e effe c t. I t is f a i r t o s a y , h o w e v e r , t h a t i n t a lk i n g a b o u t a t a x
c u t, o n e lo o k s a t t w o a sp e c ts o f th e d r a g t h a t ta x e s e x e r t o n t h e
econom y.
O n e is t h e d r a g o n p u r c h a s in g p o w e r , o n in c o m e , o n c o n s u m p t io n ,
a n d in v e s tm e n t d e m a n d .
T h e o th e r is t h e d r a g o n in c e n tiv e s.
I t is p e r f e c t ly tr u e , i f y o u
h a d p a ir e d r e d u c tio n s in e x p e n d itu r e s a n d in ta x e s , y o u w o u ld s t i l l
g a i n s o m e th in g o n th e in c e n tiv e sid e , t h o u g h y o u w o u ld m o r e t h a n
o ffs e t i t o n th e d e m a n d sid e .
I t h in k y o u w o u ld h a v e t o se t u p th ese c h a r ts o n t h e m u lt ip li e r in
reverse, i f y o u d id th a t.
C h a i r m a n D o u g l a s . I n o th e r w o r d s , t h e e c o n o m ic s tim u lu s is d e
p e n d e n t u p o n a G o v e r n m e n t d e fic it ?
M r . H e l l e r . T h e d e fic it is th e in e v ita b le p a r t o f th e s tim u lu s t h a t ,
a rise s f r o m t h e t a x r e d u c tio n .
I t is n ’t t h e o b je c t o f t h e e x e r c ise , b u t
i t d o e s n e c e s s a r ily o c c u r u n d e r p r e se n t c ir c u m sta n c e s i f y o u a r e g o in g ;
to cu t tax es.
C h a i r m a n D o u g l a s . D o y o u h a v e a n y c o n fid en ce t h a t t h is c a n bee x p la in e d t o t h e A m e r i c a n p e o p le ?
M r . H e l l e r . M r . C h a ir m a n , w e h a v e a lr e a d y d isc u sse d t h e diffi
c u ltie s in v o lv e d in t h is e x p la n a tio n b r ie fly w i t h M r s . G riffith s.
The
P r e s id e n t h a s p o in te d o u t t im e a n d t im e a g a in , a n d I t h in k t h is is,
p e r h a p s t h e m o s t p r o m is in g lin e o f d e v e lo p in g p u b lic u n d e r s t a n d in g :
o n i t , t h a t w e r e a lly d o n o t h a v e a c h o ic e t o d a y b e tw e e n a b u d g e t
s u r p lu s a n d n o t a x c u ts a n d a b u d g e t d e fic it a n d t a x cu ts.
I t is r e a lly a q u e stio n o f w h e th e r w e a re g o i n g t o c o n tin u e t o slid e
b a c k w a r d , so t o sp e a k , in to o n e d e fic it a f t e r a n o th e r b ec a u se o f “
e c o n o m ic s la c k a n d e c o n o m ic recessio n , o r w h e th e r w e ta k e a m o r e
a c tiv e p o s tu r e , a m o r e p o s itiv e p o s tu r e , a n d e n la r g e t h e d e fic it b y t a x cu te f o r th e t im e b e in g in t h e in te re st o f s t im u la t in g t h e ec o n
o m y a n d g e t t i n g b a c k t o b a la n c e d b u d g e ts.
I t h in k i f t h e c h o ic e is p u t t h a t w a y , i t d o es c o n t r ib u t e s o m e w h a t to*
b e tte r p u b li c u n d e r s t a n d in g o f th e issu e.
I t is n o t e a sy .
C h a ir m a n D o u g l a s . F o llo w i n g o u t th e lin e o f q u e s t io n in g w h ic h
C o n g r e s s m a n P a t m a n s ta r te d t h is m o r n in g , i f th e F e d e r a l E e s e r v e
B o a r d in s is te d t h a t th e d e fic it m u s t b e m e t o u t o f t h e s a v in g s o f i n d i
v id u a ls , w o u ld n o t t h is d iv e r t c a p ita l f r o m in d u s t r y a n d r e s u lt in no*
n e t in c re a se in m o n e ta r y p u r c h a s in g p o w e r , a n d , c o n se q u e n tly , n o
n e t in c re a se in d e m a n d ?
M r . H e l l e r . I f t h e p o lic y w e r e — a n d I d o n o t f o r a m o m e n t b elie v e t h a t M r . M a r t i n w o u ld in te n d t h is — t o r a ise in te r e st r a te s t o a p o in t
w h e r e p r i v a t e s p e n d in g , c a p ita l s p e n d in g in p a r t ic u la r , w e r e d e p r e sse d ,
b y a s m u c h a s th e t a x c u t e x p a n d e d s p e n d in g , s u r e ly i t w o u ld b e a
s e l f -d e f e a t in g p r o p o s it io n .
C h a ir m a n D o u g l a s . T h e r e h a s b een d isc u ssio n in t h e p a s t a s t o th e
b e s t m e t h o d s o f g e t t in g o u t o f a r ec essio n .
S o m e h a v e a d v o c a te d
p u b lic w o r k s ; so m e h a v e a d v o c a te d t a x cu ts.
I h a v e b een o n e o f the^
ECONOMIC REPORT OF THE PRESIDENT
47
la t t e r b ec a u se a t a x c u t c o u ld ta k e effe c t m o r e q u ic k ly t h a n p u b lic
w orks.
B u t is i t n o t t r u e t h a t in t h e p r e s e n t in sta n c e , w h ic h is o n e o f t r y i n g
t o e lim in a te s o m e o f th e s t a g n a t io n in in d u s t r y t h a t p u b lic w o r k s h a s
a h ig h e r m u li p li e r t h a n a t a x c u t ; n a m e ly , t h a t th e fir st $ 8 b illio n
i s d ir e c t ly s p e n t f o r la b o r a n d m a te r ia ls , a n d th e n y o u g e t th e se c o n d
a r y effe c ts o n t o p o f t h a t so t h a t i f th e m u lt ip li e r o n th e t a x c u t i s 2 ,
i t is so m e w h a t h ig h e r in th e ca se o f p u b lic w o r k s.
I f i t is 2 .5 f o r a t a x c u t, i t m i g h t b e a s h i g h a s 3 f o r p u b lic w o r k s .
I t i t is a s h i g h as 4 , as D r . R o y M o o r see m s t o t h in k m a y b e p o ssib le ,
i t m i g h t b e 5.
T h e r e f o r e , p u b lic w o r k s h a s a h i g h e r m u lt ip lie r , d o es
i t n o t , th a n a t a x c u t ?
M r . H e l l e r . I t h in k y o u h a v e sta te d i t v e r y w e ll.
T h e p u b lic
w o r k s a re s lo w e r t o g e t s ta r te d , b u t t h e y d o h a v e t h e assu ra n ce o f
a 1 0 0 -p e r c e n t e x p e n d itu r e in th e fir st r o u n d .
I m i g h t a sk M r . A c k l e y
t o c o m m e n t f u r t h e r o n th a t.
M r . A c k l e y . I t h in k th e d iffe re n ce b e tw e e n t h e t w o m u lt ip lie r
effe c ts c a n b e e x a g g e r a t e d .
I f , in fa c t , th e e ffe c t o f a b illio n d o lla r s
o f t a x r e d u c tio n is to in cre ase c o n su m e r s p e n d in g in t h e fir st in sta n c e
b y $ 9 0 0 m illio n , th e d iffe re n ce in th e u lt im a t e e ffe c ts o f th e t w o is
t h a t th e o n e is 9 0 p e rc e n t o f th e o th e r .
I t h in k t h a t th e r e is n o t a d iffe re n c e o f 1 in th e size o f th e m u lt i
p lie r .
I n a d d it io n , th e r e is, o f c o u rse, th e in c e n tiv e effe c t o f t a x
r e d u c tio n t h a t y o u d o n ’t g e t f r o m a n e x p e n d itu r e in cre ase .
B u t it
is c e r ta in ly c o r r e c t t h a t th e r e is a s o m e w h a t h i g h e r d ir e c t m u lt ip lie r
fa c t o r a p p lic a b le t o e x p e n d itu r e s.
C h a ir m a n D o u g l a s . I s n ’t o n e o f th e d iffic u ltie s w it h p u b lic w o r k s
th e fa c t t h a t w it h th e A p p r o p r i a t i o n s C o m m itt e e s t h a t w e h a v e in
th e H o u s e a n d S e n a te , m o n e y is lik e ly t o g o in to a re a s w h e re u n e m
p lo y m e n t is n o t h ig h , b u t w h e r e s e n io r it y is h i g h , a n d i t w i l l n o t
b en efit th e a re a s in n ee d ?
W e l l , I d o n ’t a s k y o u t o r e p ly to t h a t.
M r . H e l l e r . W e h a v e n o t r u n a n y c o r r e la tio n s , le t u s p u t i t t h a t
w ay.
C h a ir m a n D o u g l a s . I h a v e o n e fin a l q u e stio n .
M r . H e l l e r . M a y I m a k e o n e c o m m e n t, M r . C h a ir m a n , o n t h a t ?
C h a ir m a n D o u g l a s . C e r t a in ly
M r . H e l l e r . I n c o n tr a st w it h w h a t h a p p e n s t o t h e o r d in a r y p u b lic
w o r k s a p p r o p r ia tio n p r o c e d u r e , th e P u b li c W o r k s A c c e le r a t io n A c t ,
b y la w g o e s in to th e a reas w h e re it is n e e d e d m o s t.
I b e lie v e t h is a ct h a s h a d a v e r y s a lu ta r y effe ct.
A s y o u k n o w , th e
P r e s id e n t is p r e s s in g f o r th e r e m a in in g $ 5 0 0 m i lli o n a p p r o p r ia tio n
u n d e r t h a t act.
C h a ir m a n D o u g l a s . Y e s .
I t is a b i g im p r o v e m e n t .
I h a v e o n e fin a l q u e stio n . W e h e a r a lo t a b o u t t h e p u b lic d e b t,
a n d c e r t a in ly I a m n o t e n a m o r e d o f d e b t, b u t w h a t h a s b een t h e r a t io
o f p u b lic d e b t t o th e g r o s s n a t io n a l p r o d u c t in th e la s t 1 6 o r 1 7 y e a r s ?
M r . H e l l e r . A s w e p o in te d o u t in o u r r e p o r t o n p a g e 7 8 , t a k in g
th e g r o s s F e d e r a l d e b t, t h e r a t io t o t h e g r o s s n a t io n a l p r o d u c t w a s
1 2 3 p e r c e n t a t th e clo se o f 1 9 4 6 .
C h a ir m a n D o u g l a s . I t is a b o u t 2 6 7 t o 2 2 0 ?
W a s t h a t th e r a t i o ?
M r . H e l l e r . Y o u r m e m o r y is b e tte r th a n m in e o n th a t .
C h a ir m a n D o u g l a s . I t h in k i t w a s a p p r o x im a t e ly th a t.
48
ECONOMIC REPORT OF THE PRESIDENT
M r - H e l l e r . 2 6 0 in th e t o t a l d eb t. Y e s , th o se a re th e a p p r o x im a t e
fig u re s. T h e r a tio o f 12 3 p e rc e n t h a s d r o p p e d t o 55 p e r c e n t b y th e
eiose o f 1 9 6 2 .
C h a ir m a n D o u g l a s . O n ly a 1itt le o v e r h a l f .
M r . H e l l e r . T h a t t a k e s it o n a g ro ss b a sis. O n a n e t b a s is , t a k in g
o n ly t h e F e d e r a l d e b t h e ld b y th e p u b lic , it h a s d r o p p e d f r o m 9 7 p e r
cen t t o 3 9 p e rc e n t.
C h a ir m a n D o u g l a s . Y o u h a v e n o tic e d , h a v e y o u n o t, th e r e p o r ts o f
t h e H o u s e C o m m itt e e o n G o v e r n m e n t O p e r a tio n s w h ic h g iv e t h e v a lu e
o f r e a l p r o p e r t y o w n e d b y th e G o v e r n m e n t in te r m s o f o r ig in a l cost ?
M r . H e l l e r . W e n o te t h a t in o u r r e p o r t o n p a g e 82 .
C h a ir m a n D o u g l a s . A s I u n d e r s ta n d i t , t h e y sh o w a v a lu e in te r m s
o f o r ig in a l c o st o f la n d a n d b u ild in g s a n d o th e r p r o p e r t y o w n e d b y
t h e G o v e r n m e n t o f a p p r o x im a t e ly $ 2 9 8 b illio n as o f la st J u ly .
M r. H eller. Y es.
C h a ir m a n D o u g l a s . T h i s is o r ig in a l cost.
I f one w e re to t a k e r e
p r o d u c tio n co st o r m a r k e t v a lu e , ev en a llo w in g f o r d e p r e c ia tio n , th e
v a lu e o f r e a l a n d p e rso n a l p r o p e r t y o w n e d b y th e G o v e r n m e n t w o u ld
p r o b a b ly b e g r e a te r th a n $ 2 9 8 b illio n , w o u ld i t n o t ?
M r . H e l l e r . Y e s , it w o u ld .
C h a ir m a n D o u g l a s . M r . C u r tis .
R e p r e s e n t a t iv e C u r t i s . I w a n t t o re tu rn to th o se c h a rts.
I s t h e m u lt ip li e r effect y o u are a s s u m in g b a se d o n th e p r e se n t t a x
s tr u c tu r e ? H o w w i l l th e p r o p o s e d t a x s tru c tu re c h a n g e it ? W o u l d n ’t
y o u r m u lt ip lie r effe ct b e a lte r e d in t h a t p r o c e ss ?
M r . H e l l e r . M a y I a sk M r . A c k l e y t o r e s p o n d t o t h a t ?
M r . A c k l e y . Y e s . T h e m u lt ip lie r effe c t m o v e s in v e r s e ly w it h th e
size o f th e s o -c a lle d le a k a g e s , a n d th e lo w e r t h e t a x ra te s th e h ig h e r
t h e m u lt ip li e r effect.
A c t u a l l y , o u r e stim a te s d id a tt e m p t to ta k e
a c c o u n t o f th e n e w p r o p o s e d sc h e d u le o f t a x ra te s, r a t h e r t h a n th e
e x is t in g o n es.
R e p r e s e n ta tiv e C u r t i s . S o y o u r m u lt ip li e r is a t h e o r y , t o o ?
In
o th e r w o r d s , y o u h a v e n o t u se d th e p r e se n t t a x stru c tu re ? T h e m u lt i
p l ie r a ssu m e s t h e effects o f th e n e w t a x stru c tu re .
M r - A c k l e y . I t tr ie s to u se th e r e le v a n t r e la t io n s h ip s ; y e s, sir.
R e p r e s e n t a t iv e C u r t i s . J u s t f o r th e r e c o r d , I o b ta in e d a n u n official
e s tim a te f r o m th e D e p a r tm e n t o f C o m m e r c e on t h e a v e r a g e r a te o f
s a v in g s f r o m 1 9 2 0 to 1 9 2 9 . I t w a s 4 .5 p e rc e n t. I m u s t s a y , t h o u g h ,
th e r e w a s a flu c tu a tio n in t h a t p e r io d f r o m 1 p e r c e n t t o 7 .5 p e rc e n t.
T h i s in d ic a te s t h a t w e a re b e in g a lit tle t o o p r e s u m p tu o u s t o a ssu m e th e
1 9 5 0 - 6 0 s a v in g s ra te w ill r e m a in in th e fu tu r e .
I t is im p o r t a n t to fin d o u t t h e b a s is o n w h ic h th e se s a v in g s r a te s
v a r y b e c a u se i t is su c h a la r g e p a r t o f y o u r b a s ic a s s u m p tio n s . I s
t h a t a f a i r o b s e r v a tio n ?
M r . H e l l e r . I w o u ld sa y t h a t a n y t h in g th a t in flu e n c es th e s a v in g
r a te is , o f c o u rse, im p o r t a n t in a sse ssin g th e size o f th e m u lt ip lie r .
B u t th e w h o le p o s tw a r e x p e rie n c e sin ce 1 9 5 0 d o e s s u p p o r t t h is b a sic
p r o p o s it io n o f a 6 to 8 p e r c e n t s a v in g r a te a n d t h e p o s t w a r e x p e rie n c e
t h a t r eflects v e r y s u b s ta n tia l c h a n g e s, as I w a s s a y i n g e a r lie r , in th e
d e c r e e o f s t a b ilit y in t h e e c o n o m y .
R e p r e s e n t a t iv e C u r t i s . Y e t th e r a te w a s a b o u t 3 p e r c e n t d u r in g th e
1 9 3 0 ’s a n d 4 .5 p e r c e n t in th e 1 9 2 0 ’s. I d o n ’t k n o w th e r a te d u r i n g th e
1 9 1 0 ’ s. A s a m a t t e r o f f a c t , I u n d e r sta n d w e la c k a c c u r a te fig u r e s
b e fo re 1929.
ECONOMIC REPORT OF THE PRESIDENT
49
M r . H e l l e r . B e y o n d 1 9 2 9 w e d o n ’t h a v e v e r y a c c u r a te fig u re s. T w o
c o m m e n ts s h o u ld b e m a d e .
O n e is, o f cou rse, i f t h e s a v in g r a te sh o u ld
s lid e b a c k d o w n t o su c h le v e ls — w h ic h I w o u ld r e g a r d a s v e r y d o u b t f u l
in t h e l i g h t o f o u r p r e se n t fin a n c ia l a n d ec o n o m ic str u c tu r e — t h a t , o f
c o u rse , w o u ld ra is e th e m u lt ip lie r , b ecau se i t w o u ld m e a n t h a t p e o p le
w o u ld b e s p e n d in g a h ig h e r p r o p o r t io n o f t h e ir in c o m e .
S e c o n d ly , I w o u ld n ’t w a n t to ta k e th e 1 9 3 0 ’ s a s a g u id e t o o u r
a c t iv it ie s in t h e 1 9 6 0 ’s.
R e p r e s e n t a t iv e C u r t i s . I w o u ld n ’t eith e r . I a m s i m p ly p o i n t i n g o u t
t h a t th e r e a re d iffe r e n t r a te s. M y m a in p o in t is t h a t c o n su m e r p u r
c h a s in g p o w e r is n o t a u t o m a tic a lly tr a n s la te d in to c o n su m e r d e m a n d .
A t le a s t a l a g is d e v e lo p in g in t h is a re a .
I f th e c h a n g e in th e o r y
ev e r w a s a cc u r a te , a n d I c e r t a in ly q u e stio n t h a t i t w a s, it h a s b e c o m e
le ss a cc u r a te r e c e n tly .
L e t m e r e la te m y c o n c lu sio n to a sp ecific a re a — th e fie ld o f a g r ic u l
tu re . I n t h is c o u n tr y , in c re a se d c o n su m e r p u r c h a s in g p o w e r is n o t
going* to in c re a se c o n su m e r d e m a n d in th e fie ld o f a g r ic u ltu r e .
Yet
h e re is a fie ld w h e re w e h a v e a v e r y h i g h in c id e n c e o f u n e m p lo y m e n t.
I n f a c t , y o u r p r e s e n ta tio n a n d r e p o r t in d ic a te s a s h i f t in a g r ic u ltu r e .
W e h a v e r u r a l u n e m p lo y m e n t. W e h a v e u n u se d c a p a c ity . I n f a c t ,
G o v e r n m e n t p o lic y is to e n c o u ra g e a c u tb a c k in a g r ic u ltu r a l p la n t
u sage.
Y e t h e r e is a n a re a w h e re in c re a se d p r o d u c t iv it y a n d te c h
n o lo g ic a l a d v a n c e m e n t h a v e b een e x tr e m e ly r a p id . I h a p p e n t o t h in k
t h is is tr u e e c o n o m ic g r o w t h .
F o r th ese r e a so n s, o u r p r o b le m s a re n o t t ir e d b lo o d , b u t in d ic a te
r a p id te c h n o lo g ic a l a d v a n c e m e n t. W e e v e n h a v e a n a m e f o r it. W e
c a ll i t a u to m a tio n . I c a n ’t u n d e r s ta n d h o w y o u c a n c a ll a p e r io d lik e
t h is o n e o f ec o n o m ic slu g g ish n e ss.
M r . H e l l e r . M a y I a d d r e ss m y s e lf to y o u r a g r ic u ltu r a l e x a m p le ,
w h ic h I th in k is v e r y m u c h a case in p o in t ?
R e p r e s e n ta tiv e C u r t i s . Y e s .
M r . H e l l e r . W e fin d in lo o k in g at th e sta tistic s f o r th e m o v e m e n t
o f a g r ic u ltu r a l p o p u la t io n in to th e c itie s t h a t a t th e t im e o f h i g h a c
t i v i t y in th e e c o n o m y as a w h o le , su ch la b o r t r a n s fe r s a re effected v e r y
r e a d ily , a n d th e n u m b e r o f w o r k e r s m o v i n g in t o th e u r b a n c o m m u n ity
a n d t r a n s fe r r in g t h e ir p r o d u c t iv it y , so to s p e a k , f r o m th e f a r m to th e
c it y is v e r y h ig h .
B u t i t is o n ly d u r in g s lu g g is h p e r io d s t h a t t h is m o v e m e n t slo w s.
I n d e e d , o n e o f th e r e a so n s f o r g e t t i n g f u l l e m p lo y m e n t , o n e o f th e
r e a s o n s f o r g e t t i n g h i g h le v e ls o f d e m a n d , is t o c r e a te t h e jo b s t h a t
w o u ld ease t h is tr a n s itio n f r o m th o se a re as o f o u r e c o n o m y w h e r e h i g h
p r o d u c t iv it y is r e le a s in g w o r k e r s.
R e p r e s e n ta tiv e C u r t i s . B u t , D o c t o r , y o u a lw a y s b e g th e q u e stio n s
in y o u r a n sw e r s. Y o u a ssu m e t h is is s lu g g is h . A c t u a l l y , d u r in g t h is
sa m e p e r io d , e m p lo y m e n t i n serv ice in d u s tr ie s h a s b e e n in cre asin g*
I n y o u r o w n c h a r ts y o u h a v e sh o w n c e r ta in a re as w h e r e th e u n
e m p lo y m e n t r a te is w e ll b e lo w 4 p e rc e n t.
T h e r e is a s t r o n g d e m a n d .
W e a ls o k n o w t h a t th e g r e a te st p r o b le m in r u r a l u n e m p lo y m e n t
is th e o ld e r p e r s o n w h o w i l l n o t m o v e t o th e c itie s e a s ily . I a m n o t
a r g u in g t h a t c y c lic a l m o v e m e n t d o e s n o t h a v e a n im p a c t . O f cou rse
i t d o es. I n p e r io d s o f d o w n tu r n , y o u r p r o b le m is g r e a t e r th a n d u r in g
an u p tu rn .
W h a t is th e rea l co re o f th e p r o b le m ?
50
ECONOMIC REPORT OF THE PRESIDENT
I t seem s t o m e t h a t i n p e r io d s o f r a p id te c h n o lo g ic a l a d v a n c e m e n t
y o u h a v e a h i g h e r in c id en c e o f fr ic t io n a l u n e m p lo y m e n t. O n p a g e
15 o f y o u r s ta te m e n t, I w a s v e r y p le a se d t o see y o u li s t so m e ox th e
d r a m a tic s h i ft s .
I n 1 9 4 7 ,1 7 p e rc e n t o f o u r c iv ilia n la b o r f o r c e w a s in
a g r i c u lt u r e ; in 1 9 6 2 , o n ly 7 p e rc e n t. Y o u a lso m e n tio n e d e m p lo y m e n t
s h i f t s i n t h e se rv ic e s a n d w o m e n e n te r in g t h e la b o r fo r c e .
O n e t h in g y o u f a i le d t o m e n tio n w a s th e im p a c t o f th e d r a f t la w
o n th e la b o r m a r k e t.
A n o t h e r in te r e s tin g fig u r e w h ic h r e q u ir e s s t u d y ,
i n lin e w it h th e q u e s tio n in g o f M r . P r o x m ir e , is t h e a g e a t w h ic h
p e o p le e n te r th e la b o r fo r c e . W e s a y o u r la b o r fo r c e b e g in s a t a g e 14 .
Y e t I t h in k s ta tis tic s s h o w t h a t th e a v e r a g e p e r s o n e n te r s t h e la b o r
f o r c e a t a g e 1 9 . T h a t a g e h a s b een in c r e a s in g a s o u r y o u n g p e o p le
h a v e b een s t a y in g in sc h o o l lo n g e r .
T h i s is a r a th e r d r a m a tic c h a n g e .
I n s p ite o f t h e li s t i n g o f a ll th ese ite m s w h ic h s p e ll v e r y r a p id
g r o w t h , y o u s a y , “ A s w e p o in t o u t in o u r r e p o r t ,” a n d I k n o w y o u d o ,
o n p a g e s 2 3 a n d 2 4 , “ c a r e fu l s t u d y d o es n o t s u g g e s t th e c u r r e n t le v e l o f
u n e m p lo y m e n t c a n b e e x p la in e d * * * b y a n y u n u s u a l a c c e le r a tio n
i n t h e r a te o f w o r k e r d is p la c e m e n t.” Y e t o n p a g e 1 5 , y o u li s t so m e
o f th e d r a m a tic in c id e n ts o f la b o r d isp la c e m e n t. I d o n ’t see h o w th e
t w o s ta te m e n ts jib e .
M r . H e l l e r . T h e t w o jib e in th e siense t h a t w e a re lo o k i n g a t th e
p e r io d f r o m 1 9 4 6 t o 1 9 6 2 , a n d in th e f o u r p o s t w a r rec essio n s a n d
l o u r p o s t w a r re c o v e rie s w e fin d a p a t te r n o f u n e m p lo y m e n t, a n y w a y
t h e y a r e a n a ly z e d w h ic h a re e s s e n tia lly c o n siste n t o n e w it h th e o th e r .
T h e r e is n o in d ic a t io n t h a t s tr u c tu r a l u n e m p lo y m e n t, w h ic h is a
c o n t in u in g p r o b le m , is r e a lly a s ig n ific a n tly g r o w i n g p e r c e n ta g e o f
th e t o t a l u n e m p lo y m e n t p r o b le m .
R e p r e s e n t a t iv e C u r t i s . B u t t h a t is p r e c is e ly w h a t w e a ll k n o w a b o u t
p o s t w a r recessio n s. E a c h tim e w e r e a c h a p e a k a f t e r a r ec essio n , w e
d o n o t r e tu r n t o th e p r e v io u s ly lo w ra te o f u n e m p lo y m e n t. T h e r a te
h a s b een r is i n g w h ic h w o u ld in d ic a te , q u ite c le a r ly t h a t i t is m o r e
t h a n c y c lic a l.
I h a v e s u g g e s te d t h a t a s t u d y o f th e c o m p o n e n t p a r ts o f u n e m p lo y
m e n t w o u ld r e v e a l i t is fr ic t io n a l. I f w e d o n o t t r e a t t h is w i t h t r a in
i n g a n d r e t r a in in g p r o g r a m s , t h is fr ic t io n a l u n e m p lo y m e n t w o u ld
fr e e z e i t in to s tr u c tu r a l.
M r . H e l l e r . I a g r e e w it h y o u e n tir e ly o n t h e im p o r t a n c e o f t r a in
i n g a n d r e t r a in in g . O f co u rse, th e p r o b le m o f t h e su c c e ssiv e ly h ig h e r
r a te s o f u n e m p lo y m e n t is d ir e c t ly r e la te d , s i m p ly s t a t is t ic a lly , t o th e
r e la tiv e w e a k e n in g o f d e m a n d in th ese p e r io d s.
R e p r e s e n t a t iv e C u r t i s . T h a t is y o u r th e sis. W e a re t r y i n g t o e x
a m in e w h e th e r o r n o t t h a t th e sis is a cc u ra te . I d o n ’t t h in k y o u r th e sis
is c o r r e c t. Y o u b e g m y q u e stio n e a c h tim e .
M r . H e l l e r . T h e r a te o f g r o w t h in d e m a n d , s t a t is t ic a lly , h a s slo w e d
d o w n in th e se p e r io d s.
R e p r e s e n t a t iv e C u r t i s . H o w d o y o u m e a su re t h a t ?
M r . H e l l e r . T h e t o t a l d e m a n d o f th e p r iv a t e e c o n o m y , o f g o v e r n
m e n t , o f e x p o r t s , o f in v e s tm e n t, c o n su m e r s.
R e p r e s e n t a t iv e C u r t i s . A r e n ’t y o u r e a lly b e g g i n g t h e q u e s tio n ?
Y o u a re u s i n g th e g r o s s n a t io n a l p r o d u c t, o u r p r o d u c tio n , a n d r e la t
i n g i t t o d e m a n d , a re y o u n o t ?
M r . H e l l e r . B u t th ese a re th e sec to rs, th e o n e s t h a t I j u s t lis te d ,
t h a t g e n e r a te th e t o t a l d e m a n d f o r p r o d u c t.
T h e ir to ta l d em an d s
ECONOMIC REPORT OF THE PRESIDENT
51
h a v e b e e n d im in is h e d . I w o u ld n ’t , as I s a y , d e n y f o r a m o m e n t t h a t
w e n e e d t o h a v e t h is p ro ce ss o f r e a d a p ta tio n . I w a s t r y i n g t o stre ss
in o u r o p e n in g s ta te m e n t t h is m o r n in g t h a t th e r e r e a lly a re th r e e
t r a c k s ox p o lic y .
O n e is t o in cre a se p r o d u c t iv it y , t o m o d e r n iz e ,
m e c h a n iz e , a u to m a te , a n d so fo r t h . T h a t rele a se s la b o r . T h a t is w h a t
h a s b een g o i n g o n in sp e c ta c u la r fa s h io n in a g r ic u ltu r e .
E e p r e s e n t a t iv e C u r t i s . B u t i t cre a te s m o r e jo b s t h a n i t r ele a se s in
o th e r a reas.
M r . H e l l e r . I t a ls o c rea tes jo b s . B u t a s f a r a s t h e f u l l a b s o r p tio n
o f th o se p e o p le w h o a re rele a se d , to g e th e r w it h th e n e w e n tr a n ts i n
t h e la b o r fo r c e , y o u n e e d th e se c o n d tr a c k , w h ic h is th e e x p a n s io n
o f d e m a n d , a n d t o b u ild a b r id g e b etw e en th ese t w o y o u n e e d th e t r a in
i n g a n d r e tr a in in g .
E e p r e s e n t a t iv e C u r t i s . M y a r g u m e n t w o u ld b e t h a t y o u h a v e t h e
d e m a n d , b u t y o u a ls o h a v e a n ec e ssa ry l a g w h ic h w i l l c o n tin u e u n t il
y o u tr a in o th e r s t o a ssu m e n e w jo b s c r e a te d b y te c h n o lo g ic a l a d
v a n c e m e n t.
U n f o r t u n a t e ly , t h o se d is p la c e d b y t e c h n o lo g ic a l a d v a n c e
m e n t te n d t o b e s e m is k ille d a n d u n s k ille d . T h i s is th e g r e a te s t i m
p a c t. I t is v e r y d ifficu lt t o t r a in th e m in n e w s k ills . Y o u m u s t h a v e
a n u p g r a d i n g p r o c e ss in th e e n tire la b o r la d d e r o f sk ills .
M r . H e l l e r . I t is q u ite tr u e t h a t w e n e e d c o n s t a n t ly t o u p g r a d e
th e s k ills a n d th e m o b ilit y o f th e la b o r fo r c e . I t is a lso tr u e t h a t th e
h e a v ie s t in c id e n c e o f u n e m p lo y m e n t is a m o n g th e u n s k ille d a n d se m i
s k ille d w o r k e r s , b u t t h is in c id e n c e h a s n o t s ig n ific a n tly c h a n g e d
p r o p o r t io n a t e ly d u r in g t h e p o s t w a r p e r io d .
E e p r e s e n t a t iv e C u r t i s . 1 t h o u g h t i t h a d .
I k n o w m y t im e is
a lr e a d y u p .
I a m sorry.
S e n a t o r S p a r k m a n ( p r e s i d i n g ) . I t h a s b e e n a v e r y fin e d isc u ssio n .
D o c t o r , w h a t is y o u r a n sw e r t o th e p r o p o s it io n t h a t M r . C u r t is m a d e
r e g a r d in g th e m in im u m a g e g r o u p o f th e la b o r fo r c e ?
F o r in sta n c e , h e sa id it is set a t 1 4 , b u t t h a t a s a p r a c t ic a l m a tte r
i t is 19 . I s t h a t r ig h t ?
M r . H e l l e r . I f p e o p le b e tw e e n th e a g es o f 1 4 a n d 1 9 r e m a in in
s c h o o l a n d a re n o t se e k in g jo b s , t h e y a re n o t c o u n te d a s p a r t o f th e
la b o r fo r c e .
S e n a to r S p a r k m a n . B u t i f t h e y a re s e e k in g jo b s a t t h a t a g e , y o u
d o c o u n t th e m a s p a r t o f th e la b o r fo r c e ?
M r . H e l l e r . T h a t is r ig h t .
S e n a t o r S p a r k m a n . S o i t d o e sn ’t m a k e a g r e a t d e a l o f d iffe re n ce
e ith e r w a y , d o e s i t ?
M r . H e l l e r . I t r e a lly d o e sn ’t . O f c o u rse , it m e a n s t h a t y o u h a v e
a s o m e w h a t g r e a t e r t o t a l n u m b e r o f u n e m p lo y e d in y o u r c o u n t, b u t,
a t th e sa m e t im e , y o u r la b o r fo r c e , it s e lf , is t h a t m u c h la r g e r , a n d
t h e im p a c t o n th e u n e m p lo y m e n t ra te is n o t v e r y la r g e .
A s I s a y , th e fu n d a m e n t a l c r ite r io n is w h e th e r a p e rso n is a c tiv e ly
s e e k in g a jo b .
I f h e is in sc h o o l, p r e s u m a b ly t h a t is n o t th e case.
S e n a t o r S p a r k m a n . D o c t o r , w h ile I h a v e p le n t y o f t im e , I w a n t t o
ec h o th e s ta te m e n t m a d e b y S e n a t o r P r o x m i r e t h is m o r n in g , a n d c o m
m e n d y o u w h o w o r k e d u p th e t a x b i ll in p u t t in g in th e fir st fo r m u la
f o r t a x a t io n o f c o r p o r a tio n e a r n in g s , 2 2 p e rc e n t in lie u o f th e 8 0
p e r c e n t, ju s t r e v e r s in g th e m , o r 2 5 w h e n i t is lo w e r e d to 4 7 . I a m su re
y o u a re f a m i li a r w it h t h e fa c t t h a t th e S m a ll B u s in e s s C o m m itt e e
52
ECONOMIC REPORT OF THE PRESIDENT
r e c o m m e n d e d t h a t in its a n n u a l r e p o r t s e v e r a l y e a r s a g o a n d h a s c o n
t in u e d t o r e c o m m e n d it.
W e h a v e h a d b ills in , a n d , as S e n a t o r P r o x m i r e sa id , a g o o d m a n y
o f u s h a v e s u p p o r te d t h a t p r o g r a m f o r so m e tim e . I t h in k i t w i l l
b e a r e a l b en efit t o s m a ll b u sin e ss. O f c o u rse, t h e b en efit g o e s t o a ll
b u sin e sse s, b u t it w i ll b e p a r t ic u la r ly b e n e fic ia l t o s m a ll b u sin e sses
b ecau se so m a n y o f t h e m h a v e th e ir e a r n in g s in t h a t fie ld .
I m a y s a y t h a t n o t to o lo n g a g o I sen t a le tt e r to P r e s id e n t K e n n e d y
r e c o m m e n d in g t h a t t h is b e d o n e. A l s o , I w e n t a ste p fu r t h e r a n d
r e c o m m e n d e d t h a t t h e m in im u m b e r a ise d f r o m $ 2 5 ,0 0 0 t o $ 5 0 ,0 0 0 .
Y o u d id n o t in c lu d e t h a t in t h e r e c o m m e n d a tio n . H o w m u c h d iffe r
e n c e w o u ld t h a t m a k e in th e b i l l ?
W o u l d y o u h a v e o ffh a n d ju s t a
r o u g h e s tim a te ?
M r . H e l l e r . I d o n o t k n o w o ffh a n d . I k n o w t h a t t h e c o st o f th e
in v e r s io n t h a t is p u t t in g in t h e 2 2 p e rc e n t is $ 4 4 0 m illio n . E x t e n d i n g
t h a t li m i t u p t o $ 5 0 ,0 0 0 w o u ld p r e s u m a b ly n o t c o st q u ite a s m u c h a s
t h a t , b u t, n e v e r th e le ss, n o t to o f a r f r o m it. T h a t is ju s t t h e w o r s t k in d
o f h o r se b a c k e s tim a te . I a m su re S e c r e ta r y D i l l o n w i ll b e in a b e tte r
p o s it io n t o g iv e y o u a fir m fig u re o n t h a t.
S e n a t o r S p a r k m a n . I w ill a sk h im a b o u t it w h e n h e testifies.
N ev
e r th e le s s , I d o w a n t t o c o m m e n d y o u f o r m a k i n g th a t c h a n g e in th e
r a te .
I t h in k i t w i ll b e a v e r y re a l b en efit.
M r . H e l l e r . S e n a t o r , m a y I ju s t sa y t h a t t h a t is r e a lly p a r t a n d
p a r c e l o f a b a sic a p p r o a c h in th e t a x p r o g r a m , w h ic h is to i n v ig o r a t e
c o m p e t it io n a n d t o m a k e th e m a r k e t sy ste m w o r k .
O n e o f th e best,
w a y s t o a c c o m p lis h t h is , o f c o u rse, is t o p r o v id e b o t h m o r e in c e n tiv e
a n d m o r e w h e r e w ith a l to th e s m a ll c o r p o r a tio n s.
S e n a t o r S p a r k m a n . T h e r e i s o n e o th e r ite m y o u m e n tio n e d .
You
s a id t h a t h o u s in g c o u ld b e e x p e c te d t o c o n tin u e a t a b o u t t h e sa m e
r a te .
I r e f e r t o h o m e c o n str u c tio n .
M r. H eller. Y es.
W e t h in k t h a t t h e h i g h r a te s o f th e f o u r t h
q u a r te r , w h ic h w e r e a b o u t 1 ,5 2 0 ,0 0 0 p r iv a t e h o u s in g u n its , o n t h e a v e r
a g e , a re li k e ly t o r o u g h ly c o n tin u e in th e r e s id e n tia l fie ld in to 1 9 6 3 .
S e n a t o r S p a r k m a n . I w a s n o t g o i n g to q u e stio n t h a t so m u c h , b u t
I w a s g o i n g t o a s k y o u t h i s : H a s y o u r office g iv e n v e r y m u c h a tte n tio n
t o th e in c re a se in fo r e c lo s u r e s o f F H A m o r t g a g e s .
T h e r e h a s b een
q u ite a series o f a rticle s c o n c e r n in g fo r e c lo su r e s in t h e B a l t i m o r e S u n
w h ic h y o u m a y h a v e n o tic e d .
I w o n d e r e d i f y o u r office h a s b een c h e c k
i n g in to t h a t p r o b le m .
M r . H e l l e r . W e h a v e n ’t stu d ie d th e fo r e c lo su r e p r o b le m as su ch .
W e h a v e t r ie d to lo o k a t th e h o u s in g fie ld a n d c o n str u c tio n fie ld a s a
w h o le , to see w h e th e r th e r e a re a n y s ig n s o f s o ft n e s s o r w e a k n e ss
a p p e a r in g .
B u t I w o u ld n ’t s a y w e h a v e lo o k e d a t th e fo r e c lo s u r e
p r o b le m , p e r se.
S e n a t o r S p a r k m a n . I m a y s a y t h a t th e S u b c o m m itte e o n H o u s i n g
o f th e S e n a te h a s been g i v i n g so m e a tte n tio n to it.
I n fa c t, w e
s ta r te d in q u ir in g in to i t lp f e la s t su m m e r .
W e a re c o lle c t in g a g r e a t
m a n y fig u re s in o r d e r t o d e te rm in e t h e cau se f o r t h e in c re a se in th e
fo r e c lo s u r e r a te .
I t h o u g h t y o u m i g h t h a v e so m e i n fo r m a t i o n o n i t .
M r . H e l l e r . A s a m a t t e r o f f a c t , t h is is a case. S e n a t o r , w h e re w e
w o u l d b e d e lig h t e d to benefit, fr o m th e i n fo r m a t io n b e in g g a th e r e d b y
"voiiT* c o m m itte e , b ecau se it w o u ld fit in to o u r stu d ie s.
I hope our
s ta ffs ca n g e t to g e th e r o n th a t.
ECONOMIC REPORT OF THE PRESIDENT
53
S e n a t o r S p a r k m a n . M r . P a t m a n t h is m o r n in g a sk e d q u e stio n s a b o u t
th e h a n d li n g o f t h e d e fic it t h a t is g o i n g t o r e s u lt f o r th e first c o u p le
o f years.
I f t h e a n sw e r w a s g iv e n , I d id n ’t u n d e r s ta n d it .
T h is , I
s u p p o s e , is n o t o n e o f y o u r p r o b le m s , b u t I w o n d e r h o w it is g o in g to
b e h a n d le d so as t o a v o id in fla tio n .
M r . H e l l e r . M a y I a sk M r . A c k l e y to c o m m e n t o n t h a t ?
S e n a to r S p a r k m a n . Y e s .
I w o u ld lik e t o k n o w w h a t o u r p o lic y is
.g o in g t o b e t o a v o id in fla tio n .
M r . A c k l e y . T h e a sso c ia tio n b etw e en d e fic its a n d in fla tio n is f a r
f r o m a d ir e c t o n e t o o n e r e la tio n s h ip . W e h a v e h a d la r g e d e fic its in
t h e tim e s o f s ta b le p r ic e s.
S e n a t o r S p a r k m a n . I n a r r o w e d th e q u e stio n t o o m u c h w h e n I sa id
w it h re fe r e n c e t o in fla tio n , b ec a u se I t h in k it b e a r s u p o n th e a m o u n t
o f s a v in g s , a n d w h e th e r o r n o t c o n su m e r s p e n d in g is g o i n g t o b e c u t
d o w n , a n d th o s e t h in g s , w h ic h w e a re c o u n t in g o n t o b r i n g p r o s p e r ity .
T h e r e f o r e , I t h in k it w o u ld b e in te r e s tin g t o k n o w ju s t h o w it c a n b e
fin a n c e d so a s t o g iv e u s th e r e su lts t h a t w e w a n t.
M r . A c k l e y . I t seem s t o m e , S e n a to r , t h a t t h e m o s t im p o r t a n t
t h i n g t o r e c o g n iz e is t h a t in fla tio n b e c o m e s a d a n g e r w h e n reso u rces
a r e f u l l y e m p lo y e d a n d w h e n w e a re t r y i n g t o p u t t o o m u c h p re ssu re
o n o u r reso u rces, a n d t r y i n g t o d e m a n d m o r e t h a n w e are a b le t o
p r o d u c e . S o lo n g a s o u r p r o b le m is o n e o f id le reso u rc es, a n d ex cess
in d u s t r ia l c a p a c it y , a d d it io n a l d e m a n d is n o t lik e ly t o g e n e r a te a n y
se rio u s in fla tio n a r y p r o b le m s .
P e r h a p s I a m n o t b e in g f u l l y
r e s p o n s iv e t o y o u r q u estio n .
S e n a t o r S p a r k m a n . I u n d e r s ta n d th e p r o b le m c o n c e r n in g in fla tio n ,
b u t I s t ill d o n o t k n o w h o w w e a re g o i n g t o fin a n c e t h is a d d e d d e b t.
W i l l i t b e b y c a p it a l e x p a n s io n , o r b y b o r r o w in g f r o m th e p u b lic ,
u s i n g th e s a v in g s , o r w h a t ?
M r . A c k l e y . D u r i n g a p e r io d o f e x p a n s io n , p e o p le a d d t o t h e ir
e x p e n d itu r e s , b u t t h e y a ls o a d d to t h e ir s a v in g s . A s o u r c h a r t s u g
g e s te d , a s m a ll p a r t o f a n y in c r e m e n t o f in c o m e is a d d e d to s a v in g s .
S e n a t o r S p a r k m a n . S i x p e rc e n t I b e lie v e y o u e stim a te d , d id n ’t
you ?
M r . A c k l e y . T o p e r s o n a l s a v in g . T h i s , o f c o u rse, is o n ly o n e o f
t h e fo r m s o f s a v in g in o u r s o c ie ty . T h e r e is s a v in g t h r o u g h b u sin e ss,
b u s in e s s s a v in g , a s w e ll. S o q u ite n a t u r a lly in a p e r io d o f e x p a n sio n
t h e r e is a d e m a n d f o r a d d it io n s t o p e o p le ’s fin a n c ia l a ssets, in c lu d in g
a ssets in th e f o r m o f G o v e r n m e n t b o n d s , o r in d ir e c tly f o r G o v e r n m e n t
b o n d s t h r o u g h v a r io u s k in d s o f fin a n c ia l in te r m e d ia r ie s .
S o th e p r o b le m is n o t o n e o f a s h o r ta g e o f s a v in g s t o fin a n ce th e
d e fic it. T o t h e c o n t r a r y , t h e p r o b le m is a s h o r ta g e o f m a r k e ts . O n l y
a s w e b r i n g o u r o p e r a tio n s u p t o c a p a c it y is th e p r o b le m o n e o f
s a v in g . O r , t o p u t i t a n o th e r w a y , i f w e h a v e f u l l u t iliz a t io n o f o u r
reso u rces, w e c a n in c re a se e x p e n d itu r e i n o n e a re a o n ly i f w e re d u c e
i t in a n o th e r .
T h e n f o r t h e G o v e r n m e n t t o a tt e m p t t o s p e n d m o r e o r r e d u c e ta x e s
w o u ld b e in fla t io n a r y b ec a u se th e r e w o u ld b e n o fr e e r eso u rc es t o m e e t
t h e a d d it io n a l d e m a n d . B u t so lo n g a s w e a re d e a lin g w i t h th e k in d
o f s itu a tio n w h ic h w e fa c e , t h e p r o b le m is n o t o n e o f s h o r ta g e o f
s a v in g s .
S e n a to r S p a r k m a n . T h a n k y ou .
M r . K i lb u r n ?
54
ECONOMIC REPORT OF THE PRESIDENT
R e p r e s e n t a t iv e K i l b u r n . I d id n ’t u n d e r s ta n d y o u r la s t r e p ly .
I
t h o u g h t t h a t w h e n th e c on fid en ce i n t h e d o lla r w e n t d o w n , in fla tio n
o c c u r s.
M r . A c k l e y . A r e y o u s p e a k in g o f e x te r n a l con fid en c e ?
E e p r e s e n t a t iv e K i l b u r n . A n y con fid en ce.
I f th e r e is t o o b i g a
n a t io n a l d e b t, p e o p le lo se c o n fid en ce i n t h e d o lla r a n d in fla tio n
f o llo w s .
M r . A c k l e y . W e g e t in fla tio n w h e n p e o p le a re t r y i n g t o s p e n d
m o r e t h a n t h e y a re a b le t o p r o d u c e .
I t is c e r t a in ly t r u e t h a t i n
p e r io d s o f g a ll o p in g in fla tio n , p e o p le c o m e t o e x p e c t in fla tio n a n d ,
t h e r e fo r e , d o n ’t w is h t o h o ld w e a lth in t h e f o r m o f c a sh . T h e y t r y
t o g e t r id o f it. T h i s , o f c o u rse , h e lp s g e n e r a te th e in fla tio n w h ic h
is th e ca u se o f th e tr o u b le .
S o in fla tio n te n d s t o b e s e lf-g e n e r a t i n g
u n d e r su c h c irc u m sta n c e s.
B u t th e se c irc u m sta n c e s h a v e o c c u r r e d
o n l y v e r y r a r e ly .
C e r t a in ly in t h e U n i t e d S t a te s w e h a v e h a d n o
p e r io d in w h ic h t h a t k in d o f p r o b le m h a s b e e n serio u s.
E e p r e s e n t a t iv e K i l b u r n . A n d w e c e r ta in ly d o n ’t w a n t a n y .
M r . A c k l e y . W e c e r ta in ly d o n o t.
E e p r e s e n t a t iv e K i l b u r n . I h a v e n ’t b een h e r e , M r . C h a ir m a n , so
I w i l l n o t t a k e a n y m o r e t im e e x c e p t t o s a y t h a t I a m v e r y g l a d t o
g r e e t m y o ld f r i e n d , W a l t e r H e lle r .
M r . H e l l e r . T h a n k y o u , M r . K i lb u r n . I t is n ic e t o b e h ere.
S t a t o r S p a r k m a n . S e n a t o r P r o x m ir e ?
S e n a t o r P r o x m i r e . I h a v e fo u n d t h a t th e b ig g e s t o b je c tio n t o th e
P r e s id e n t ’s p r o p o s a l is n o t t h e t a x c u t, b u t th e t a x c u t in r e la tio n s h ip
t o th e b u d g e t . W e c a n see t h is in th e c h a n g e in t h e p u b lic a tt itu d e
in th e f e w d a y s b e tw e e n t h e s ta te o f t h e U n i o n m e s s a g e a n d th e
b u d g e t p r o p o s a l a ft e r th e P r e s id e n t s a id t h is w o u ld m e a n a $ 9 8 .8
b i lli o n s p e n d in g p r o g r a m .
I t h in k th e r e is a f e e l in g t h a t sin c e w e s t a r t w it h a $ 8 .8 b illio n
d e fic it, sin c e t h e P r e s id e n t t e lls u s w e a re g o i n g t o s p e n d b e tw e e n $ 4
a n d $ 5 b i lli o n m o r e as a s ta r te r , o n th e b a s is o f p a s t e x p e rie n c e w e
w i l l p r o b a b ly in cre a se s p e n d in g a b o v e t h a t , t h a t a c u t in t a x e s u n d e r
th e s e c irc u m s ta n c e s in a p e r io d o f r e la tiv e e x p a n s io n r e a lly d o es g o
a g a in s t t h a t g o o d o ld P u r i t a n e th ic y o u t a lk e d a b o u t, a n d i n su c h a
s h o c k in g a n d d r a s tic w a y t h a t i t is v e r y , v e r y h a r d f o r u s t o a cc e p t.
M y q u e s tio n i s : S u p p o s e th e C o n g r e s s a d o p ts th e p o li c y t h a t m a n y
o f u s h a v e a d v o c a te d o f r e d u c in g s p e n d in g b e lo w w h a t t h e P r e s id e n t
h a s re q u e ste d , a n d su p p o se w e su cceed in c u tt in g b a c k t o th e f u l l
e x te n t o f th e t a x c u t, w h ic h , a ft e r a ll, w o u ld n ’t b e a g r e a t d e a l t h is
y e a r , b eca u se I u n d e r sta n d t h a t th e n e t effe ct o f th e t a x c u t w i l l b e
a b o u t $ 2 .7 b illio n f o r th e c a le n d a r y e a r 1 9 6 3 -------M r . H e l l e r . O n th e b u d g e t d e fic it, t h a t is r ig h t .
T h e a c tu a l r e
d u c t io n in lia b ilit ie s w i l l b e a b o u t d o u b le th a t .
S e n a t o r P r o x m i r e . I f w e c a n c u t s p e n d in g b y $ 2 y2 o r $ 3 b illio n ,
t r y i n g m o r e , b u t su p p o s e w e d id t h a t m u c h , w o u ld y o u r ju d g m e n t
b e t h a t th e t a x c u t ’s e c o n o m ic effe c t w o u ld b e w a s h e d o u t ?
M r . H e l l e r . A r e y o u s p e a k in g o f a $ 2 .5 b i lli o n c u t f r o m th e P r e s i
d e n t ’s p r o p o s e d $ 9 8 .8 b illio n ?
S e n a t o r P r o x m i r e . Y e s , w it h o u t d is c u s s in g a n y p a r t ic u la r fig u re .
S u p p o s e t h e C o n g r e s s su cceed s in r e d u c in g s p e n d in g b y t h e sa m e
a m o u n t a s i t r ed u c e s t a x e s , r e d u c e s s p e n d in g p r o p o s e d in t h e b u d g e t .
I a m n o t s a y i n g w e c a n g e t a b a la n c e d b u d g e t , b u t w e w i l l r e d u c e th e
ECONOMIC REPORT OP THE PRESIDENT
55
s p e n d in g b e lo w t h e P r e s id e n t ’s b u d g e t b y a b o u t th e sa m e a m o u n t as
i n t h e t a x c u t.
M r . H e l l e r . I w o u ld sa y t h a t e v e r y d o lla r o f e x p e n d itu r e c u t t h a t
i s m a d e w it h o u t a c o r r e s p o n d in g in c re a se in th e t a x c u t w o u ld b e a n
o ffs e t t o th e s tim u lu s t h a t th e t a x c u t o ffe rs t o t o t a l d e m a n d . A s I
s t a t e d e a r lie r in r e s p o n d in g t o a q u e stio n f r o m S e n a t o r D o u g la s , y o u
w o u ld s t ill h a v e so m e effect o n in c e n tiv e s b y r e d u c in g th e t a x e s in a n y
ev en t.
B u t as f a r a s t h e o v e r a ll im p a c t o n t h e d e m a n d f o r t h e p r o d u c ts o f
in d u s t r y a n d a g r ic u ltu r e , a n d f o r serv ic e s— a s f a r a s t h a t d e m a n d is
-con cern ed— t h e p a i r i n g o f t a x c u ts a n d e x p e n d itu r e c u ts in e ffe ct
s i m p l y w ip e s i t o u t a n d m a k e s it s e lf-d e fe a t in g .
S e n a t o r P r o x m i r e . W h a t y o u a r e a s k in g f o r , th e n , is a n in c re a se d
d e fic it r a th e r th a n a t a x c u t, a n d i t m a k e s v e r y li t t le d iffe r e n c e i f w e
•spend m o r e o r r e d u c e ta x e s , b u t o n th e o th e r h a n d , in c re a se d G o v
e r n m e n t s p e n d in g w o u ld p r o v id e a g r e a t e r m u lt ip li e r effe c t a n d , th e r e
f o r e , t h a t w o u ld t e n d to b a la n c e th e in c re a se in in c e n tiv e s y o u w o u ld
lia v e ?
M r . H e l l e r . I w o u ld r e sta te i t t h is w a y : I t is n ’t th e d e fic it w e seek.
W h a t w e seek is a n in c re a se in th e t o t a l d e m a n d in t h e e c o n o m y , a
r e m o v a l, a s i t w e re, o f th e fisca l d r a g o n s p e n d in g in t h e e c o n o m y .
T h e P r e s id e n t h a s p o in te d o u t -------S e n a to r P r o x m i r e . I u n d e r sta n d t h a t , b u t in o r d e r t o a ch iev e th a t ,
y o u s a y n o m a t t e r w h e th e r w e d o i t t h r o u g h t h e t a x r o u te o r th e sp e n d
i n g r o u te , w e w i l l H ave to a c h ie v e a b i g g e r d e fic it in o r d e r t o p r o m o te
g r e a te r d e m a n d , s t im u la t e th e e c o n o m y .
M r . H e l l e r . U n d e r c u r r e n t c irc u m sta n c e s, th e n e t effe c t is g o in g to
b e th e a c h ie v e m e n t o f a b ig g e r d e fic it, a s y o u e ith e r in c re a se s p e n d in g
o r c u t ta x e s.
T h e c h o ic e b etw e en th e t w o is m a d e o n t h e b a sis o f
w h e th e r y o u w a n t to d o y o u r p r im a r y s t im u la t in g in s p e n d in g th r o u g h
th e p r iv a t e e c o n o m y o r t h r o u g h th e p u b lic e c o n o m y .
T h e P r e s id e n t
h a s o p te d in t h is $ 1 0 b illio n t a x c u t p r o g r a m , o b v io u s ly , t o d o it
th r o u g h th e p r iv a t e m a r k e t e c o n o m y .
S e n a t o r P r o x m i r e . I t h in k C o n g r e s s c e r ta in ly sh a r e s t h a t o p t , e x
c e p t th a t w e a ls o fe e l, o r I fe e l, fli'at t h is is su c h a d r a s tic r e v is io n
in g o v e r n m e n ta l p o lic y .
W e h a v e n e v e r r e a lly d o n e th is .
The W ash i n g t o n P o s t t a lk s a b o u t a n a c tiv e d e fic it, a b o u t h a v i n g a d e fic it a t
a t im e o f e x p a n s io n t o p r o m o te s t ill fu r t h e r e x p a n s io n , a d e fic it
w h ic h is c o n s ta n tly p r o m o te d , n o t s o m e th in g y o u s tu m b le in t o b e
c a u se y o u f a l l in to a recessio n .
B e f o r e w e ta k e t h is v e r y s ig n ific a n t a n d s u b s ta n tia l s te p , I w o n d e r
i f w e s h o u ld n ’t c o n sid e r w h a t w e a re d o i n g in t e r m s o f p e r h a p s
g o i n g to o f a r w it h t h e u n c e r ta in a n d u n e v e n scien ce o f ec o n o m ic s.
T h i s n o tio n o f ju s t lo o k in g a t th e t o t a l p ic tu r e , th e im p a c t o f a t a x
c u t, th e im p a c t o f g o v e r n m e n ta l s p e n d in g , I t h in k , h a s a lo t o f
w e ak n esses.
I t seem s to m e it is th e q u a lit y t h a t is so v e r y , v e r y
im p o r t a n t .
I h a v e h ere th e “ B u d g e t in B r i e f , ” a n d I fin d t h a t b e tw e e n 1 9 5 7 a n d
1 9 6 4 , 7 s h o r t y e a r s , w e in c re a se d o u r s u b s id y t o a v ia t io n f r o m $ 2 1 9
m i lli o n , as s h o w n o n p a g e 6 0 , t o $ 8 8 5 m illio n .
I n o th e r w o r d s , a f o u r
f o l d in c re a se in s p e n d in g o f su b sid ie s t o a v ia t io n .
W a t e r tra n sp o r
ta tio n w a s d o u b le d , $ 3 6 5 m i llio n t o $ 6 7 7 m illio n .
A d van cem en t o f
b u s in e s s , $ 1 2 2 m illio n in 1 9 5 7 to $ 6 1 7 m illio n .
56
ECONOMIC REPORT OF THE PRESIDENT
Y o u ta k e th ese th re e fo r m s o f su b sid ie s t o b u sin e ss w h ic h h a v e
in c re a se d in 7 y e a r s f r o m $ 8 0 0 m illio n t o $ 2 ,1 7 9 m illio n .
I a m a r g u in g
th a t th e r e is a lo t o f u n ju stifie d w a ste in th is .
Y o u h a v e pressu re
g r o u p s t h a t a re p u s h in g f o r t h is k in d o f s u b s id y .
I fe e l i f y o u c o m
p a r e t h is k in d o f G o v e r n m e n t s p e n d in g w it h s p e n d in g f o r ed u ca tio n ,,
w h ic h is la r g e ly lo c a l, a n d sh o u ld b e , o r S t a t e , a n d sh o u ld b e, I t h in k
t h a t th e effect in s t im u la t in g th e e c o n o m y , in p r o v i d i n g f o r lo n g -t e r m
g r o w t h , th e d iffe re n c e , is v e r y g r e a t.
I w o u ld t h in k t h a t w e m i g h t p o s s ib ly — a n d I t h in k i t is o u r r e
s p o n s ib ilit y a s M e m b e r s o f C o n g r e s s — b e a b le t o w o r k o u t a p r o g r a m
w h ic h w o u ld n o t r e su lt in a g r e a te r d e fic it, b u t w h ic h w o u ld r e su lt
in h ig h e r q u a lit y o f s p e n d in g f r o m t h e s t a n d p o in t o f th e p u b lic in
te r e s t, a n d e ith e r r e s u lt in n o t a x c u t o r a t a x c u t w h ic h w o u ld b e
p a r a lle le d w it h a r e d u c tio n in so m e o f th e s p e n d in g w h ic h i s in t h i s
r e d u c tio n .
M r . H e l l e r . I w o u ld n ’t f o r a m o m e n t s u g g e s t t h a t t h e d is t r ib u t io n
o f G o v e r n m e n t e x p e n d itu r e s c a n ’t b e im p r o v e d .
O b v io u s ly th e r e a r e
p o in t s w h e r e G o v e r n m e n t s p e n d in g is less efficient t h a n so m e o t h e r
p o in ts .
W e a lw a y s h a v e to b e o n t h e lo o k o u t f o r r e a llo c a tio n .
I
m i g h t s a y t h a t o n e w a y in w h ic h t h e P r e s id e n t h a s m a n a g e d t o c u t
b a c k th e c iv ilia n sid e o f th e b u d g e t b y a s m a ll a m o u n t, f r o m th e
1 9 6 3 fisc a l y e a r to th e 1 9 6 4 fisc a l y e a r , h a s b een t h r o u g h c h a n g i n g
s o m e o f th e p r i o r i t i e s ; g i v i n g s o m e w h a t le ss s u p p o r t t o so m e o f th e
o ld e r p r o g r a m s , a n d s o m e w h a t m o r e s u p p o r t t o n e w e r p r o g r a m s .
T h i s h a s t o g o o n a ll t h e tim e as p a r t o f a so u n d b u d g e t a r y p r o ce ss.
I n d e e d , a s f a r a s th e in c re a se s in e x p e n d itu r e s a re c o n c e rn e d , in t h e
fir s t 3 fisca l y e a r s o f th e K e n n e d y a d m in is t r a t io n , c o m p a r e d , s a y , w ith
th e la s t 3 y e a r s o f th e E is e n h o w e r a d m in is t r a t io n , t h e r a te o f in cre ase
in th e p u r e ly c iv ilia n e x p e n d itu r e s o u ts id e o f sp a c e , d e fe n se , a n d
in te r e s t h a s been a g o o d d e a l less.
I t h a s b een a b o u t h a l f o f w h a t
t h a t r a te o f in c re a se w a s b e fo r e .
I a m t r y i n g to s u g g e s t t h a t th e r e is a d e g r e e o f r e s tr a in t o n th e e x
p e n d itu r e s id e w h ic h is c o n siste n t w it h th is g e n e r a l p r in c ip le o f t a x
r e d u c tio n .
O n e o th e r p o i n t : y o u m e n tio n e d t h a t th e r e w a s n o p r e c e d e n t f o r t h is
w h a ts o e v e r .
B u t th e 1 9 5 4 ex p e rie n c e is n ’t e n tir e ly w it h o u t re le v a n c e .
P r e s id e n t E is e n h o w e r p r e sid e d o v e r a $ 7 .5 b illio n t a x c u t in th e te e th
o f a d e fic it.
S e n a t o r P r o x m i r e . B u t th e r e w e re g r e a t s p e n d in g re d u c tio n s.
M r . H e l l e r . E x p e n d itu r e s w e re c o m in g d o w n f r o m t h e K o r e a n w a r y
a n d , in d e e d , t h a t is g e n e r a lly r e g a r d e d as h a v i n g set o ff th e recessio n
o f 1 9 5 3 -5 4 .
I f a n y t h in g , tlie tro u b le is t h a t th e t a x e s w e r e n o t c u t
so o n e r.
B u t t h e y w e re cu t in th e fa c e o f a d eficit.
S e n a t o r P r o x m i r e . T h e y w e re c u t a t th e sa m e t im e t h a t sp e n d in g '
w a s c u t.
I o n ly h a v e a m in u te m o r e , so I w o u ld lik e to iu s t a sk y o u b rie fly
a b o u t o n e m o r e ite m .
I g e t th e fe e lin g , in v ie w o f w h a t th e P r e s id e n t
h a s s a id , o r m o r e s p e c ific a lly f r o m w h a t y o u h a v e s a id t h is m o r n in g ,,
th a t i f w e c a n n o t s tim u la te th e e c o n o m y a d e q u a te ly w it h th e t a x c u t
th e P r e s id e n t h a s p r o p o s e d , a n d I h a v e g r e a t r e s e r v a tio n s a b o u t it — I
d o n ’t t h in k w e a re g o i n g to g e t th e r e d u c tio n in u n e m p lo y m e n t y o u
seek w it h t h is k in d o f a t a x p r o p o s a l— y o u w o u ld c o m e b a c k w it h
a n o th e r req u est f o r a t a x c u t.
ECONOMIC REPORT OF THE PRESIDENT
57
I s a y t h a t b ec a u se y o u s a y t h a t p e r h a p s i n 1 9 5 7 th e a n sw e r s h o u ld
h a v e b een a t a x c u t t h a t y e a r , a fu r t h e r t a x c u t.
I a m w o n d e r in g h o w
f a r w e c a n g o w i t h t h is k in d o f t h in g .
T h e th e o r y is t h a t i f y o u c u t
t a x e s y o u a re g o i n g t o in cre a se r e v en u es, b u t o b v io u s ly th e r e is a p o in t
w h e re t h is is n ’t g o i n g t o w o r k o u t.
Y o u g a v e th e im p r e s s io n to m e
t h is m o r n in g , a n d I u n d o u b te d ly m is u n d e r s to o d y o u , t h a t w e h a v e th e
h ig h e s t t a x r a te s o f a n y in d u s t r ia l c o u n tr y .
M r . H e l l e r . I n c o m e t a x r a tes.
S e n a t o r P r o x m i r e . T h e t o t a l t a x b u rd e n , w h ic h is th e im p o r t a n t
b u r d e n , is c o n s id e r a b ly less.
D e p a r t m e n t o f C o m m e r c e sta tistic s s h o w
t h a t W e s t G e r m a n y h a s 3 4 p e rc e n t o f t h e ir G N P , F r a n c e 3 3 , A u s t r i a
3 3 , F i n la n d 3 2 , N o r w a y 3 1 , L u x e m b o u r g 3 0 , S w e d e n 2 9 , I t a l y 2 9 ,
N e t h e r la n d s 2 9 , B r it a in 2 8 , a n d t h e U n i t e d S t a t e s 2 6 .
T h e r e is n o s u b s ta n tia l in d u s t r ia l c o u n tr y , e x c e p t m a y b e C a n a d a ,
w h ic h h a s le ss t h a n w e h a v e n o w .
I t w o u ld see m to m e t h a t th ese
c o u n trie s a re t h r i v in g w it h h ig h e r t a x e s t h a n w e h a v e a n d m o v in g
a h e a d , g r o w in g fa s t e r , th e o n e s t h a t I h a v e lis t e d , in g e n e r a l.
H ow
c a n w e b u y t h is t h e o r y t h a t i f w e c rea te a b ig g e r d e fic it a n d c u t ta x e s
t h a t e v e n tu a lly w e a re g o i n g t o g e t o u r a n s w e r t h is w a y ?
M r . H e l l e r . I th in k in c o m p a r in g o u r s itu a tio n w it h th e irs w e
h a v e t o a ls o m a k e a c o m p a r is o n b e tw e e n o u r s itu a tio n t o d a y a n d o u r
s itu a tio n in th e fir st p o s t w a r d e cad e.
A t t h a t tim e — le t ’s s a y th e fir st 7 o r 8 y e a r s a f t e r t h e w a r , in c lu d in g
t h e K o r e a n w a r — w e h a d t a x in cre ase s. W i t h d e m a n d a t v e r y h ig h
le v e ls , a n d , in d e e d , w it h a g o o d b it o f in fla tio n , th e h i g h le v e ls o f
t a x a t io n d id n o t r e ta r d e c o n o m ic a c t iv it y b e lo w th o s e le v e ls t h a t th e
a v a ila b le m a n p o w e r a n d a v a ila b le c a p a c ity c o u ld a c c o m m o d a te .
O n c e y o u r e c o n o m y f a ll s b e lo w — d e m a n d f a l l s b e lo w , a n d in c en tiv es
f a l l b e lo w — t h a t li m i t , th e t a x r e d u c tio n s b ec o m e r e le v a n t a n d b ecom e
n ec e ssa ry .
A n o t h e r f a c t o r is t h a t in th ese c o u n trie s, o f c o u rse, t h e y d o h a v e
v e r y h i g h le v e ls o f g o v e r n m e n t s p e n d in g , m u c h h ig h e r th a n o u rs.
T h a t is w h a t g e n e r a te s th e h i g h le v e ls o f t a x a t io n . T h e y h a v e b e e n ,
b y a n d la r g e , s p e n d in g a ll o f th e ir rev en u es.
T h o se th a t w e h a v e
m a d e c o m p a r a b le stu d ie s o f , lik e G e r m a n y , F r a n c e , t h e U n i t e d K i n g
d o m , h a v e ev en b een s p e n d in g b e y o n d t h e ir t a x r e v e n u e s, o r h a v e b een
r u n n in g d e fic its, i f w e tr a n s la te t h e ir b u d g e t s in to o u r b a sis.
S o y o u h a v e to ta k e in to a cc o u n t, as t o y o u r e a r lie r q u e stio n , th e
n e t d r a g , th e n e t r e la tio n s h ip b e tw e e n ta x e s a n d e x p e n d itu r e s .
In
te r m s o f o u r d e m a n d s in th e p r iv a t e e c o n o m y , I t h in k th e e v id e n c e is
p r e t t y c le a r t h a t t h a t d r a g is n o w to o h e a v y , t h a t i t is p r e v e n t in g u s
f r o m g e t t i n g to t h e f u l l e m p lo y m e n t le v e l t h a t th ese c o u n trie s a re
e n jo y in g .
S e n a t o r P r o x m i r e . M y t im e is u p , M r . C h a ir m a n .
C h a ir m a n D o u g l a s . M r s . G riffith s.
R e p r e s e n ta tiv e G r i f f i t h s . I w o u ld lik e to a sk y o u : H a s a n y o n e
e v e r d o n e a n y s t u d y o n th e a m o u n t, t h e p e r c e n ta g e , o f m o n e y t h a t is
s p e n t w it h th e D e fe n s e D e p a r t m e n t n o w in c o m p a r is o n t o w h a t w a s
s p e n t d u r i n g W o r l d W a r I I a n d p r e c e d in g W o r l d W a r I I , a n d th e
n u m b e r o f m a n -h o u r s i t p u r c h a se s t o d a y in c o m p a r is o n t o w h a t it
d id th e n ?
M r . H e l l e r . I a m n o t su r e I h a v e t h is at m y fin g e r tip s . I k n o w t h a t
t o d a y th e D e fe n s e D e p a r t m e n t is p u r c h a s in g 10 p e rc e n t o f th e g o o d s
58
ECONOMIC REPORT OF THE PRESIDENT
a n d serv ic e s o f t h is c o u n t r y ; t h a t r o u g h ly , d u r in g th e w a r , w e w ere
u s in g 4 0 p e r c e n t o f th e t o t a l g r o s s n a t io n a l p r o d u c t in t h e w a r e ffo r t.
T h o s e a re t w o p e rc e n ta g e s t h a t d o n ’t a n sw e r y o u r q u e stio n , b u t a re a t
le a s t a fir s t a p p r o x im a t io n .
R e p r e s e n t a t iv e G r i f f i t h s . T h e d o lla r v a lu e a n d m a n -h o u r s w o u ld ,
I w o u ld s a y , t o d a y b e m u c h m o r e .
Y o u a re p a y i n g a m u c h h ig h e r
r a t e f o r t h e m a n -h o u r t h a t y o u a re g e t t in g th a n y o u w e r e d u r i n g th e
w a r , b eca u se th e t h in g s y o u a re b u y in g a re li t e r a lly h a n d m a d e , as
c o m p a r e d t o p r o d u c tio n -lin e ite m s.
S o y o u h a v e b u ilt in to t h a t 1 0 p e rc e n t, a s o p p o s e d to 5 0 , a lo t o f
u n e m p lo y m e n t.
M r . H e l l e r . E s s e n t i a lly it is a d u a l p r o b le m , is i t n o t ? O n e is t h a t
p r o d u c t iv it y h a s r ise n so t h a t th e n u m b e r o f m a n -h o u r s r e q u ir e d to
p r o d u c e m o s t p r o d u c ts in th e e c o n o m y is lo w e r t h a n i t w a s a t t h a t
tim e .
T h e o th e r p a r t o f it , t h o u g h , t o th e e x te n t t h a t y o u a re n o t o n a n
a s s e m b ly -lin e b a s is , is s o m e w h a t o ffs e ttin g . I n s o f a r as y o u d o h a v e
th e se h a n d c r a ft e d ite m s in t h e d e fe n s e e q u ip m e n t, m o r e m a n -h o u r s
w i l l b e re q u ir e d f o r th e e n d p r o d u c t. T h e t h r u s t is n ’t a ll o n e w a y .
R e p r e s e n t a t iv e G r i f f i t h s . B e f o r e w e c lo se t h is b o o k o n lo w e r in g
ta x e s f o r in c e n tiv e , I d o t h in k it s h o u ld b e m a d e c le a r t h a t w e a re n o t
e n t ir e ly d is c o u n tin g th e f a c t t h a t w e le v y ta x e s t o p a y t h e b ills .
M r . H e l l e r . I c a n ’t d o a n y t h in g b u t a g r e e w it h y o u o n t h a t .
R e p r e s e n t a t iv e G r i f f i t h s . T h a n k y o u v e r y m u c h .
C h a ir m a n D o u g l a s . D r . H e ll e r , I w o n d e r i f I m i g h t c o m e b a c k to
th e m u lt ip li e r a n d its e ffe cts a g a in .
A s s u m i n g t h a t a n $ 8 b illio n t a x c u t g o e s in to e ffe c t, a n d a s s u m in g a
m u lt ip li e r o f th r e e , t h is w o u ld m e a n a $ 2 4 b illio n in c re a se in t h e g r o s s
n a t io n a l p r o d u c t.
H o w m u c h o f a n in c re a se w o u ld t h is m e a n in t a x r e v e n u e a t t h e
lo w e r t a x r a te s ?
M r . H e l l e r . M a y I a sk M r . A c k l e y t o d e a l w it h t h a t ?
M r . A c k l e y . I f a n $ 8 b illio n t a x r e d u c tio n in c re a se d g r o s s n a tio n a l
p r o d u c t b y $ 2 4 b illio n , a n d i f w e a re a t le a s t r o u g h ly c o r r e c t t h a t 3 0
c e n ts o f e a c h a d d it io n a l d o lla r o f g r o s s n a t io n a l p r o d u c t in c re a se s th e
n e t r e c e ip ts o f th e F e d e r a l G o v e r n m e n t -------C h a i r m a n D o u g l a s . W h i c h I t h in k is h ig h .
M r . A c k l e y . P o s s ib ly h ig h .
C h a ir m a n D o u g l a s . T h r e e -t e n t h s o r 3 0 p e rc e n t o f $ 2 4 b illio n w o u ld
b e $ 7 .2 b illio n . I n t h a t case th e t a x r e d u c tio n w o u ld c o m e c lo se , w o u ld
it n o t , t o p a y i n g f o r i t s e lf in th e sense o f a d d it io n a l rev e n u e s ?
A s s u m i n g t h a t G o v e r n m e n t n e t re c e ip ts in c re a se d b y 2 0 c e n ts f o r
ea c h $ 1 in c re a se in th e g r o s s n a t io n a l p r o d u c t, th e r e w o u ld b e a n i n
c rease in t a x rev en u es o f $ 4 .8 b illio n , a n d a n e t lo ss f r o m th e t a x cu t
o f $ 3 .2 b illio n . I n o th e r w o r d s , a n in itia l lo ss in t a x re v e n u e s o f a b o u t
$ 8 b illio n , o ffs e t b y a n in c re a se in t a x r ev en u es o f $ 4 b illio n t o $ 5
b illio n , w o u ld b r i n g an in c re a se in th e g r o s s n a t io n a l p r o d u c t o f $ 2 4
b illio n i f th e m u lt ip lie r is 3.
H o w m u c h o f a n in c re a se in e m p lo y m e n t w o u ld y o u g e t ?
T h ere
w e r e 6 7 m i lli o n p e o p le g a i n f u l l y e m p lo y e d , o n t h e a v e r a g e , la s t y e a r .
T h e a v e r a g e g r o s s n a tio n a l p r o d u c t w a s $ 5 5 4 b illio n .
T h a t w o u ld
m e a n , v e r y r o u g h ly , e v e r y e m p lo y e d p e rso n o n th e a v e r a g e p r o d u c e d
: $ 8 ,3 0 0 o f g r o s s n a t io n a l p r o d u c t. S o y o u w o u ld g e t a n in c re a se , w o u ld
ECONOMIC REPORT OF THE PRESIDENT
59
y o u n o t , o f so m e w h e r e b etw e en 2 m illio n a n d 3 m illio n in th e n u m b e r s
o f th e e m p lo y e d . D o y o u h a v e a m o r e p r e c ise e s tim a te ?
M r . H e l le r . W e h a v e m a d e so m e stu d ie s, b o t h o f t h e a v e r a g e G N P
p e r jo b as o f 1 9 6 2 , w h ic h is $ 7 ,8 0 0 , a n d o f th e m a r g in a l G N P t h a t
d e v e lo p s a s y o u in c re a se g r o s s n a t io n a l p r o d u c t.
T h e m a r g in a l i n
crea se is m u c h g r e a t e r , o f co u rse, t h a n th e a v e r a g e .
W e c a r r ie d t h is b a c k o v e r a n u m b e r o f p e r io d s , S e n a t o r D o u g la s ,
t o see w h a t th e in c re m e n t h a d b een in G N P a sso c ia te d w it h a g iv e n
in c r e m e n t in jo b s .
C h a ir m a n D o u glas . W h a t d o y o u g e t ?
M r . H eller . T h e fig u r e t h a t w e a re n o w u s in g f o r t h is is $ 1 5 ,5 0 0
o n th e b a s is o f fig u re s lik e t h i s : F r o m th e fir st q u a r te r o f 1 9 5 8 t o th e
sec o n d q u a r te r o f 1 9 6 0 , a r e c o v e r y p e r io d , th e a d d e d G N P p e r a d d e d
jo b w a s $ 2 3 ,0 0 0 . F r o m th e fir st q u a r te r o f 1 9 6 1 t o th e fo u r t h q u a r te r
o f 1 9 6 2 , i t w a s $ 3 3 ,6 0 0 . I n th e se c o n d y e a r o f r e c o v e r y , h o w e v e r , t h a t
d r o p p e d , o u t o f t h a t 2 -y e a r p e r io d , t o $ 1 3 ,2 0 0 o f a d d e d G N P p e r
a d d e d jo b . G o i n g b a c k t o 1 9 5 4 , f r o m th e se c o n d q u a r te r o f 1 9 5 4 t o
th e t h ir d q u a r te r o f 1 9 5 7 . t h e in c re a se o f G N P p e r a d d e d jo b w a s
$ 2 1 ,0 0 0 . W e d e r iv e d th e $ 1 5 ,5 0 0 b y t a k in g in to a c c o u n t t h e f a c t t h a t
i n th e e a r ly p a r t o f a r e c o v e r y f r o m a recessio n y o u g e t a m u c h la r g e r
m a r g in a l in c r e m e n t b eca u se p r o d u c t iv it y rise s fa s t e r .
C h a ir m a n D o u glas . Y o u r fig u r e s o n r e e m p lo y m e n t w o u ld b e so m e
w h e r e b e tw e e n 1 a n d 2 m i lli o n ?
M r . H e lle r . T h e r e e m p lo y m e n t-------C h a ir m a n D o uglas . A d d e d e m p lo y m e n t , I m e a n t.
M r . H elle r . T h e a d d e d e m p lo y m e n t o n t h e w a y f r o m h e re t o , s a y ,
4 p e rc e n t u n e m p lo y m e n t, w o u ld b e a b o u t 2 m i lli o n , o r a li t t le o v e r 2
m illio n .
T h a t in c lu d e s th e 1 .1 m i lli o n u n e m p lo y e d , b e tw e e n 4 a n d
5 .6 p e rc e n t, p lu s th e p e o p le y o u d r a w in to th e la b o r fo r c e a s y o u
p r o v id e m o r e jo b o p p o r tu n itie s , w h ic h is a b o u t a n o th e r 8 0 0 ,0 0 0 t o 1
m illio n .
Chairm an D o u g la s . Y ou are assum ing a 2 m illion increase in em
ploym ent?
M r . H elle r . T w o m i lli o n o r s li g h t ly m o r e .
C h a ir m a n D ouglas . I t h in k y o u h a v e to d o a lo t o f w o r k p o p u la r iz
i n g th e m u lt ip lie r a n d th e a cc e le ra to r, D r . H e ll e r . I h a p p e n t o b e lie v e
in b o t h o f th ese, b u t I th in k y o u h a v e t o d o a lo t o f w o r k t o p o p u la r iz e
it.
M r . H el le r . W e c e r ta in ly d o .
C h a ir m a n D ouglas . M r . C u r t is .
R e p r e s e n ta tiv e C u r t is . T h a n k y o u , M r . C h a ir m a n .
R e t u r n in g t o th e r a t io o f s a v in g s t o in c o m e , I w a n t t o e m p h a siz e
a g a in t h a t m u c h o f y o u r th e sis a ssu m e s a l a g in c o n su m e r d e m a n d ,
w h ic h is r e la te d t o c o n su m e r p u r c h a s in g p o w e r .
I n o u r h e a r in g s la s t A u g u s t , o n th e S t a t e o f t h e E c o n o m y a n d
P o lic ie s f o r F u l l E m p lo y m e n t , S e c r e ta r y D i l l o n in se r te d in to th e r e c
o r d t w o m a jo r s tu d ie s o f t h is v e r y issu e. T h e fir st s t u d y w a s p r e p a r e d
b y th e F e d e r a l R e s e r v e B o a r d -M i c h ig a n S u r v e y R e s e a r c h C e n te r , th e
sec o n d b y t h e B u r e a u o f L a b o r S t a t i s t ic s -W h a r t o n S c h o o l, th e U n i
v e r s it y o f P e n n s y lv a n ia . T h e y a re o n p a g e 6 7 3 .
I a m m e n t io n in g th e se f o r tn e r e c o r d , D r . H e ll e r .
T a b l e 1 e stim a te s s a v in g s in c o m e r a tio s b y in c o m e c la ss f o r 1 9 5 0 .
T h e in c o m e g r o u p s , a ft e r ta x e s , a r e d iv id e d b y b r a c k e ts o f $ 1 ,0 0 0 a n d
9 3 7 6 2 — 63— p t. 1-------- 5
60
ECONOMIC REPORT OF THE PRESIDENT
in d ic a te a v e r y w id e d iv e r g e n c e in th e r a t io o f s a v in g s t o in c o m e .
C e r t a in ly s in c e 1 9 5 0 b o th a d m in is t r a t io n s h a v e p r id e d th e m se lv e s on
t h e in c re a se in th e f a m i l y in c o m e le v e ls.
I a m c o n v in c e d t h a t t h is r a tio d o es c h a n g e , j u s t a s t h is t a b le i n
d ic a te s.
T h e r e f o r e , I t h in k i t b ecom e s a ll t h e m o r e im p o r t a n t to
s t u d y c a r e f u lly th e 7 p e rc e n t s a v in g s r a te t h a t y o u a ssu m e d . E v e n
m o r e im p o r t a n t , p e r h a p s , i s a n y u n d e r s t a n d in g w e c o u ld g a i n a b o u t
th e c h a n g e in s a v in g s r a te as in c o m e s in c re a se t o d a y .
D o e s t h is in c re a se g o a u t o m a tic a lly in to c o n su m e r d e m a n d ?
W hat
is t h e in c re a se d d e m a n d f o r ? W h a t ro le d o e s i d le o r o b so le te c a p a c ity
p l a y i n t h is p ic tu r e ?
T h e steel i n d u s t r y , f o r e x a m p le , h a s b een o p e r a t in g a t b e lo w 6 0
p e r c e n t o f c a p a c i t y ; is t h a t n o t r ig h t ?
M r. H eller. Y es.
I t h a s b een in t h a t o r d e r o f m a g n itu d e .
E e p r e s e n t a t iv e C u r t i s . H o w a cc u ra te is t h is m e a su re o f c a p a c it y ?
O n l y t h is y e a r t h e steel in d u s t r y sp e n t o v e r $ 1 b illio n in c r e a s in g its
c a p a c it y t o p r o d u c e a t h in sh ee t o f steel t h a t w o u ld e n a b le i t t o c o m
p e te w it h p la s t ic s a n d o th e r m a te r ia ls .
T h e r e a re t o o m a n y s im ila r e x a m p le s .
I s u g g e s t t h a t w e e x a m in e
t h e n a tu r e o f t h is i d le c a p a c it y , in th e sa m e w a y w e n e e d t o lo o k in to
th e c o m p o n e n ts o f u n e m p lo y m e n t.
I d o u b t i f t h is id le c a p a c ity w o u ld r e s p o n d t o in c re a se d c o n su m e r
p u r c h a s in g p o w e r .
L ik e w is e , y o u r o w n m o d e l p r o je c t s a n u n e m p lo y
m e n t ra te t h a t v a r ie s li t t le a f t e r th e first y e a r .
A m I n o t c o r r e c t?
M r . H e l l e r . T h e u n e m p lo y m e n t r a te t h is y e a r o p e n e d a t 5 .8 p e r
c e n t a n d d r o p p e d to 5 .6 p e rc e n t, I b e lie v e , in M a r c h , o r 5 .5 p e r c e n t,
a n d h a s v a r ie d a r o u n d t h a t le v e l sin ce M a r c h .
E e p r e s e n t a t iv e C u r t i s . Y o u m e n tio n e d 5 .3 p e rc e n t.
T h e ra te w en t
d o w n t o 5 .3 p e rc e n t in J u l y , a n d th e n rose t o 5 .8 p e rc e n t in N o v e m b e r
I t d r o p p e d t o 5 .6 p e rc e n t i n D e c e m b e r .
M r . H e l l e r . T h a t is r ig h t .
E e p r e s e n t a t iv e C u r t i s . W e m u s t g o b e h in d th e se a s s u m p tio n s to
u n d e r s ta n d t h e m .
I n t h e 1 9 6 2 E c o n o m ic E e p o r t , y o u m a d e r e fe r e n c e t o t h e f u l l e m
p lo y m e n t b u d g e t.
I n t h is y o u p r e d ic te d t h a t i f 4 p e r c e n t u n e m p lo y
m e n t w a s a tta in e d b y t h e e n d o f fisca l 1 9 6 3 , th e n a t io n a l in c o m e a n d
p r o d u c t a cc o u n t b u d g e t w o u ld sh o w a $ 4 .4 b illio n s u r p lu s .
A s f a r a s I c a n d e te rm in e , t h is f u l l e m p lo y m e n t s u r p lu s e stim a te
w a s n o t in c lu d e d in y o u r 1 9 6 3 E c o n o m ic E e p o r t .
W o u l d y o u t e ll
u s w h y y o u f a i le d t o in c lu d e it a n d g iv e u s t h e b e st e s tim a te o f w h a t
t h e f u l l e m p lo y m e n t b u d g e t w o u ld lo o k lik e a t t h e e n d o f fisc a l 1 9 6 4
i f w e a ssu m e d t h is 4 p e rc e n t u n e m p lo y m e n t r a t e ?
M r . H e l l e r . I w o u ld lik e t o c o m m e n t o n t h a t a n d th e n a sk M r .
A c k l e y t o c o m m e n t o n y o u r e a r lie r o b s e r v a tio n s c o n c e r n in g t h e s a v
in g s r a te s i n d iffe r e n t in c o m e g r o u p s .
B y t h e w a y , w e in se r te d in to t h e r e c o r d la s t s u m m e r t h e sa m e ta b le
t h a t S e c r e ta r y D i l lo n d id .
E e p r e s e n t a t iv e C u r t i s . A s a m a t t e r o f f a c t , M r . C h a ir m a n , i t sh o u ld
b e c le a r t h a t I w e lc o m e le a v in g th e r e c o rd o p e n a t a n y p o i n t f o r y o u
t o s u p p ly a d d it io n a l d a ta .
M r . H e l l e r . W i t h r e sp e c t to th e f u l l e m p lo y m e n t s u r p lu s , w e i n d i
c a te d la s t y e a r t h a t t h e f u l l e m p lo y m e n t s u r p lu s w o u ld r u n s o m e th in g
ECONOMIC REPORT OF THE PRESIDENT
61
lik e $ 8 b illio n in t h e c a le n d a r y e a r 1 9 6 2 .
T h a t w a s re d u c e d so m e
w h a t b y so m e o f th e a c tio n s ta k e n b y C o n g r e s s a n d b y t h e a d m in is t r a
tio n , b o t h o n th e e x p e n d itu r e sid e a n d b y th e t a x in v e s tm e n t c r e d it,
a n d d e p r e c ia tio n g u id e lin e s w h ic h r ed u c e d t a x e s s o m e w h a t.
U n d e r t h is p r o g r a m t h a t is n o w p r o p o s e d , th e s u r p lu s , th e f u l l
e m p lo y m e n t s u r p lu s , w o u ld b e c u t to a v e r y lo w le v e l u n d e r th e p r o
g r a m a t th e e n d o f 1 9 6 4 .
R e p r e s e n ta tiv e C u rtis . W o u l d y o u h a v e a b a la n c e d b u d g e t o n t h is
a s s u m p tio n , i f y o u p r o je c t e d i t ?
M r . H e l l e r . A s f a r a s th e sp e c ific q u estio n is c o n c e rn e d w it h resp e ct
t o th e y e a r 1 9 6 4 , th e P r e s id e n t ’s p r o g r a m w o u ld s t ill le a v e th e f u l l
e m p lo y m e n t b u d g e t , t h a t is, t h e b u d g e t o n a n a t io n a l in c o m e a cco u n ts
b a s is , in s u r p lu s , n o t a v e r y la r g e o n e, b u t a s u r p lu s o f p e r h a p s a
b illio n d o lla r s o r so.
R e p r e s e n ta tiv e C u r t i s ,. I t h o u g h t it w a s n o t in s u r p lu s .
M r . H e l l e r . I t w o u ld b e in s u r p lu s u n d e r t h is p r o g r a m , a t 4 p e rc e n t
u n e m p lo y m e n t.
R e p r e s e n ta tiv e C u r t i s . A s s u m i n g y o u r f u l l e m p lo y m e n t b u d g e t,
w o u ld y o u h a v e f u l l e m p lo y m e n t , i f a p p lie d h e re ?
L e t m e r e m a r k t h a t I a m v e r y p le a se d t h a t m y c o lle a g u e s h a v e g o n e
in to so m e d e p th in a s k in g h o w y o u a re g o i n g t o fin a n ce th e d eficit.
T h i s w a s th e lin e o f q u e stio n s I u sed in A u g u s t , b o t h o n W a y s a n d
M e a n s a n d th e J o i n t E c o n o m ic C o m m itte e s , w h e n t h e q u ic k ie t a x c u t
w a s pro p osed .
I m u s t s a y , h o w e v e r , t h a t a f t e r lis t e n in g t o y o u r r e p lie s t o S e n a to r
P r o x m ir e , in s p it e o f th e f a c t t h a t y o u sa y y o u a r e n o t , y o u a re a d v o
c a t in g a d e ficit.
I t is m e r e ly a q u estio n o f w h e th e r th e d e fic it w ill
r e s u lt f r o m th e e x p e n d itu r e in c re a se o r a t a x c u t. T h e n e t r e su lt y o u
a re se e k in g is a n im b a la n c e b etw e en r e c e ip ts f r o m t h e p u b lic a n d p a y
m e n ts t o th e p u b lic .
T h i s w e c a ll a d eficit.
Y o u a re a r g u in g t h a t i f
t h a t d e fic it is re d u c e d , i t w i l l n o t h a v e th e n e c e ssa r y e c o n o m ic im p a c t.
M r . H e l l e r . M r . C u r t is , w h a t I a m s a y in g is t h i s : S u p p o s e w e w e re
t o d a y r u n n in g a s u r p lu s o f $ 6 o r $ 7 b illio n a t th e p r e s e n t le v e ls o f u n
e m p lo y m e n t .
T h e n th e o b je c t o f th e t a x c u t w o u ld n o t b e t o c rea te a
d e n c it, b u t t o c u t d o w n , ju s t a s i t is t o d a y , t h e d r a g o n th e e c o n o m y .
B u t th e r e s id u a l effe c t w o u ld b e t o r ed u c e th e size o f th e s u r p lu s
f r o m , s a y $ 7 b illio n t o $ 1 b illio n , r a th e r t h a n t o in c re a se th e size o f
t h e d e ficit.
T h e p o in t I a m t r y i n g t o m a k e is t h a t th e s t im u lu s , th e t h r u s t,
c o m e s f r o m e ith e r th e t a x sid e o r th e e x p e n d itu r e sid e a n d t h e d e fic it
is a r e s id u a l t h a t cre a te s c e r ta in p r o b le m s , p r o b le m s o f fin a n c in g ,
p r o b le m s o f a d d itio n s t o t h e d e b t a n d so f o r t h .
B u t i t is n o t th e
p u r p o s e o f th e t a x c u t o r t h e e x p e n d itu r e in c re a se f o r e c o n o m ic s t im u
lu s .
T h e d e fic it d o e s n o t s u p p ly th e th r u s t.
I t is th e t a x c u t, o r th e e x p e n d itu r e in c re a se , t h a t s u p p lie s th e th r u s t.
R e p r e s e n t a t iv e C u r t i s . A s I u n d e r s ta n d i t , in c r e a s in g c o n su m e r
p u r c h a s in g p o w e r s u p p lie s th e t h r u s t.
M r . H e l l e r . T h a t is c o r r e c t ; p lu s in c re a se d in c e n tiv e s.
R e p r e s e n ta tiv e C u r t t s . I n t h is in sta n c e , y o u a re c r e a t in g i t t h r o u g h
a t a x c u t.
B u t , y o u a r g u e , w e sh o u ld n o t c u t b a c k o n t h e G o v e r n m e n t
e x p e n d itu r e , w h ic h is a p a y m e n t to th e p u b lic , b eca u se y o u d o n o t g e t
t h e n e c e ssa r y flo w .
S o y o u a re r e a lly a f t e r t h a t in c re a se .
Y o u u se a
d e fic it to g e t it.
T h a t is th e o n ly p la c e it co m e s fr o m .
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ECONOMIC REPORT OF THE PRESIDENT
M r . H e l l e r . T h e d e fic it is th e n e t r e su lt.
B u t w e s h o u ld d is t in
g u is h -betw een th e t y p e o f d e ficits w h ic h h a v e b een o c c u r r in g b y s lid in g
in to recessio n o r s li d i n g in to sla c k in w h ic h th e d e fic it r e su lts f r o m
lo w e r t a x p a y m e n ts b ec a u se in c o m e is lo w e r e d r a th e r t h a n lo w e r
t a x p a y m e n ts o u t o f a g iv e n in c o m e .
L o w e r t a x p a y m e n ts t h a t re su lt f r o m lo w e r G N P a n d lo w e r in c o m e
d o n o t p r o v id e a n y th r u s t t o th e e c o n o m y .
T h e y p r o v id e a c u sh io n .
B u t lo w e r t a x p a y m e n ts t h a t r e su lt f r o m t a k in g le ss o u t o f c o r p o r a te
in c o m e a n d b u sin e ss in c o m e a n d le a v in g m o r e in t h e h a n d s o f t h e p r i
v a t e e c o n o m y o u t o f a n y g iv e n in c o m e p r o v id e a p o s itiv e t h r u s t a n d a
p o s itiv e c o n tr ib u tio n to e x p a n d in g th e n a t io n a l p r o d u c t a n d to e x p a n d
i n g th e g r o w t h ra te.
R e p r e s e n ta tiv e C u r t i s . I see m y t im e h a s e x p ir e d .
I w a n t t o c lo se
w it h o n e r e fe r e n c e : I d o n 't q u ite u n d e r s ta n d w h a t y o u a r e s a y in g
h e r e , b u t I d o u n d e r s ta n d w h a t th e P r e s id e n t sa y s o n X I V o f h is
E c o n o m ic R e p o r t .
H e r e fe r s to th e f r i v o lo u s b o r r o w e r v e r s u s th e
p ru d en t borrow er.
H e is p o in t in g o u t t h a t th e r e a re t w o k in d s o f
d e fic it.
I f a n in d iv id u a l s p e n d s f r i v o lo u s ly b e y o n d h is m e a n s t o d a y a n d
b o r r o w s b e y o n d h is p r o sp e c ts f o r e a r n in g t o m o r r o w , i t is a s ig n o f
w e a k n ess.
B u t i f h e b o r r o w s p r u d e n tly to in v e s t in a m a c h in e t h a t
b o o s ts h is p r o d u c tio n o r to p a y f o r e d u c a tio n a n d t r a i n in g t h a t b o o sts
h is e a r n in g p o w e r , th is c a n b e a so u rce o f s t r e n g t h .
T h e la t t e r is a
d e fic it t h r o u g h w h ic h h e b u ild s a b e tte r p la c e f o r h i m s e lf a n d h is
f a m i l y , a d e fic it ju s tifie d b y h is in c re a se d p o t e n tia l.
I c a n u n d e r s ta n d t h a t , b u t I w a n t to d e b a te G o v e r n m e n t e x p e n d itu r e
p o lic y .
S o f a r , th e a d m in is tr a tio n d o es n o t w a n t to t a l k a b o u t e x
p e n d itu r e s . A p p a r e n t l y w e a re t o a ssu m e t h a t n o n e o f th e se e x p e n d i
tu r e s h a v e b een f r i v o l o u s ; t h e y h a v e a ll b een p r u d e n t.
T h e a d m in is t r a t io n n e e d s t o p r o v e it s case.
F r i v o lo u s e x p e n d itu r e
t h a t c r e a te s la r g e d e fic its is n o t g o o d .
M r . H e l l e r . I t is u n ju s tifie d .
I a g r e e e n t ir e ly .
R e p r e s e n t a t iv e C u r t t s . T h e n w e a g r e e t h a t C o n g r e s s s h o u ld e x
a m in e e x p e n d itu r e p o lic y .
M r . H e l l e r . A n d t o m o r r o w m o r n in g w it h K e r m i t G o r d o n , y o u w ill
h a v e t h a t o p p o r t u n ity .
R e p r e s e n t a t iv e C u r t i s . T h a t is r ig h t .
Thank you .
C h a i r m a n D o u g l a s . S e n a t o r P r o x m ir e .
S e n a t o r P r o x m i r e . D r . H e l l e r , in t h e la s t 6 y e a r s , o r 5 y e a r s , w e
h a v e h a d a v e r y , v e r y d is t u r b in g fa i lu r e o n t h e p a r t o f o u r T r e a s u r y
D e p a r t m e n t a n d o th e r e x p e r t s t o g a g e w h a t is g o i n g t o h a p p e n t o th e
g r o s s n a t io n a l p r o d u c t o r t h e d e fic it o r a n y t h i n g o f th e k in d .
I t is
m o s t d is t u r b in g t o u s b e c a u se t h is c o m m itte e m e e ts a s t h e J o i n t E c o
n o m ic C o m m itt e e o f t h e C o n g r e s s a n d w e a re in te r e s te d in e c o n o m ic
p o li c y , in a d v is in g o u r f e llo w C o n g r e s s m e n o n w h a t p o lic ie s t o fo llo w .
O f c o u r s e , o u r a d v ic e is n o b e tte r t h a n o u r in fo r m a t i o n o n w h a t th e
fu t u r e is g o i n g t o b e.
I n 1 9 5 9 , t h e p r e v io u s a d m in is t r a t io n a n tic i
p a t e d a $ 4 6 6 m illio n s u r p lu s , a n d w e e n d e d u p w i t h a fa n t a s t ic $ 1 2
trillio n d e fic it.
I n 1 9 6 0 w e a n tic ip a te d a $ 4 b i lli o n s u r p lu s, a n d e n d e d u p w i t h a $ 3 .8
b illio n d e fic it.
I n 1 9 6 2 , w e a n t ic ip a t e d $ 1 % b i lli o n s u r p lu s a n d e n d e d
u p w it h a $ 6 b illio n d e fic it.
L a s t y e a r a $ 4 6 3 m i lli o n s u r p lu s a n d
e n d e d w i t h a n $ 8 .8 m i lli o n d e ficit.
ECONOMIC REPORT OF THE PRESIDENT
63
W h a t g o o d is an estim a te ? W e a re t o ld , i f w e a d o p t th e P r e s id e n t ’s
p r o p o s a ls , t h a t w e w i l l e n d u p w i t h a b o u t a $ 1 2 b i lli o n d e ficit.
But
i t c o u ld b e a s u r p lu s o n t h e b a s is o f p a s t ex p e rie n c e .
T h i s c e r ta in ly
w o u ld n o t se e m t o b e b e y o n d im a g in a t io n .
O r i t c o u ld b e a f a r g r e a te r
d e fic it.
M r . H eller . T h e e r r o r s h a v e n o t r u n in t h a t d ir e c tio n .
S e n a t o r P roxm ire . T h e y d i d a t o n e p o in t r u n in t h a t d ir e c tio n .
M r . H eller . E a r l i e r in t h e g a m e , y e s, b u t n o t in t h is p e r io d o f sla c k .
S e n a t o r P roxm ire . I n o tic e y o u h a v e a $ 5 7 8 b illio n G N P y o u a re
e s t im a t in g .
M r . H eller . Y e s .
S e n a t o r P roxm ire . T h a t w o u ld b e a r e la tiv e ly m o d e st in c re a se , c o m
p a r e d to th e o n e w e h a d la s t y e a r a n d th e y e a r b e fo r e .
M r . H eller . T h a t is tru e .
S e n a t o r P roxm ire . I f t h e t a x c u t a n d a n tic ip a tio n o f fu r t h e r t a x
c u ts a re e ffe c tiv e , y o u c o u ld e n d u p w it h a g r e a t ly r e d u c e d d e fic it o r
p e r h a p s a s u r p lu s .
M r . H eller . I t h in k t h a t th e r e is an im p o r t a n t d iffe re n ce b etw e en
th e p r o je c t io n s f o r n e x t y e a r a n d th e p r o je c t io n s f o r p r e v io u s y e a r s.
W h a t h a s h a p p e n e d in th e p a s t 5 y e a r s is t h a t t im e a n d a g a in th e
fo r e c a s te r s , th e p r o je c to r s , w h e th e r in a R e p u b lic a n a d m in is tr a tio n
o r D e m o c r a t ic a d m in is t r a t io n , h a v e f e lt t h a t w e w e re g o i n g t o th r u s t
o ff th e im p a c t o f t h is sla c k o r s lu g g is h n e s s o r g a p t h a t o p e n e d u p in
1 9 5 7 . I n s t e a d , t im e a n d a g a in , w e h a v e fa lle n sh o r t o f o u r e x p e c ta
tio n s a b o u t th e d e g r e e o f r e c o v e r y . A s a r e s u lt, fo r e c a s ts t h a t w e re
s in c e r e ly a n d g e n u in e ly m a d e h a v e f a lle n s h o r t o f t h e m a r k o n w h a t
rev en u es w o u ld b e. T h e y h a v e a lso , i f y o u w i l l lo o k a t th e c o m p o
n e n ts , u n d e r e s tim a te d a n u m b e r o f tim e s w h a t C o n g r e s s w o u ld a p p r o
p r ia te . B u t I g r a n t y o u t h a t m u c h o f th e g r e a t e r p a r t o f th e m iss
h a d b een on th e re v e n u e sid e , o v e r e s tim a tin g r e v en u es o n th e b a sis o f
e x p e c ta tio n s t h a t th e e c o n o m y w o u ld a g a in h i t its e a r lie r p o s t w a r
s tr id e .
S e n a t o r P roxm ire . Y o u see, t h is is su ch d e v a s ta t in g p o w e r f u l a d
v ic e , t h is e c o n o m ic sta te m e n t. P u t t i n g m y s e lf in th e p o s itio n o f th e
P r e s id e n t, h e w a s fa c e d t h is y e a r , it see m s to m e , f r o m a p o lit ic a l s ta n d
p o in t , w it h a v e r y d ifficu lt d e c isio n . I f h e is t o ld t h a t h e m i g h t g e t a n
in c re a se o f $ 2 4 b illio n in th e G N P w it h o u t a t a x c u t a n d I r e a liz e y o u r
a s s u m p tio n s a re t h a t h e h a s a t a x c u t, th e n h e is fa c e d w it h th ese
ch oices- H e c a n , o n t h is b a sis, c o m e t o th e C o n g r e s s w it h a n e s tim a te d
d e fic it o f $ 9 .2 b illio n . N o w t h a t ’s p r e t t y h a r d t o d e fe n d . P e o p le s a y ,
“ W h y d o n ’t y o u in c re a se ta x e s o r red u c e s p e n d in g u n d e r th e se c ir c u m
s t a n c e s ? ” O r w h a t h e can d o is b e o p t im is t ic a n d e s tim a te w e w i ll
h a v e a $ 6 2 0 b illio n G N P a n d a b a la n c e d b u d g e t . T h e n h e ’s a ll r ig h t
t h is y e a r ; b u t n e x t y e a r , lo o k o u t. O r h e c a n c u t s p e n d in g , w h ic h
h e fe e ls is im p o s s ib le in v ie w o f o u r n a t io n a l c o m m itm e n ts a n d o u r
n a t io n a l g o a ls .
A n d see k s o m e th in g c lo se r t o a b a la n c e .
O n th e
o th e r h a n d , w h a t h e h a s d o n e , I t h in k , is a b o u t th e b e st t h in g h e c o u ld
d o p o li t ic a lly w it h it.
H e h a s m a d e a v ir t u e , a n a d v a n ta g e o f th is
t o u g h p o lit ic a l b u rd e n .
H e h a s sa id , “ W h a t w e a re g o i n g t o d o ,”
a s th e W a s h i n g t o n P o s t h a s sa id , “ is t h a t w e w i l l h a v e a n a c tiv e d e fic it,
a d e fic it t h a t w i l l p u t p e o p le to w o r k .” T h e n in J u n e 1 9 6 4 , w h e n th is
com es b e f o r e th e c o u n tr y , in ste a d o f h a v i n g a d e fic it w h ic h th e a d m in
is tr a tio n h a s t o a p o lo g iz e f o r , d e fe n d , b e a sh a m e d o f , t h is is s o m e th in g
w e p la n n e d , w e w o r k e d fo r , a n d is g o i n g t o p u t p e o p le to w o rk .
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ECONOMIC REPORT OF THE PRESIDENT
M r . H eller . A n d th e p r o o f o f th e p u d d i n g w o u ld b e in a d im in is h
i n g u n e m p lo y m e n t r a te a n d a n in c r e a sin g r a te o f in c re a se in g ro ss
n a tio n a l p r o d u c t.
S e n a t o r P roxm ire . M a y b e y o u w o u ld g e t t h a t w it h o u t t h e t a x cu t.
A f t e r a ll, t h is t a x c u t p r o b a b ly is n ’t g o i n g t o h a v e m u c h effe c t th e
fir st y e a r , o r a t le a st its r e a l e ffe c t, its rea l p u n c h a n d im p a c t w i l l b e
la te r .
M r . H eller . A g o o d p a r t o f its im p a c t w o u ld d e v e lo p w it h in th e
se c o n d a n d t h ir d 6 m o n th s , s h a ll w e s a y , a ft e r it w e n t in to e ffe c t.
So
a g o o d p a r t o f its im p a c t w o u ld b e g in to b e f e l t in 1 9 6 4 , t h o u g h th e
f u l l im p a c t w o u ld n ’t w o r k i t s e lf o u t u n til 1 9 6 5 a n d 1 9 6 6 .
S e n a t o r P roxm ire . M y p o in t is n o t th e e c o n o m ic c a lc u la tio n s .
My
p o in t is t h a t th e N a t i o n ’s t a x p o lic y a n d s p e n d in g p o lic y is b a s e d o n
t h is e c o n o m ic a d v ic e .
I h a v e th e g r e a te st r e sp e c t f o r y o u .
I t h in k
y o u a re a s fin e a n e c o n o m ist a s th e r e is, a n d v e r y se n s itiv e t o th e
lim it a t io n s o f e c o n o m ic s.
N e v e r th e le ss, so m e h o w w e fin d o u r se lv e s
b a s in g so m u c h o f th e p u b lic p o lic y on sta te m e n ts a n d e stim a te s w h ic h
h a v e p r o v e n to b e so f a u lt y in th e p a s t a n d a re lik e ly to c o n tin u e t o b e
f a u lt y in th e fu t u r e .
M r . H eller . T h i s r e c o r d o f fo r e c a s ts o f r e v e n u e s h a s g r o w n o u t o f a
s itu a tio n t h a t h a s n o w b een f u l l y r e c o g n iz e d in th e a n a ly s is o f b o t h
th e o u tlo o k f o r 1 9 6 3 a n d th e p o lic y t h a t is a d e q u a te t o m e e t t h a t
p r o b le m s u g g e s te d b y th e o u tlo o k , n a m e ly , th e p e r s is te n t u n d e r u t iliz a
tio n o f reso u rces, p e r siste n t u n e m p lo y m e n t.
A c t u a l l y , th is is a p r o b
le m w h ic h h a s b een s lo w in g a i n i n g f u l l r e c o g n itio n .
I t h in k i t h a s
f u l l r e c o g n itio n n o w .
I t h in k th ere is v e r y li t t le d o u b t, o n th e b a sis
o f r e p e a te d e x p e rie n c e s, th a t w e d o h a v e a v e r y la r g e p r o b le m o f
r e e m p lo y in g th ese reso u rces t h a t h a v e c o n t in u a lly b een u n e m p lo y e d
o r u n d e r e m p lo y e d .
S e n a t o r P roxm ire . Y ou a re n o t s a y in g t h a t y o u r p r o g n o s is — y o u r
p r o g n o s tic a t io n s f r o m n o w o n a re lik e ly to b e a cc u ra te, t h o u g h ?
M r . H eller . N o, b u t I a m s a y in g -------S e n a t o r P roxm ire . T a k e t h is v e r y d ifficu lt area o f p e r s o n a l s a v in g ,
o n w h ic h w e h a v e sp e n t so m u c h t im e t o d a y .
A s G e o r g e S h e a p o in te d
o u t in th e W a l l S tr e e t J o u r n a l t h is m o r n in g , t h e f a c t is t h a t i f y o u
h a v e a n in cre a se i n p e r s o n a l s a v in g s w ith in th e lim ita tio n s y o u y o u r
s e l f h a v e d e fin ed , b etw e en 6 a n d 8 p e rc e n t, i f t h a t in c re a se s ju s t 2
p e rc e n t y o u lo se th e w h o le effect o f y o u r t a x c u t.
I n o th e r w o r d s ,
i f p e o p le sa v e , o f th e ir p e r s o n a l in c o m e , n o t 6 p e r c e n t b u t 8 p e r c e n t,
w h ic h is w it h in e x p e rie n c e a n d p e r f e c t ly p o s s ib le , a n d s o m e th in g y o u
m i g h t e x p e c t, p e r h a p s , in v ie w o f th e fa c t t h a t t h e y a re g o i n g t o g e t
th is t a x cu t w e h a v e b een t a lk i n g a b o u t, i f t h e y d o t h a t , t h a t 2 p e rc e n t
o f th e p e r s o n a l in c o m e a d d s u p t o a lm o st p r e c is e ly th e t o t a l effe ct o f
th e t a x c u t d u r in g th e c o m in g fiscal y e a r .
M r . H eller . I w o n d e r i f I m i g h t ask M r . A c k l e y to c o m m e n t o n
t h a t in te r m s o f t h is a n a ly s is ?
M r . A c k l e y . O n e c a n ’ t q u a r r e l w it h th e a r ith m e tic t h a t 2 p e rc e n t
o f p e r s o n a l d is p o sa b le in c o m e is a p p r o x im a t e ly o f t h a t m a g n itu d e .
C le a r ly , th e p e r s o n a l s a v in g r a te h a s flu c tu a te d w it h in t h is r a n g e in
th e p a s t d o ze n y e a r s, a n d th e r e is r o o m f o r a c o n tin u e d flu c tu a tio n .
I t h in k th e r e is v e r y lit tle r ea so n to su p p o se t h a t it n e c e ssa r ily w ill
h a p p e n in th is w a y .
I t c o u ld m o v e , o f cou rse, in th e o th e r d ir e c tio n .
O n e h a s to b ase h is ju d g m e n t s on th e b est in fo r m a t io n h e h a s a n d p u t
ECONOMIC REPORT OF THE PRESIDEMT
65
a c e r ta in r a n g e o f u n c e r ta in ty a b o u t it.
W h a t w e d o k n o w is t h a t
th ese flu c tu a tio n s , w h e n th e y o ccu r, seem to rev erse th e m se lv e s.
If
w e lo o k n o t o n ly a t a n n u a l d a t a b u t a lso a t q u a r te r ly d a ta , f o r e x a m p le ,
w e fin d t h a t th e flu c tu a tio n is w id e r t h a n t h a t .
I f w e ta k e th e s a v in g
r a te b y q u a r te r s , w e w i l l fin d t h a t it flu c tu a te s c o n s id e r a b ly , f r o m one
q u a r te r t o th e n e x t.
B u t a ft e r a fe w q u a r te r s in w h ic h it is lo w , it
t e n d s t o co m e b a c k u p a g a in .
W h a t th e se d a t a s u g g e s t is t h a t th e r e
is a l a g o f v a r ia b le le n g t h b etw e en re c e ip ts o f a d d it io n a l in c o m e a n d
th e e x p e n d itu r e o f t h a t a d d itio n a l in c o m e , a n d a t so m e p o in ts , f o r a
w h ile , a d d it io n a l in c o m e m a y te n d to b e m o r e la r g e ly sa v e d .
B u t as
it a cc u m u la te s , it seem s g r a d u a lly t o s a t i s f y w h a te v e r n e e d s p e o p le
h a v e h a d to b u ild u p t e m p o r a r ily th e ir s a v in g , a n d th e n t h e y b e g in to
r e s p o n d a g a in a t a m o r e n o r m a l r a te .
A s in d ic a te d in o u r a n n u a l r e p o r t (t a b le 8 , p . 4 6 ) , th e s a v in g ra te
s h o w e d n o te n d e n c y to rise in th e p e r io d s f o ll o w i n g t h e t a x c u ts o f
1948 and 1954.
T h e r e is c e r ta in ly n o e v id en c e to s u g g e s t th a t th e
t a x c u t w o u ld ca u se th e s a v in g r a te to r ise in th e m a n n e r y o u h a v e
in d ic a te d .
O f c o u rse, i t is c o n c e iv a b le t h a t a r ise in th e s a v in g rate
d u e t o so m e o th e r cau se m i g h t h a p p e n b y a cc id e n t t o o cc u r a t a b o u t
th e sa m e t im e as th e t a x c u t.
I n t h is case, h o w e v e r , th e s h i f t w o u ld
n o t w e ak en th e case f o r t a x re d u c tio n — in d e e d , i f a n y t h in g it w o u ld
s tr e n g th e n th e case , sin ce in th e absen ce o f t a x r e d u c tio n , th e rise in
th e s a v in g r a te w o u ld h a v e ca u se d a d e c lin e in in c o m e .
W e c e r ta in ly d o n ’t p r o p o s e to e x a g g e r a te th e a c c u r a c y w it h w h ic h
w e c a n fo r e c a s t th e p recise n u m b e rs.
T h e fig u re s u sed in th ese c h a r ts
a re o b v io u s ly f o r illu s t r a t iv e p u r p o se s.
B u t th e r e c e r ta in ly is n o
r ea so n t o s u p p o s e th a t th e effect o f t a x r e d u c tio n m i g h t b e p e r m a n e n tly
o ffse t b y a f u l l r e d u c tio n in th e s a v in g r a te .
I n a n y case, th a t r e d u c
tio n w o u ld b e a o n e -s h o t p r o p o s it io n .
O n c e th e s a v in g r a te sta b iliz e d
a t th e n e w lo w e r le v e l, u n le ss i t c o n tin u e d to f a l l , th e n th e c o n tin u in g
in c re m e n t o f in c o m e f r o m th e t a x c u t w o u ld h a v e i t s effect.
The
w o r s t t h a t c o u ld h a p p e n th e n w o u ld b e to d e la y it f o r th e p e r io d in
w h ic h th e d e c lin e in th e s a v in g r a te w a s o c c u r r in g .
S e n a t o r P roxm ire . O n c e th e s a v in g s ta b iliz e d a t 2 p e rc e n t le ss,
it w o u ld c o n tin u e t o ta k e t h a t m u c h m o r e o u t o f th e s p e n d in g stre a m ,
w o u ld n ’t i t ? I t w o u ld c o n tin u e to a b so rb t h a t ?
M r . A ck ley. Y e s .
S e n a t o r P roxm ire . S o th e e ffe ct o f th e t a x c u t w o u ld c o n tin u e to
b e n u llifie d , u n til y o u g o b a c k t o w h a t y o u h a d b e f o r e ?
I n o th e r
w o r d s , i f y o u in c re a se y o u r s a v in g b y 2 p e r c e n t, 2 p e rc e n t o f y o u r
to t a l in c o m e , a n d y o u g o o n t h a t w a y , th e n y o u r t a x cu t is c o n s ta n tly
p u t in th e so ck . I f M r . M a r t i n fo llo w s h is p o lic y , I t h in k t h a t is
w h a t is g o i n g t o h a p p e n .
C h a ir m a n D ouglas. U n le s s th e re is a p r e s s in g d e sire t o a sk m o r e
q u e stio n s-------S e n a t o r P roxm ire . I w o u ld lik e to a sk on e m o r e q u e stio n .
I a m v e r y m u c h c o n c e rn e d , a s a re se v e r a l o th e r m e m b e r s o f th e
c o m m itte e , S e n a t o r D o u g la s , M r . P a t m a n , a n d o th e r s, a b o u t th e g r e a t
p o s s ib ilit y , in m y ju d g m e n t , t h a t th e effe ct o f th e t a x c u t is g o i n g
t o b e n u llifie d b y r e s tr ic tiv e m o n e ta r y p o lic y .
I c a ll y o u r a tte n tio n
t o a v e r y fin e a r tic le b y D r . B u c h a n a n , c h a ir m a n o f ec o n o m ic s a t th e
U n iv e r s i t y o f V i r g i n i a , w h ic h h e w r o te a s a F u lb r i g h t p r o fe s s o r ,
p o i n t i n g o u t t h a t w e a re m o v i n g in to a r a c h e t in g effe ct in o u r m o n e -
66
ECONOMIC REPORT OF THE PRESIDENT
t a r y s y s te m , b ec a u se o f t h e p o lit ic a l a d v a n ta g e o f t a x c u ts , t o s t im u
la te th e e c o n o m y a n d th e p o t e n t p o lit ic a l a n d fin a n c ia l p u s h to sto p
in fla tio n b y r a is in g in te re st ra tes.
I t h in k u n le ss w e f u l l y r e a liz e th a t
a n d p r e p a r e f o r i t , a n d a re w i l li n g t o fig h t h a r d a g a in s t i t — t h is k in d
o f r e s tr ic tiv e m o n e ta r y p o lic y — w e a re g o i n g t o d i g a te r r ific a lly d eep
d e b t.
A s C o n g r e s s m a n P a t m a n s a id , t h is m o r n in g , w e a re g o i n g t o h a v e
a b u r d e n o f s e r v ic in g th e n a t io n a l d e b t w it h a b i g g e r d e b t a n d h ig h e r
in te r e s t r a te s w h ic h is g o i n g t o b e m o s t d ifficu lt a n d v e r y u n ju s tifia b le .
M r . H eller . I a m su r e y o u k n o w , S e n a t o r , t h a t w e a re v e r y m u c h
a le r t t o t h is p r o b le m , a n d I d o n ’t t h in k i t is a b a d a u g u r y t h a t o u r
lo n g -t e r m in te r e s t r a te s d e c lin e d i n 1 9 6 2 , a n d t h a t t o d a y o u r lo n g
t e r m in te re st r a te s a re b e lo w w h a t t h e y w e r e a t t h e b e g in n in g o f th e
recovery.
I t d o es s u g g e s t t h a t th e r e h a s b een a g o o d d e a l o f c o o r d i
n a t io n a n d c o o p e r a tio n in th e m a n a g e m e n t o f m o n e ta r y p o li c y , sid e
b y s id e w it h fisca l p o lic y .
I h a v e e v e r y h o p e t h a t t h is c o o r d in a tio n
w i l l c o n tin u e t o a v o id th e r e su lt t h a t y o u f e a r a n d t h a t in d e e d I w o u ld
fe a r , to o , i f i t w e r e a r e a l p o s s ib ilit y .
S e n a t o r P roxm ire . T h a n k y o u .
C h a ir m a n D ouglas. T h a n k y o u v e r y m u c h , D r . H e ll e r , a n d M r .
A c k le y .
W e a p p r e c ia te y o u r b e in g h e r e t o d a y v e r y m u c h .
T h e h e a r in g is recessed u n t il t o m o r r o w a t 1 0 o ’c lo c k , w h e n M r .
G o r d o n , D ir e c t o r o f th e B u r e a u o f th e B u d g e t , w i l l t e s t if y , a n d 2
o ’c lo c k in th e a ft e r n o o n , w h e n S e c r e ta r y F r e e m a n w i l l t e s t if y .
T h a n k y o u a g a in .
(W h e r e u p o n , a t 4 : 0 8 p .m ., th e j o i n t c o m m itte e recesse d , t o re c o n
v e n e a t 1 0 a .m . o n t h e f o ll o w i n g d a y , T u e s d a y , J a n u a r y 2 9 , 1 9 6 3 . )
JANUARY 1963 ECONOMIC REPORT OF THE
PRESIDENT
TUESDAY, JANUARY 29, 1963
C ongress of t h e U n ited S tates ,
J o in t E conom ic C o m m ittee ,
*Washington, D.C.
T h e c o m m itte e m e t a t 1 0 a .m ., p u r s u a n t t o recess, in r o o m A E - 1 ,
th e C a p it o l, S e n a t o r P a u l H . D o u g la s (c h a ir m a n o f t h e j o i n t c o m
m itt e e ) p r e s id in g .
P r e s e n t : S e n a t o r s D o u g la s , S p a r k m a n , P r o x m ir e , a n d J a v i t s ; R e p
re se n ta tiv e s R e u s s , G r iffith s, C u r t is , K i l b u m , a n d W i d n a l l .
A l s o p r e s e n t : W i l l i a m S u m m e r s J o h n s o n , e x e c u tiv e d ir e c t o r ; J o h n
R . S t a r k , c le r k ; J a m e s W . K n o w le s , se n io r e c o n o m is t; a n d R o y E .
M o o r a n d D o n a l d A . W e b s t e r , e c o n o m ists.
C h a ir m a n D ouglas . T h e c o m m itte e w i l l c o m e to o rd e r .
M r . G o r d o n , w e a p p r e c ia te y o u r b e in g h e r e t h is m o r n in g . W e are
v e r y g la d t o w e lc o m e y o u t o th e v e r y im p o r t a n t a n d o n e ro u s ta s k
w h ic h y o u h a v e a ssu m e d , D ir e c t o r o f th e B u r e a u o f th e B u d g e t .
W e a p p r e c ia te y o u r sta te m e n t.
STATEMENT OP KERMIT GORDON, DIRECTOR OP THE BUREAU OF
THE BUDGET; ACCOMPANIED BY ELMER B. STAATS, DEPUTY
DIRECTOR; CHARLES L. SCHULTZE, ASSISTANT DIRECTOR; AND
SAMUEL M. COHN, DEPUTY FOR FISCAL ANALYSIS, OFFICE OF
BUDGET REVIEW
M r . G ordon. T h a n k y o u , M r . C h a ir m a n .
H a v i n g b een D ir e c t o r o f t h e B u d g e t B u r e a u f o r ju s t 3 1 d a y s , I
t h o u g h t it w is e t o e q u ip m y s e l f w it h a fe w o f m y c o lle a g u e s in th e
B u r e a u o f th e B u d g e t , a n d I w o u ld lik e t o in tr o d u c e th e m .
A t m y r ig h t is M r . S t a a t s , w h o is D e p u t y D ir e c t o r o f th e B u r e a u
o f th e B u d g e t.
C h a ir m a n D ouglas. A n o ld fr ie n d .
M r . G ordon . O n m y l e f t i s M r . S c h u lt z e , A s s i s t a n t D ir e c t o r o f th e
B u r e a u o f t h e B u d g e t , a n d a ls o M r . C o h n , D e p u t y f o r F i s c a l A n a ly s i s .
M r . C h a ir m a n , I h a v e a r e a s o n a b ly s h o r t sta te m e n t a n d a c o lle c tio n
o f c h a r t s , w h ic h I t h in k h a v e b e e n fu r n is h e d t o m e m b e r s o f th e
c o m m itte e .
A t several points in the course o f my statement, I will refer to
charts which relate to points made in the statement.
M r . C h a ir m a n a n d m e m b e r s o f t h e c o m m itte e , I w e lc o m e th e o p p o r
t u n it y t o a p p e a r b e fo r e t h is c o m m itte e t o d a y to d isc u ss th e b u d g e t
r e c e n tly t r a n s m it t e d b y t h e P r e s id e n t f o r t h e fisc a l y e a r 1 9 6 4 .
67
68
ECONOMIC REPORT OF THE PRESIDENT
E c o n o m ic b a s is f o r t h e b u d g e t : B u d g e t e stim a te s m u s t b e b a s e d in
p a r t u p o n a s s u m p tio n s c o n c e r n in g th e r a t u r e b e h a v io r o f th e n a t io n a l
econom y.
I t is b e st t h a t th e se a ssu m p tio n s b e m a d e e x p lic it , so t h a t
th o s e w h o a p p r a is e t h e e c o n o m ic o u tlo o k d iffe r e n tly m a y ju d g e th e
b u d g e t e s tim a te s i n t h e l i g h t o f t h e ir o w n v ie w s .
T h e e c o n o m ic a s s u m p tio n s u n d e r ly in g t h e 1 9 6 4 b u d g e t ta k e in to
a cc o u n t th e f a c t t h a t w e h a v e h a d sev en q u a r te r s o f e c o n o m ic e x p a n
s io n s in c e t h e r ec essio n t r o u g h , d u r in g w h ic h t h e g r o s s n a t io n a l p r o d
u c t h a s r is e n b y $ 6 1 b illio n , p e r s o n a l in c o m e b y $ 4 3 b illio n , a n d c o r p o
r a t e p r o fits b y m o r e t h a n $ 1 1 b illio n .
T h e y a ls o a r e in flu e n c e d b y t h e f a c t t h a t th e r a te o f e x p a n s io n w a s
s u b s ta n tia lly s lo w e r in 1 9 6 2 t h a n in 1 9 6 1 , a n d b y th e w id e s p r e a d e x
p e c ta tio n t h a t t h e p a c e o f e x p a n s io n in 1 9 6 3 is n o t lik e ly t o b e tte r th e
1 9 6 2 p e r fo r m a n c e in th e a bsen ce o f n e w fisc a l stim u lu s .
C h a ir m a n D ouglas. M r . G o r d o n , I w o n d e r i f y o u w o u ld c l a r i f y t h a t
s ta te m e n t.
D o y o u m e a n t h a t u n le ss w e h a v e n e w fisca l s t im u li, 1 9 6 3
in a b s o lu te t e r m s w i l l b e n o b e tte r t h a n 1 9 6 2 , o r t h a t th e a d d it io n s to
g r o s s n a t io n a l p r o d u c t in 1 9 6 3 w i l l b e n o g r e a t e r t h a n t h e y w e r e ?
M r . G ordon. T h e la tt e r , M r . C h a ir m a n .
C h a ir m a n D ouglas . W e l l , a s s u m in g t h a t t h e y a re n o g r e a te r , r a th e r
a s s u m e t h a t t h e y a re t h e sa m e a m o u n t, w h a t w o u ld th e g r o s s n a t io n a l
produ ct fo r 1963 be?
W h a t w a s th e in c re m e n t in 1 9 6 2 o v e r 1 9 6 1 ?
M r . G ordon. W e l l , t h e in c r e m e n t, a c t u a lly , f o r 1 9 6 2 o v e r 1 9 6 1 w a s
a b o u t $ 3 5 b illio n .
B u t t h is , I t h in k , o v e r lo o k s th e f a c t t h a t a la r g e
p a r t o f th e e x p a n s io n w h ic h is reflected in t h is in c re m e n t o c c u r re d in
t h e se c o n d h a l f o f 1 9 6 1 .
T h e r a te o f e x p a n s io n w it h in th e c a le n d a r y e a r 1 9 6 2 w a s c lo se r to
a b o u t $ 6 b illio n p e r q u a r te r .
T h a t is th e r a te -------C h a ir m a n D ouglas. $ 2 4 b illio n a y e a r ?
M r . G ordon. A b o u t $ 2 4 b illio n a y e a r .
C h a ir m a n D ouglas. N o w , t h e a v e r a g e f o r 1 9 6 2 w a s w h a t , 5 5 4 ?
M r . G ordon. 5 5 4 , c o rrec t.
C h a i r m a n D ouglas. A n d f o r th e la s t q u a r te r , h o w m u c h , 5 6 6 ?
M r . G ordon. 5 6 2 f o r t h e la s t q u a r te r.
C h a ir m a n D ouglas. T h a t w o u ld m e a n , th e n , t h a t i t w o u ld b e— a re
y o u s p e a k in g o f fisc a l o r c a le n d a r y e a r ?
M r . G ordon. I a m t a lk i n g o f c a le n d a r y e a r s n o w , M r . C h a ir m a n .
C h a ir m a n D ouglas. W e l l , t h e a v e r a g e , th e n , f o r c a le n d a r y e a r 1 9 6 3
a t $ 6 b illio n in a q u a r te r w o u ld b e $ 5 7 8 b illio n .
S e n a t o r P roxm ire . 5 7 8 .
M r . G ordon. A t $6 b illio n a q u a r te r , I t h in k t h a t is c o r r e c t.
C h a ir m a n D ouglas. Y e s ; a n d y e t y o u s a y t h a t y o u e x p e c t t o g o u p
to 5 7 8 w it h a fisc a l s tim u lu s , so t h a t th e fisc a l s t im u lu s w i l l a d d o n ly
$ 4 b illio n t o t h e g r o s s n a t io n a l p r o d u c t f o r c a le n d a r 1 9 6 3 ?
M r . G ordon. I t h in k t h a t t h e 5 7 4 - 5 7 8 c o m p a r is o n is w i t h i n th e
r a n g e o f p o s s ib ilitie s , b u t I t h in k i t p r o b a b ly s o m e w h a t o v e r sta te s
th e fo r m e r fig u re i n t h is s e n s e : I f y o u lo o k a t t h e p a c e o f eco n o m ic
e x p a n s io n in 1 9 6 2 , y o u fin d a slo w e r p a c e in t h e s e c o n d h a l f t h a n i n
th e fir s t h a l f . T h e r a te o f e x p a n s io n f o r t h e y e a r a s a w h o le w a s
a b o u t $ 6 b i lli o n a q u a r te r , b u t t o r t h e sec o n d h a l f o f t h e y e a r , a b o u t
$ 5 b i lli o n a q u a r te r .
C h a ir m a n D ouglas. N ow , y o u a re lo o k in g f o r t h e b i g s t im u lu s t o
o cc u r i n 1 9 6 4 r a th e r t h a n 1 9 6 3 ?
ECONOMIC REPORT OF THE PRESIDENT
69
M r . G ordon. T h a t is c o rre c t. W e w o u ld e x p e c t t h a t t h e s tim u lu s
w o u ld b e g in to ta k e h o ld t o w a r d t h e e n d o f c a le n d a r 1 9 6 3 . B u t sin ce
it w o u ld a ffe c t o n ly p a r t o f th e y e a r , i t w o u ld n o t h a v e a v e r y g r e a t
e ffe c t u p o n t h e t o t a l fig u r e f o r t h e y e a r a s a w h o le .
C h a ir m a n D ouglas. T h i s is t o a ssu m e th e t a x c u t is p a s s e d so t h a t
i t w i l l g o in to effe c t r e tr o a c tiv e ly a n d i t w i l l b e h a d b y t h e e n d o f th is
fisc a l y e a r , b y J u ly ?
M r . G ordon. N o t n e c e ssa r ily p r e c is e ly , M r . C h a ir m a n , b u t I th in k
i t d o e s a ssu m e t h a t th e t a x b i ll w i l l b e e n a c te d in t im e t o h a v e a n effect
o n t h e e c o n o m y s o m e t im e a r o u n d th e m id d le o f t h e y e a r .
H o w e v e r , w it h e a r ly e n a c tm e n t o f t h e P r e s id e n t ’s n e w t a x p r o
p o s a ls , w e w o u ld e x p e c t t h a t t h e ec o n o m ic e x p a n s io n o f t h e la s t 1 2
m o n t h s w ill b e g in t o a cc e lera te in th e c o m in g y e a r .
S p e c ific a lly , th e b u d g e t is b a se d o n t h e e x p e c ta tio n t h a t th e g ro ss
n a t io n a l p r o d u c t w h ic h re a ch e d $ 5 5 4 b illio n in c a le n d a r 1 9 6 2 w i ll rise
t o a r o u n d $ 5 7 8 b i lli o n in c a le n d a r 1 9 6 3 .
P e r s o n a l in c o m e s i n c a le n d a r 1 9 6 3 a re e x p e c te d t o a d v a n c e t o $ 4 5 9
b illio n , n e a r ly $ 2 0 b i lli o n h ig h e r t h a n la s t y e a r , a n d c o r p o r a te p r o fits
t o $ 5 3 b illio n , u p a b o u t $ 2 b illio n f r o m a y e a r e a r lie r .
S in c e e c o n o m ic p r o je c t io n , h o w e v e r , is a n im p r e c is e a r t, I sh o u ld
a d d t h a t su c h e x p e c ta tio n s e n c o m p a ss a r a n g e o f p o ssib le le v e ls o f
g r o s s n a t io n a l p r o d u c t f o r 1 9 6 3 e x t e n d in g t o p e r h a p s $ 5 b illio n o n
e ith e r sid e .
L o o k in g a t th e t r e n d o f th e e c o n o m y m o r e c lo s e ly , w e n o te t h a t th e
c u r r e n t r e c o v e r y h a s c a r r ie d th e g r o s s n a tio n a l p r o d u c t t o a n ew h ig h
o f $ 5 6 2 b illio n , a n n u a l ra te , in th e fo u r t h q u a r te r o f c a le n d a r 1 9 6 2 .
T h i s is $ 1 0 b illio n a b o v e th e r a te in th e seco n d q u a r te r o f th e sa m e
year.
T h e b u d g e t e s tim a te s a re b a se d o n a c o n tin u a tio n o f e c o n o m ic r e
c o v e r y a t a b o u t th is sa m e r a te o f a d v a n c e t h r o u g h th e m id d le o f th e
c a le n d a r y e a r 1 9 6 3 .
T h e r e a ft e r , a s s u m in g e a r ly e n a c tm e n t o f th e
p r o p o s e d t a x p r o g r a m , th e r a te o f g r o w t h in e c o n o m ic a c t iv it y w o u ld
b e e x p e c te d to p ic k u p as w e a p p r o a c h th e e n d o f th e y e a r .
A s t h is c o m m itte e h a s o ft e n o b se rv e d , th e r e is a m u tu a l r e la tio n sh ip
b e tw e e n b u d g e t p o lic y a n d th e e c o n o m y . A n e c o n o m y o p e r a t in g s u b
s t a n t ia lly b e lo w its f u l l p o t e n tia l n o t o n ly ir r e v o c a b ly lo ses p r iv a t e
p r o d u c tio n a n d in c o m e a n d F e d e r a l r e v en u es, b u t a lso g e n e r a te s F e d
e r a l e x p e n d itu r e s w h ic h c o u ld , u n d e r h a p p ie r c irc u m sta n c e s, b e
a v o id e d .
T h e F e d e r a l b u d g e t th u s d e p e n d s o n th e sta te o f t h e e c o n o m y a n d ,
a t th e sa m e tim e , s ig n ific a n tly in flu en ces th e le v e l o f e c o n o m ic a c t iv it y .
E x p e n d it u r e o u t l o o k : U n d e r th e P r e s id e n t ’s r e c o m m e n d a tio n s , F e d
e r a l p a y m e n ts to th e p u b lic in th e fiscal y e a r 1 9 6 4 a re e stim a te d to t o t a l
$ 1 2 2 .5 b illio n , a n in c re a se o f $ 5 .7 b illio n o v e r 1 9 6 3 . O n a n a d m in is
tr a tiv e b u d g e t b a s is, t o t a l e x p e n d itu r e s a re e stim a te d a t $ 9 8 .8 b illio n ,
$ 4 .5 b illio n a b o v e th e p r e se n t fisca l y e a r .
70
ECONOMIC REPORT OF TH E PRESIDENT
T a b le 1.— Payments
to the public
[Fiscal years. In billions]
1962
actual
1963
estimate
1964
estimate
Administrative budget expenditures:
National defense.................................................................
Space research and technology...........................................
Interest..............................................................................
$51.1
1.3
9.2
$53.0
2.4
9.8
$55.4
4.2
10.1
Subtotal................ ..........................................................
61.6
65.2
69.7
All other functions:
International allairs and finance..................................
Agriculture and agricultural resources.........................
Natural resources........................................................
Commerce and transportation.....................................
Housing and community development.................. —
Health, labor, and welfare.................. ......... ...............
Education..................... ..............................................
Veterans' benefits and services____________________
General Government................... ............ .................
2.8
5.9
2.1
2.8
.3
4.5
1.1
5.4
1.9
2.9
6.7
2.4
3.3
.5
4.9
1.4
5.5
2.0
2.7
5.7
2.5
3.4
.3
5.6
1.5
5.5
2.2
Subtotal, all other functions....................................
Allowances:
Comparability pay adjustment...................................
Contingencies__________________________________
Intorfund transactions (deduct).........................................
26.9
29.7
29.4
.6
.1
.6
.2
.2
.7
Total, administrative budget expenditures....................
87.8
94.3
98.8
20.4
2.7
1.5
.7
.4
.5
21.8
2.9
.5
.9
1.7
.5
22.8
3.2
1.0
.6
1.2
.5
Total, trust fund expenditures,......................................
Intragovernmental transactions and other adjustments
(deduct).................................................................................
25.2
27.3
28.4
5.3
4.8
4.7
Total payments to the public___________ ______ ____
107.7
116.8
122.5
Trust fund expenditures:
Health, labor, and welfare.................................................
Commerce and transportation...........................................
Housing and community development........................... —
Veterans’ benefits and services........................... ...............
All other...................................... ................ ...................
Interfund transactions (doduct)........................................
T a b l e 1 p r o v id e s a s u m m a r y o f th ese fig u re s. I t b re a k s d o w n u n d e r
a d m in is t r a t iv e b u d g e t e x p e n d itu r e s th o se e x p e n d itu r e s r e la te d t o
n a t io n a l d e fe n s e , sp a c e r esea rch a n d t e c h n o lo g y a n d in te r e st.
I t s h o w s a n in cre a se in t h is c a t e g o r y f r o m $ 6 1 .6 b illio n i n 1 9 6 2 t o
$ 6 9 .7 b illio n in 1 9 6 4 .
A l l o th e r a d m in is t r a t iv e b u d g e t fu n c t io n s a re s u m m a r iz e d in th e
n e x t s u b to ta l.
T h e fig u r e h e r e is $ 2 6 .9 b illio n in 1 9 6 2 , $ 2 9 .7 b i lli o n in
1 9 6 3 , a n d $ 2 9 .4 b illio n in 1 9 6 4 .
T h i s g iv e s th e t o t a l o f a d m in is t r a t iv e b u d g e t e x p e n d itu r e s , w h ic h
a re $ 9 8 .8 b illio n , e stim a te d f o r 1 9 6 4 .
A d d i n g in th e t r u s t f u n d s w h ic h a re sh o w n in t h e n e x t s u b to ta l, w e
g e t t o t a l p a y m e n ts t o t h e p u b lic o f t h e fig u r e I m e n tio n e d a m o m e n t
a g o , $ 1 2 2 .5 b illio n , a s c o m p a r e d w i t h t h e in d ic a te d fig u r e s f o r 1 9 6 2
and 1963.
M r s . G r if fith s . M r . C h a ir m a n , m a y I a sk a q u e s tio n ?
S e n a t o r P roxm ire ( p r e s i d i n g ) . Y e s .
M r s . G r if fith s . W h a t is g o i n g t o b r i n g d o w n a g r ic u ltu r e in a ll th e
fig u re s in 1 9 6 4 ?
M r . G ordon. T h e r e a re a n u m b e r o f u p s a n d d o w n s w it h in th e a g r i
c u ltu r e b u d g e t , M r s . G riffith s, b u t th e p r in c ip a l ca u se o f t h is c h a n g e
r e la te s t o th e p re se n t c o tto n s itu a tio n .
A t th e p r e se n t t im e , f o r
r e a so n s w h ic h I w i l l e la b o r a te in a m in u t e , th e C o m m o d it y C r e d it C o r
p o r a t io n is t a k in g in v e r y la r g e q u a n titie s o f c o tto n . W e e x p e c t t h a t
ECONOMIC REPORT OF THE PRESIDENT
71
th e r e w i l l b e s u b s ta n tia l sales o f c o tto n o u t o f C C C in v e n to r ie s in 1 9 6 4 .
T h e re a so n f o r t h is s itu a tio n is t h a t a n e x p e c ta tio n o f a d e c lin e in t h e
Sr ic e o f c o tto n h a s ca u se d p r iv a t e h o ld e r s o f c o tto n in v e n to r ie s t o r e u ce t h e ir in v e n to r ie s t o tn e m in im u m n ec e ssa ry to c o n d u c t t h e ir a f
fa ir s .
T h i s m e a n s t h a t w h a t w o u ld n o r m a l ly b e p r iv a t e in v e n to r ie s
a re in f a c t g o i n g in to C C C sto c k s t h is y e a r , a n d t h a t a la r g e p r o p o r t io n
o f t h e m w i l l co m e o u t o f C C C sto c k s in to p r iv a t e in v e n to r ie s n e x t y e a r .
T h e r e a re a n u m b e r o f o th e r fa c to r s , b u t t h is is th e m a j o r one.
T h e fig u re s g iv e n i n t h is t a b le a re s u m m a r iz e d in t h e first c h a r t
in t h is c o lle c tio n o f c h a r ts w h ic h I b e lie v e m e m b e r s o f th e c o m m itte e
h a v e , b r e a k in g d o w n t o t a l F e d e r a l p a y m e n ts b y th e th r e e c a te g o r ie s
w h ic h I h a v e ju s t in d ic a te d , a n d s h o w in g n o t o n l y t h e 1 9 6 4 fig u re s
b u t s h o w in g th e b e h a v io r o f th e se th r e e c a te g o r ie s b a c k t o 1 9 4 2 .
In c r e a s e d o u t la y s f o r n a t io n a l d e fe n se , sp a c e , a n d in te r e s t a re a b o u t
e q u a l to th e in c re a se in t o t a l a d m in is t r a t iv e b u d g e t e x p e n d itu r e s. F o r
a ll o th e r p r o g r a m s , c o m b in e d , a d m in is t r a t iv e b u d g e t e x p e n d itu r e s in
1 9 6 4 a re a b o u t th e sa m e as— a c t u a lly s li g h t ly b e lo w — 1 9 6 3 .
A lth o u g h
t h is la r g e s e g m e n t o f e x p e n d itu r e s is a p p r o x im a t e ly u n c h a n g e d m
t o t a l, i t c o n ta in s a n u m b e r o f in c re a se s a n d o ffs e tt in g decreases.
I
s h a ll c o v e r th e se c h a n g e s in m o r e d e ta il la te r .
A t t h is p o in t, h o w e v e r , I w a n t t o e m p h a s iz e t h e f a c t t h a t a la r g e
p a r t o f th e c iv ilia n e x p e n d itu r e s r e c o m m e n d e d b y t h e P r e s id e n t r e p
r e se n t a n in v e s tm e n t in th e fu t u r e p r o g r e s s o f th e N a t io n — fa c i li t a t in g
th e lo n g -r u n g r o w t h o f o u r e c o n o m y .
T h e y in c lu d e n e w p r o g r a m s a n d
e x p a n s io n s in e x is t in g F e d e r a l a c tiv itie s in su c h a re a s as e d u c a tio n ,
h e a lth , m a n p o w e r r e t r a in in g , a re a d e v e lo p m e n t, y o u t h e m p lo y m e n t
o p p o r tu n itie s , c o n se r v a tio n a n d d e v e lo p m e n t o f n a t u r a l reso u rces,
s c ie n tific r esea rch , a n d tr a n s p o r ta tio n .
O f t h e t o t a l F e d e r a l c a sh p a y m e n ts t o t h e p u b lic e s t im a t e d f o r
1 9 6 4 , a b o u t $ 1 7 .6 b illio n , o r a lm o s t o n e -se v e n th , a r e f o r F e d e r a l c iv il
? >ublic w o r k s , f o r h ig h w a y s , h o s p ita ls , a n d o th e r S t a t e -lo c a l assets,
o r s m a ll b u sin e ss, r u r a l ele c trific a tio n , a n d o th e r lo a n s a n d a d d itio n s
to c iv ilia n F e d e r a l a ssets, a n d f o r su c h d e v e lo p m e n ta l a c tiv itie s a s e d u
c a tio n , h e a lt h , a n d n o n d e fe n s e sc ie n tific r e se a r ch a n d d e v e lo p m e n t.
T a k e n a s a p r o p o r t io n o f n o n d e fe n s e p a y m e n ts , r a th e r t h a n o f
th e t o t a l o f a ll p a y m e n ts , th e r a tio b eco m e s m o r e t h a n o n e -fo u r t li
in s te a d o f o n e -s e v e n th .
O f t h is $ 1 7 .6 b illio n n o n d e fe n s e c a t e g o r y , $ 1 0 .8 b illio n is f o r a d d i
tio n s t o c i v i l a ssets a n d $ 6 .8 b illio n is f o r e d u c a tio n , t r a i n in g , h e a lt h ,
a n d n o n d e fe n s e re se a rch a n d d e v e lo p m e n t.
T h e sec o n d c h a r t illu s t r a t e s n o t t o t a l e x p e n d itu r e s o f a g r o w t h in d u c in g c h a r a c te r , b u t ju s t th o se w h ic h r e la te t o a d d it io n s t o n o n
d e fe n s e a ssets.
I t b r e a k s d o w n t h is $ 1 0 .8 b i lli o n fig u re w h ic h I h a v e ju s t g iv e n in to
th e m a j o r c o m p o n e n ts o f a d d it io n s t o n o n d e fe n s e a sse ts a n d sh o w s
th e r e la tio n s h ip o f th e se p a y m e n ts t o t o t a l F e d e r a l p a y m e n ts in 1 9 6 4 .
S in c e th e w a r , a s t h e P r e s id e n t p o in te d o u t i n t h e b u d g e t m e ssa g e ,
th e p r e s s u r e o f a g r o w i n g p o p u la t io n , r is i n g w a g e s a n d p r ic e s , a n d
d e m a n d s f o r i m p r o v e d p u b lic serv ic e s h a v e r e s u lte d in s h a r p in c re a se s
in e x p e n d itu r e s a t a ll le v e ls o f g o v e r n m e n t.
S in c e 1 9 4 8 , S t a t e a n d
lo c a l g o v e r n m e n t e x p e n d itu r e s h a v e m o r e t h a n t r e b le d .
F e d e r a l o u t
la y s f o r n o n d e fe n s e p u r p o s e s h a v e m o r e t h a n d o u b le d , a n d th e se o u t
la y s in c lu d e a n e x p a n d in g a m o u n t o f a id t o S t a t e a n d lo c a l g o v e r n
m e n ts .
72
ECONOMIC REPORT OF THE PRESIDENT
T h e t h ir d c h a r t illu s tr a te s th e g r o w t h i n S t a t e a n d lo c a l g o v e r n m e n t
e x p e n d itu r e s a n d F e d e r a l n o n d e fe n s e e x p e n d itu r e s , t r a c in g t h e m b a c k
to 1950.
I t sh o w s t h e r e la tio n s h ip in t h e r a t e o f g r o w t h o f th ese tw o
t y p e s o f c iv ilia n e x p e n d itu r e s , in d ic a t in g a lso th e p r o p o r t io n o f F e d
e r a l a id p a y m e n ts .
T h i s is th e c r o s s -h a tc h e d a re a w h ic h c o n stitu te s F e d e r a l a id t o
S t a t e a n d lo c a l g o v e r n m e n ts .
A s y o u see, t h is h a s b een a g r o w i n g
s u m t h r o u g h o u t t h is p e r io d o f n e a r ly 15 y e a r s .
I n t h e 1 9 6 4 b u d g e t , p a y m e n ts f o r a id i n g S t a t e a n d lo c a l g o v e r n
m e n t s a re e s tim a te d t o t o t a l $ 1 0 .4 b illio n , c o m p a r e d w it h $ 9 .4 b illio n
in 1 9 6 3 a n d $ 8 .2 b illio n i n 1 9 6 2 .
H i g h w a y a n d p u b lic a ssista n c e g r a n ts , t o g e th e r , c o m p r is e o v e r t h r e e f i f t h s o f su c h a id .
E x c lu d i n g t r u s t fu n d s , a d m in is t r a t iv e b u d g e t e x
p e n d itu r e s f o r F e d e r a l a id to S t a t e a n d lo c a l g o v e r n m e n ts a re e x
p e c te d t o b e $ 6 .6 b i lli o n in 1 9 6 4 , c o m p a r e d w it h $ 6 .1 b i lli o n in 1 9 6 3 ,
a n d $ 5 b i lli o n i n 1 9 6 2 .
T h i s is illu s tr a te d in th e fo u r t h c h a r t, w h ic h , lik e t h e c h a r t w e sa w
a m o m e n t a g o , in d ic a te s t h e p o r tio n o f t o t a l F e d e r a l p a y m e n t s w h ic h
c o n s titu te s a id t o S t a t e a n d lo c a l g o v e r n m e n ts a n d b r e a k s d o w n in th e
p ie c h a r t th e m a j o r c o m p o n e n ts o f p a y m e n ts t o S t a t e a n d lo c a l g o v e r n
m e n ts in r e la tio n t o t o t a l F e d e r a l p a y m e n ts .
T h e f o ll o w i n g t a b le su m m a r iz e s t h e v a r io u s c a te g o r ie s o f a n t ic i
p a t e d in c re a se s a n d decreases in th e se c to r o f th e 1 9 6 4 a d m in is t r a t iv e
b u d g e t e m b r a c in g a ll p r o g r a m s e x c e p t d e fe n se , sp a ce, a n d in te r e st.
T a b l e 2. —Changes
Description
in 1964 administrative "budget expenditures for programs
other than defense, space, and interest
Billions
1963 program expenditures (other than defense, space, and interest),
as in table 1__________________________________________________________ $29. 7
Expenditure increases in 1964:
Pay reform already enacted________________________________________
Program commitments already made (urban renewal grants, public
assistance grants, etc.)----------------------------------------------------------------Proposed increases in present programs (public health, manpower
training, scientific research, etc.)--------------------------------------------------Legislative proposals for new programs (education, youth employ
ment opportunities, etc)___________________________________________
.3
1.5
1.0
.3
Total___________________________________________________________+ 3 .1
Expenditure decreases in 1964:
Effect of new postal rates----------------------------------------------------------------—. 5
Farm price supports------------------------------------------------------------------------- —. 9
Other built-in decreases (U.N. loan, veterans readjustment benefits,
etc.)______________________________________________________________
—.8
Substitution of private for public credit-------------------------------------------- —1.0
Other decreases____________________________________________________
—. 3
Total_____________________________________________________________ - 3 .4
1964 program expenditures, as in table 1---------------------------------------------------
29.4
I t m i g h t b e u s e fu l t o lo o k a t t h is ta b le in co n n e ctio n w it h t h e fif t h
c h a r t, w h ic h in effect sh o w s g r a p h ic a lly th e sa m e fig u re s a s a re sh o w n
in ta b le 2 .
I n t h is c a te g o r y , 1 9 6 3 p r o g r a m e x p e n d itu r e s c o n s titu te d $ 2 9 .7 b i l
lio n . W e h a v e h ere in d ic a te d th e p r in c ip a l ca te g o rie s o f e x p e n d itu r e
ECONOMIC REPORT OF THE PRESIDENT
73
in c re a se s in 1 9 6 4 a s c o m p a r e d w it h 1 9 6 3 a n d th e p r in c ip a l c a te g o r ie s
o f e x p e n d itu r e decreases.
U n d e r th e fir st h e a d in g , “ E x p e n d it u r e
in c re a se s,” w e s h o w $ 3 0 0 m illio n f o r th e p a y r e f o r m , th e c iv il serv ic e
p a y r e f o r m w h ic h w a s e n a c te d b y th e C o n g r e s s la s t y e a r , a n d w h ic h
w i ll h a v e th e e ffe c t in fiscal 1 9 6 4 o f r a is in g e x p e n d itu r e s in t h is c a te
g o r y b y a b o u t $ 3 0 0 m illio n .
T h e n e x t h e a d in g sh o w s “ P r o g r a m c o m m itm e n ts a lr e a d y m a d e ” —
th a t is, su c h t h in g s a s c o n tr a c ts a lr e a d y en te re d in to o r p a y m e n ts
u n d e r fo r m u la s e s ta b lish e d b y a cts o f C o n g r e s s , w h ic h w i l l cause a n
in c re a se in p a y m e n ts t o b e m a d e in 1 9 6 4 a s c o m p a r e d t o 1 9 6 3 . T h a t
s u m is $ 1 .5 b illio n .
T h e t h ir d h e a d in g r e p r e se n ts p r o p o s e d in cre a se s in p r e se n t p r o
g r a m s — t h a t is, o f a so r t w h ic h d o n o t a rise f r o m p r o g r a m c o m m it
m e n ts a lr e a d y m a d e , in c lu d in g su ch t h in g s a s p u b lic h e a lth , m a n p o w e r
t r a in in g , scien tific r esea rch , a n d so f o r t h . T h i s a m o u n ts t o a n in crease
o f $ 1 b illio n .
T h e n th e r e a re th e n e w le g is la tiv e p r o p o s a ls w h ic h
a re in c o r p o r a te d in th e 1 9 6 4 b u d g e t— e d u c a tio n , y o u t h e m p lo y m e n t
o p p o r tu n itie s , a n d so fo r t h , w h ic h w o u ld e x p e c t t o in cre a se , g iv i n g
y o u a t o t a l o f $ 3 .1 b illio n o f in creases.
T h e r e d u c tio n s a re su m m a r iz e d u n d e r th e n e x t h e a d in g . T h e f u l l
y e a r effect o f th e n e w p o s t a l ra te s c o n stitu te s a r e d u c tio n in e x p e n d i
tu re s o f a b o u t $ 5 0 0 m i llio n .
T h e m a t t e r o f f a r m p r ic e s u p p o r ts , p a r t o f w h ic h I e x p la in e d a
m o m e n t a g o , w o u ld c o n stitu te a r e d u c tio n o f $ 9 0 0 m illio n .
O t h e r b u ilt -in d ecreases— t h is w o u ld b e th e d e cre ase c o u n te r p a r t
o f th e ite m a b o v e c a lle d p r o g r a m c o m m itm e n ts a lr e a d y m a d e , b u ilt -in
decreases, a u to m a tic decreases c o m in g a b o u t f o r a v a r ie t y o f rea son s,
a n d so m e o f th e e x a m p le s a re g iv e n here— w o u ld a ch ie v e a re d u c tio n
o f $ 8 0 0 m illio n in ex p e n ses. T h e su b s titu tio n o f p r iv a t e f o r p u b lic
c r e d it, w h ic h w i l l b e d o n e in 1 9 6 4 , in se v e ra l c r e d it p r o g r a m s — t h is
h a s in g e n e r a l t h e c h a r a c te r istic o f a r r a n g in g f o r p r iv a t e c r e d it t o
b e a v a ila b le f o r fu n c t io n s n o w serv ed b y d ir e c t p u b lic le n d in g — w o u ld
c o n s titu te a r e d u c tio n o f a b o u t $ 1 b illio n in e x p e n d itu r e s , a n d a ll o th e r
decreases, a b o u t $ 3 0 0 m illio n .
I n th e c h a r t, a s y o u see, th e d ecreases in p r e se n t p r o g r a m s , $ 1 .1
b illio n , is th e s u m o f b u ilt -i n d ecreases a n d o th e r d ecreases, g iv i n g
t o t a l decreases o f $ 3 .4 b illio n .
T h i s w o r k s o u t t o 1 9 6 4 p r o g r a m e x p e n d itu r e s o f $ 2 9 .4 b illio n .
T h e s e c h a n g e s , w it h in a n a p p r o x im a t e ly sta b le t o t a l, reflect th e
P r e s id e n t ’s d e te r m in a tio n b o th t o m in im iz e th e im p a c t o f h is t a x
p r o p o s a ls o n th e size o f th e d e fic it a n d , a t th e sa m e t im e , t o e x p a n d ,
m o d e s t ly a n d s e le c tiv e ly , th o se a c tiv itie s w h ic h c o n tr ib u te m o s t essen
t i a ll y t o th e g r o w t h a n d p r o g r e s s o f o u r N a t io n .
I n th e fisca l y e a r 1 9 6 4 , a s in o th e r recen t y e a r s , th e F e d e r a l G o v e r n
m e n t , t h r o u g h t a x a t io n a n d b o r r o w in g , w i ll h a v e r e c e ip ts e q u a l t o
s o m e 2 0 t o 2 1 p e rc e n t o f t o t a l g r o ss n a tio n a l in c o m e o r p r o d u c t.
T h i s is illu s t r a t e d in th e fi f t h c h a r t, w h ic h sh o w s F e d e r a l p a y m e n ts
a s a p e rc e n t o f g r o s s n a tio n a l p r o d u c t, a n d in d ic a te s t h a t t o t a l F e d e r a l
p a y m e n ts , m e a s u r e d in t h is w a y , h a v e b een q u ite c lo se t o 2 0 p e rc e n t o f
g r o s s n a t io n a l p r o d u c t f o r a b o u t th e la s t 12 y e a r s.
H o w e v e r , o n ly a b o u t t h r e e -fift h s o f t h a t p e r c e n ta g e o f 2 0 to 21
p e r c e n t— t h a t is , 1 1 t o 1 2 p e rc e n t o f th e g r o s s n a t io n a l p r o d u c t— w i ll
r e p r e s e n t a u se o f n a t io n a l o u t p u t b y th e F e d e r a l G o v e r n m e n t.
74
ECONOMIC REPORT OF TH E PRESIDENT
I n o th e r w o r d s , 8 8 t o 8 9 p e r c e n t o f th e N a t i o n ’s o u t p u t o f g o o d s
a n d serv ic e s w i l l b e p u r c h a s e d b y b u sin e ss fir m s, co n su m e rs, a n d S t a t e
a n d lo c a l g o v e r n m e n ts , a n d o n ly 11 t o 1 2 p e rc e n t b y th e F e d e r a l
G o v e r n m e n t.
M o r e o v e r , o f t h e F e d e r a l G o v e r n m e n t ’s 11 to 1 2 p e rc e n t u se o f t o t a l
o u t p u t , 9 to 1 0 p e r c e n t w i l l b e u se d in th e d e fe n se a n d sp a c e p r o g r a m s
a n d 2 p e rc e n t in a ll o th e r p r o g r a m s .
T h e r e m a in d e r o f F e d e r a l p a y m e n ts — a b o u t t w o -f i ft h s o f th e t o t a l—
w i l l b e m a d e to in d iv id u a l c o n su m e rs, b u sin e ss fir m s, a n d S t a t e a n d
lo c a l g o v e r n m e n ts i n t h e f o r m o f s o c ia l se c u r ity b en efits, v e te r a n s ’
S ensions, loans, grants, subsidies, interest, and similar outlays which
o not involve Federal Government use o f goods and services.
C h a ir m a n D ouglas. M r . G o r d o n , d o y o u r t o t a ls in c lu d e so c ia l secu
r i t y p a y m e n ts ?
M r . G ordon. Y e s ; t h is re la te s to t o t a l c a sh p a y m e n ts a n d so c ia l
s e c u r ity p a y m e n ts w o u ld b e a t y p e o f o u t la y w h ic h d o es n o t r e p r e se n t
u se b y th e F e d e r a l G o v e r n m e n t o f a n y p a r t o f c u rr e n t o u t p u t .
I t is,
i n te c h n ic a l te r m s , a s y o u k n o w , M r . C h a ir m a n , a t r a n s fe r p a y m e n t .
C h a ir m a n D ouglas. B u t it is in c lu d e d in y o u r 2 0 p e r c e n t o f t o t a l
g r o s s n a t io n a l p r o d u c t ?
M r . G ordon . Y e s ; t h a t in c lu d e s a ll F e d e r a l p a y m e n ts , t r u s t f u n d
p lu s a d m in is t r a t iv e b u d g e t .
F i s c a l p o l i c y : T h e m o s t im p o r t a n t a sp e c t o f fisca l p o lic y in t h is
y e a r ’s b u d g e t is , o f c o u rse , th e P r e s id e n t ’s p r o g r a m f o r t a x r e d u c tio n
and r e fo rm .
T h e d e ta ils o f t h a t p r o g r a m w e re s p e lle d o u t in th e t a x
m e s s a g e , a n d it s ec o n o m ic im p a c t h a s b een a n a ly z e d b o t h in th e E c o
n o m ic E e p o r t a n d i n C h a ir m a n H e l l e r ’s te s t im o n y y e s t e r d a y .
I
s h o u ld lik e , t o d a y , to lo o k b r ie fly a t th e t a x p r o g r a m in r e la tio n t o
th e b u d g e t as a w h o le , a s i t a ffe c ts b o th fisc a l y e a r 1 9 6 4 a n d la te r y e a r s .
T a b l e 3 g iv e s t h e t o t a l r e c e ip ts a n d e x p e n d itu r e s o n ea ch o f th e
th r e e b u d g e t a r y b a se s u p o n w h ic h th e se c a lc u la tio n s a re m a d e .
As
y o u w i l l see, i t in d ic a te s a p r o je c t e d d e fic it in th e a d m in is t r a t iv e b u d g
e t o f $ 1 1 .9 b i lli o n in 1 9 6 4 , in th e c o n s o lid a te d c a sh b u d g e t o f $ 1 0 .3
b illio n a n d i n th e F e d e r a l se c to r o f n a t io n a l in c o m e a cc o u n ts, a d e fic it
o f $ 7 .6 b illio n .
T a b l e 3. —Budget
totals
[Fiscal years, in billions]
1962
actual
1963
1964
estimate estimate
Administrative budget:
Receipts____________________________________________________
Expenditures________________________________________________
$81.4
87.8
$85.5
94.3
$86.9
98.8
Deficit____________________________________________________
-6 .4
-8 .8
-11.9
Consolidated cash budget:
Receipts____________________________________________________
Expenditures______________________ _____ ___________________
101.9
107.7
108.4
116.8
112.2
122.5
Deficit____________________________________________________
-5 .8
-8 .3
-10.3
104.0
(105.7)
59.8
45.9
108.8
(113.2)
64.4
48.8
111.4
(119.0)
68.2
50.8
-1 .7
-4 .3
-7 .6
National income basis:
Receipts...............................................................................................
Expenditures________________________________________________
Purchases of goods and services......................................................
Other........................................... ............... ...................................
Deficit_________________________________________________
ECONOMIC REPORT OF THE PRESIDENT
75
G iv e n t h e p r o s p e c tiv e le v e l o f g r o s s n a tio n a l p r o d u c t, t h e t a x a n d
e x p e n d itu r e s p o lic ie s reflected in th e fisca l 1 9 6 4 b u d g e t w i l l y ie ld a
la r g e d e fic it o n t h e b a sis o f e a c h o f t h e th re e b u d g e t a r y c o n c e p ts. T h e
1 9 6 4 d e fic it is a r e s u lt, b u t n o t t h e m e a n s o r t h e p u r p o s e , o f fisc a l
p o lic y . T h e m e a n s is th e e c o n o m ic s tim u lu s p r o v id e d Dy a c a r e f u lly
p h a s e d p r o g r a m o f t a x re d u c tio n a n d r e fo r m .
T h e p u r p o s e is th e
a c h ie v e m e n t o f f u l l p r o s p e r ity a n d m o r e r a p id g r o w t h in th e A m e r i
c a n e c o n o m y — t h e a tta in m e n t o f a n e c o n o m ic c lim a t e w it h in w h ic h
th e c h r o n ic d e fic its o f rec en t y e a r s w i l l d is a p p e a r .
A s e c o n o m ic a c t iv it y re sp o n d s t o th e su ccessive s te p s o f t a x r e d u c
t io n a n d r e f o r m , t h e a d v a n c e in o u tp u t a n d in c o m e s t o w a r d f u l l
e m p lo y m e n t le v e ls w i l l b e a c c o m p a n ie d b y a m o r e th a n p r o p o r t io n a l
in c re a se in F e d e r a l rev en u es.
I t is c h a r a c te r is tic o f o u r e c o n o m y t h a t c o r p o r a te p r o fits a re m o r e
v o la tile t h a n o th e r f o r m s o f in c o m e . A s a con se q u e n ce , th e a d v a n c e
t o w a r d f u l l e m p lo y m e n t sh o u ld see a p a r tic u la r ly la r g e r ise in p r o fits
a n d in t h e F e d e r a l r e v en u es d e r iv e d f r o m t h e c o r p o r a te in c o m e t a x .
W i t h i n a fe w y e a r s a ft e r e n a c tm e n t, t o t a l r e v en u es u n d e r th e n e w t a x
s y s te m s h o u ld b e la r g e r t h a n th o se w h ic h w o u ld h a v e b een y ie ld e d
b y th e e x is tin g t a x stru c tu re .
T h e f a c t t h a t u n d e r c e r ta in c o n d itio n s a d e c re a se in t a x r a te s c a n
le a d t o a n in c re a se in t a x rev en u es sh o u ld n o t b e s u r p r is in g .
I t is
a n a lo g o u s t o t h e s itu a tio n w h ic h o ft e n c o n f r o n t s a b u sin e ss fir m . A
fir m ’s rev en u es d e p e n d b o t h o n th e p r ic e o f its p r o d u c t a n d th e v o lu m e
o f its sa les.
I t h a s b een t y p ic a l o f m a n y o f o u r in d u s tr ie s t h a t a
r e d u c tio n in p r ic e s can o ft e n so s tim u la te t h e v o lu m e o f sa les t h a t
t o t a l r ev en u es a r e e v e n t u a lly in c re a se d . S in c e th e r esp o n se o f v o lu m e
t o p r ic e r e d u c tio n o ft e n ta k e s t im e t o w o r k i t s e lf o u t, i t m a y so m e tim e s
b e n e c e ssa r y t o a c c e p t a t e m p o r a r y r e d u c tio n in r e c e ip ts— to in c u r a
d e fic it i f y o u w i l l— u n til t h e f u l l effe c ts o f t h e p r ic e r e d u c tio n a re
fe lt .
E l i m i n a t i n g t h e sla c k in o u r e c o n o m y , r e t u r n in g t o f u l l e m p lo y
m e n t , a n d s p e e d in g u p t h e r a te o f e c o n o m ic g r o w t h a re v it a l o b je c tiv e s
i n a n d o f th e m s e lv e s, b o t h f o r w h a t t h e y i m p ly f o r th e w e ll-b e in g
o f o u r c itiz e n s a n d f o r th e ir e ffe c t o n o u r p o s itio n o f w o r ld le a d e r sh ip .
F i s c a l p o lic y , a s reflected in th e 1 9 6 4 b u d g e t , la y s t h e fo u n d a tio n n o t
o n ly f o r a m o r e p r o s p e r o u s e c o n o m y b u t a ls o f o r a n im p r o v e d
b u d g e t a r y p o s itio n .
A s the tax reduction becomes fu lly effective and as the economy
m oves back tow ard fu ll em ploym ent, a substantial part o f the ac
com panying rise in revenues w ill be available and w ill be used to
reduce the transitional deficit.
M any have wondered w hy the adm inistration did not reduce ex
penditures in order to make room fo r a tax cut w ithin a balanced
budget. T he answer to this is tw o fo ld :
F i r s t , t h e e x p e n d itu r e s c o n te m p la te d in t h e 1 9 6 4 b u d g e t a re , in th e
ju d g m e n t o f t h e a d m in is t r a t io n , t h e m i n im u m n e c e ssa ry t o s a fe g u a r d
o u r n a t io n a l s e c u r ity a n d t o f u l f i ll o u r p r e s s in g d o m e s tic r e s p o n s i
b ilitie s .
A s I in d ic a t e d e a r lie r , e x p e n d itu r e s f o r p r o g r a m s o th e r
t h a n d e fe n s e , sp a c e , a n d d e b t se r v ic e h a v e b een h e ld s li g h t ly b e lo w
la s t y e a r ’s le v e l. T o h a v e g o n e e v e n f u r t h e r in e x p e n d itu r e r e str a in t
w o u ld h a v e b een a d isse rv ic e t o th e n a t io n a l se c u r ity a n d t h e n a tio n a l
w e lfa r e .
937 6 2 — 63— p t. 1-------- 6
76
ECONOMIC REPORT OF THE PRESIDENT
S e c o n d , a r e d u c tio n in th e p r o p o s e d le v e l o f F e d e r a l e x p e n d itu r e s ,
n o t m a tc h e d b y a la r g e r t a x re d u c tio n , w o u ld b e s e l f -d e f e a t in g u n d e r
c u r r e n t c o n d itio n s . R e d u c e d F e d e r a l p u r c h a se s o f g o o d s a n d serv ic e s
in fisca l 1 9 6 4 w o u ld , o f c o u rse, r ed u c e p r iv a t e p r o d u c tio n , e m p lo y
m e n t, p r o fits , a n d w a g e s. T h i s , in t u r n , w o u ld le a d t o lo w e r F e d e r a l
r e v e n u e c o lle c tio n s a n d a d e fic it w o u ld r e m a in .
I n th e e n d , th e
p r o b le m o f F e d e r a l d e fic its c a n b e s o lv e d o n ly in a p r o s p e r o u s a n d
g r o w in g econ om y.
I t is t o t h is g o a l t h a t t h e a d m in is t r a t io n h a s
d ir e c te d its t a x a n d e x p e n d itu r e p o lic ie s.
I
h a v e a f e w c o m m e n ts, M r . C h a ir m a n , o n th e m a t t e r o f b u d g e t
p r e s e n ta tio n w h ic h I m i g h t r u n t h r o u g h q u ic k ly .
B u d g e t p r e s e n ta tio n : T h e m e m b e r s o f t h e c o m m ite e m a y b e i n
te r e ste d in a b r i e f s u m m a r y o f so m e o f th e c h a n g e s w e h a v e m a d e in
th e b u d g e t p r e s e n ta tio n t h is y e a r , a n u m b e r o f w h ic h sh o u ld b e h e l p f u l
to th o s e in te r e s te d in ec o n o m ic a n d fisca l a n a ly s is o f th e G o v e r n
m e n t ’ s a c tiv itie s .
T h e m o s t o b v io u s f a c t a b o u t th e 1 9 6 4 b u d g e t is , I su p p o se , t h a t
w e h a v e r e ta in e d th e s m a lle r size , c o m p a c t b u d g e t in itia t e d la s t y e a r .
T h i s in n o v a t io n w a s w e ll r e c e iv e d a n d I b e lie v e i t g r e a t ly in c re a se s
th e c o n v e n ie n c e o f h a n d lin g th e b u d g e t m a t e r ia l. I h o p e i t w i l l a lso
c o n tin u e t o e x p a n d th e u se o f th e d o c u m e n t a n d p r o m o te in fo r m e d
d is c u s s io n o f F e d e r a l b u d g e t a r y issu es.
T h e 1 9 6 4 b u d g e t g iv e s in c re a se d e m p h a s is t o th e c o n s o lid a te d ca sh
b u d g e t as c o m p a r e d to th e a d m in is t r a t iv e b u d g e t , a lth o u g h fig u re s
o n th e la tt e r b a s is a re c le a r ly id e n tifie d t h r o u g h o u t th e d o c u m e n t.
T h e m o v e t o a m o r e c o m p r e h e n siv e c o v e r a g e o f th e G o v e r n m e n t ’ s
p r o g r a m — i n c lu d in g th e a p p r o x im a t e ly $ 3 0 b i lli o n o f e s tim a te d t r u s t
f u n d r e c e ip ts a n d e x p e n d itu r e s — h a s b een r e c o m m e n d e d a t v a r io u s
t im e s b y su ch g r o u p s as th e c h a m b e r o f c o m m e r c e , th e C o m m itt e e f o r
E c o n o m ic D e v e lo p m e n t , a n d th e N a t io n a l P l a n n i n g A s s o c ia t io n .
M e m b e r s o f t h is c o m m itte e h a v e a lso s h o w n a n in te r e st i n t h e c o n
s o lid a te d c a s h fig u re s, a n d w e b e lie v e th e p r e s e n ta tio n in th e 1 9 6 4
b u d g e t i s a u s e f u l s te p fo r w a r d in p r o v i d i n g a m o r e c o m p le te p i c
tu r e o f g o v e r n m e n ta l a c tiv itie s a n d rev en u es.
A c c o r d i n g ly , in th e ta b le s a n d t e x t th r o u g h o u t t h e b u d g e t d o c u
m e n t, w h e r e a p p r o p r ia te , in fo r m a t io n o n t r u s t f u n d tr a n s a c tio n s is
p r o v id e d in a d d it io n to in fo r m a t io n o n th e a d m in is t r a t iv e b u d g e t
b a s is . T o h e lp im p r o v e u n d e r s t a n d in g o f a ll th re e m a j o r m e a su re s
o f F e d e r a l fin a n ce s c u r r e n tly in use— th e a d m in is t r a t iv e b u d g e t , th e
c o n s o lid a te d c a sh s ta te m e n t, a n d th e F e d e r a l se c to r o f th e n a t io n a l i n
c o m e a cc o u n ts— w e h a v e in c lu d e d in th e b u d g e t a s p e c ia l a n a ly s is
b r ie fly e x p la in in g a ll th ese c o n c e p ts a n d r e c o n c ilin g th e fig u r e s o n th e
th re e b a se s. ( S p e c i a l a n a ly s is A , p . 3 2 4 o f th e b u d g e t .)
A n o t h e r in n o v a t io n in th e 1 9 6 4 b u d g e t is th e in c lu s io n o f a se p a r a te
se c tio n o f h is to r ic a l ta b le s p e r m it t in g r e a d y c o m p a r is o n s o f tr e n d s
in F e d e r a l fin a n c ia l d a ta o v e r t im e in te r m s o f a ll th re e m e a su re s.
ECONOMIC REPORT OF THE PRESIDENT
77
F u r t h e r , th e P r e s id e n t ’s b u d g e t m e ssa g e t h is y e a r in c lu d e s a n e w
ta b le (o n p . 2 8 ) s h o w in g th e t o t a l e stim a te d n e w o b lig a t io n a l a u
t h o r it y , w it h th e a m o u n ts r e q u ir in g c u rr e n t a c tio n b y t h e C o n g r e s s
s h o w n s e p a r a te ly f r o m th o se b e c o m in g a v a ila b le u n d e r p e r m a n e n t
a u t h o r iz a tio n w it h o u t c u r r e n t c o n g r e ssio n a l a c tio n .
I n th e p a r t o f th e d o c u m e n t c o n t a in in g s u m m a r y ta b le s , w e a re c o n
t in u i n g t o in c lu d e ta b le s in itia t e d la s t y e a r s u m m a r iz in g o b lig a
t io n s in c u r r e d , F e d e r a l c iv ilia n e m p lo y m e n t , a n d F e d e r a l e x p e n d itu r e s
o f a n in v e s tm e n t n a tu r e . T h e t a b le o n t h e p u b lic d e b t i n t h is sectio n
h a s b een e x p a n d e d t o d is tin g u is h b etw e en th e p a r t o f t h e d e b t h e ld
b y th e p u b lic a n d t h a t p a r t h e ld b y G o v e r n m e n t a g e n c ie s a n d tru st
fu n d s .
F i n a l l y , t h e n in e sp e c ia l a n a ly se s, in p a r t 6 o f th e b u d g e t , p r o v id e
v a lu a b le a d d it io n a l in fo r m a tio n . I n a n u m b e r o f in sta n c e s t h e y h a v e
b een im p r o v e d a n d e x p a n d e d .
W e hope to continue to improve the budget document to make it
more useful for the many purposes it serves.
(The charts referred to are as follow s:)
C hart I
*&&&»*
Composition of Federal Payments
1944 1946 1948 1950 *95* 1954 1956 I95S 1960 196* 1964
Estimate
ECONOMIC REPORT OF THE PRESIDENT
78
C hart II
Additions to Non-defense Assets
$ Billiots
Grants lor Other.
State-local Public Works
Executive Office of the President • Bureau of the Budget
Chart III
Federal Non-defense Expenditures and
State and Local Expenditures
| § Federal W t# Slate art local Smmntafe
.....
(tittteito
t* Stattaifd teal 6or.)
Q Slate and local fewiMienf Cash Payments
1962
1964
Estimate
Executive Office ef the President •Burtau of the Budget
ECONOMIC REPORT OF THE PRESIDENT
79
C h ar t IV
F e d e ra l A id to S t a t e an d Local G o v e r n m e n ts
I m m
1125
t o t t f Lnchts
f##t Stamps, tie.
Fiscal Year Estimates 1 9 6 4
Executive Office if the Preside* •Im a if the Budget
Chabt V
1 9 6 3 -6 4
C hanges
in A d m in is tr a tiv e B u d g e t
E x p e n d i t u r e s (Other Than Defense, Space, Interest)
DECREASES
1KCREASES
Increasas is Present Prugfass
Decreases in Present Programs
(Including Biiit-in)
Net Cltaage:
Executive Office of the President •Bureau of the Budget
* Bilft
80
ECONOMIC REPORT OF THE PRESIDENT
Chart VI
Chart
VII
ECONOMIC REPORT OF THE PRESIDENT
Chart VIII
G ross
P u blic and
P r iv a te
Executive Office of the President •Bureau of the Budget
D ebt
81
82
ECONOMIC REPORT OF THE PRESIDENT
Chart
IX
Executive Branch C ivilian E m ploym en t
Chairman Douglas. Thank you very much, Mr. Gordon.
I want to commend you for putting increasing emphasis on the
consolidated cash budget. It is a very graphic thing to do, because if
the consolidated cash figures are compared with the previous adminis
trative budget, it shows, of course, a very large increase.
Now, I am well aware of the fact that many cosmic-minded econ
omists tend to concentrate their emphasis on totals and perhaps not
to give importance to individual items.
I hope you will forgive me, but as an earthbound person, I tend
to deal with some of these individual items and not with the general
theory of the budget with which, on the whole, I agree.
I would like to start off with this chart which shows the changes in
the administrative budget expenditures. I notice that you estimate
that you are going to have a deficit of half a billion dollars less this
coming year than the previous year.
Mr. Gordon. In this category, if I follow you, Mr. Chairman, it
shows a net change of about $300 million—a net reduction of about
$300 million, I am sorry; I misunderstood you. You were talking
about the postal deficit. That is correct.
ECONOMIC REPORT OF THE PRESIDENT
83
Chairman Douglas. Do you believe that the increase in postal rates
will exceed the increase in pay rates by this much?
Mr. Gordon. I have estimates, Mr. Chairman, as to the basis for
computing the Post Office deficit. Perhaps this will provide the
relevant information.
The increase in revenues arising from the recent postal rate in
crease is, for 1964, projected at about $580 million. In addition, a pro
posed administrative parcel post increase of $127 million should be
added to that, providing a total of a little over $700 million in in
creased revenues arising from increased rates.
The postal pay increase—I do have this shown separately—is cur
rently projected at $344 million for fiscal 1964.
Consequently, the projected increase in revenues arising from the
rate increase is substantially greater—about twice as great, actually—
more than twice as great as the projected impact of the pay increase.
Chairman Douglas. But if the increase in parcel post rates does not
go through, this would, of course, diminish.
Mr. Gordon. If it doesn’t go through, you would reduce this figure
by about $127 million.
Chairman Douglas. Will there be a further increase in postal pay
during the fiscal year 1964-65, or will the full effects be taken in
1963-64?
Mr. Gordon. Mr. Staats, would you like to answer that ?
Mr. Staats. Surely.
Mr. Chairman, as you will recall, the formula contemplated an
annual review based on Bureau of Labor Statistics survey data on
professional, technical, administrative employees—the report we have
from BLS would indicate a 3 percent overall average increase. It
would be slightly less than 3 percent for the postal service.
Chairman Douglas. Three percent would be about $100 million ?
Mr. Staats. That is right.
Chairman Douglas. I s that included in the estimate ?
Mr. Staats. That is not included in the post office. It is included
in the overall totals, but not the post office.
Chairman Douglas. Then you may find your revenues $120 million
less than you expect and your expenses $100 million more, so the econ
omy may be a quarter of a billion dollars instead of half a billion.
Mr. Gordon. The increase in expenses is included in the total budget.
Chairman Douglas. Under postal ?
Mr. Staats. No; under new legislation.
Chairman Douglas. In the Agriculture budget, where you expect to
have a decreased expense of $900 million, is that based on the idea of
selling an increasedquantity of cotton abroad ?
Mr. Gordon. I am afraid I can’t answer precisely, Mr. Chairman,
on the projected foreign sales. It is mainly based on a change in the
relative inventories of holders of cotton. There may be a slight ele
ment which is related to changes in the rate of cotton exports.
Chairman Douglas. But it is based on an assumption that a con
siderable portion of the cotton reserve will be sold ?
Mr. Gordon. That is correct, sir. It seems to me this is a particu
larly good assumption—as assumptions go in the field of agriculture,
where projections are very difficult to make—because the anticipated
1963 increase in CCC holdings of cotton is already occurring.
84
ECONOMIC REPORT OF THE PRESIDENT
There have been, as of now, substantial shifts, in effect, of stocks
from private holders to the Commodity Credit Corporation.
Chairman Douglas. I am not objecting to this, I am just trying to
make it clear.
Now, a similar decrease of $1 billion is estimated for the substitu
tion of private for public credit. Does this mean that some of the
housing expenditures by FNMA will be sold off to private investors?
Mr. Gordon. A part of this—not a very large part, but a part of
this—represents a net sale of mortgages from the FNMA special assis
tance portfolio to private investors. That is not a very large com
ponent, however.
Chairman Douglas. Well, having criticized the previous admin
istration for counting the sale of capital assets, in its budget, partic
ularly in the field of housing, in all consistency I am compelled to say
that this looks like a very similar practice and subject to the same
criticism that I made a few years ago.
Mr. Gordon. May I defend it, Mr. Chairman?
Chairman Douglas. Certainly.
Mr. Gordon. It would seem to me that if it is an appropriate
budgetary practice and procedure to count new loans when they are
made as budgetary expenditures, it then follows, I think, as a matter
of logic that repayments of loans or sales of loans should be counted
as receipts.
Now perhaps neither should be counted. I would argue that there
should be consistency in the treatment.
Chairman Douglas. That is very well done, but doesn’t this
strengthen the case for a capital budget so you can segregate the items
of current expenditure from the items of investment ?
Mr. Gordon. It certainly seems to me, Mr. Chairman, that it argues
for special attention to this part of the administrative budget—for
recognizing that you are dealing with a quite different animal here
than you are on expenditures which relate to the purchase of goods and
services. And as you know, the Federal sector of the national income
accounts does do this. It excludes transactions in financial assets,
both sales and purchases.
Chairman Douglas. I regret that I haven’t had time to go over the
budget in detail. Last year I thought it was a very commendable in
novation for you to make an approach to a capital budget as an alterna
tive method. Have you done that this year?
Mr. Gordon. There is a special analysis distinguishing investment
from operating and other expenditures in considerable detail.
Chairman Douglas. If that is done, how much would the deficit be
for 1964?
Mr. Gordon. I am afraid that is a very hard one to answer, Mr.
Chairman, because there are so many capital budget concepts. One
figure that we can use as a beginning is this chart on additions to non
defense assets. We have been very careful to eliminate the acquisition
of physical assets of a defense character, even though some of those
may have a civilian use, and have restricted ourselves closely to addi
tions to nondefense assets. This shows total additions of about $10.8
billion in fiscal 1964, which is somewhat in excess of the projected
deficit in the cash budget.
ECONOMIC REPORT OF THE PRESIDENT
85
Chairman Douglas. So that if you had a capital budget of this type
for fiscal 1964, the cash budget would be balanced?
Mr. Gordon. Here again, Mr. Chairman, I would have to say that
this would depend upon the kind of capital budget concept you used.
Chairman Douglas. If you include the items shown here?
Mr. Gordon. If this is the way it was done, it would show a small
surplus in the capital budget. Almost any capital budget concept
you used would have the effect of substantially reducing or eliminating
the deficit.
Chairman Douglas. I s it not true that if the European countries
were to keep their budget in the same way we have kept ours in the
past, including capital outlays along with current expenses, that
virtually every country would have shown a deficit in almost every
year?
Mr. Gordon. That, I think, is a correct statement, Mr. Chairman.
All the European countries maintain a special budget. In some cases
they are called capital budgets and in others extraordinary budgets.
But the effect of this is to segregate transactions which are considered
appropriate for debt financing. When a European talks about a
balanced budget, he is talking about the operating budget, not the
budget we are talking about.
Chairman Douglas. Last year I asked the Bureau to collect ma
terial on European budgets and they did and we published a brief
summary of this.
Have you developed this in more detail ?
Mr. Staats. There has been no further work done on that report.
Chairman Douglas. I wonder if you would insert the material that
you have in the record at this point ?
I will ask unanimous consent that that be done.
(The Bureau of the Budget subsequently furnished the following
information for the record:)
A study which was prepared by Mr. Andrew H. Gantt for Harvard University
compares the central government budget results of England, France, and Western
Germany with the United States. Adjusted to a basis comparable to the U.S.
consolidated cash statement (Federal receipts from and payments to the public),
the study shows that England ran deficits in 9 o f the last 11 calendar years (1950
through 1960) ; France in every one o f the last 10 calendar years (1951 through
1960) ; and Germany in 4 o f the last 6 calendar years (1955 through 1960). In
the 11 calendar years 1950 through 1960, inclusive, the United States ran sur
pluses in 5 years and deficits in 6. Research on this project was made possible
by the support o f the National Committee on Government Finance of the
Brookings Institution.
86
ECONOMIC REPORT OF THE PRESIDENT
Central government surpluses and/or deficits for recent years for 4 countries
Calendar year
1950................................ .......................................
1951....................................... ................................
1952........................................................................
1953........................................................................
1954......... ..............................................................
1955........................................................................
1956.......................................................................
1957........................................................................
1958........................................................................
1959........................................................................
1960........................................................................
England
(millions of
current £ )
France (bil
lions of cur
rent new
francs)
611
-5 5
-464
-628
-7 4
-4 2
150
-175
-101
—292
-453
0)
-2 .40
-6 .27
-7 .94
-7 .56
-8 .3 2
-11.72
-12.21
-9 .3 6
—5.48
-3 .2 4
Germany United States
(millions of
(billions of
current
current
DM )
dollars)
0)
0)
0)
0)
0)
2,221
1,331
-2,926
-1,755
-3,881
-641
0.5
1.2
-.6
- 7 .2
-1 .1
—.7
5.5
1.2
- 7 .3
—8.0
3.5
1 Figures not available at this time on the same basis.
N o te . —The figures in this table differ from the usual “ budget” deficit or surplus figures printed by these
countries, which usually do not express adequately the surpluses or deficits for which their central govern
ments are responsible. For instance, in the United States, the trust funds and other items are excluded
from the budget figures. The figures in the table are on a basis analogous to the “ cash receipts from and
payments to the public” of the United States, which encompass the entire operations of the central govern
ments of these countries, including trust funds, government owned and sponsored enterprises, etc. It
should be noted, however, that no attempt has been made to include exactly the same operations in each
country. If the central government of the United Kingdom operates her radio stations and they run a
deficit, this deficit is included above, even though the U.S. Government has nothing to do in an operational
way with the radio stations here.
Chairman Douglas. I now ask the Bureau of the Budget to do the
reverse. Suppose we kept our budgets in the same way that the
Europeans do, what would be the situation ?
Would it not show surpluses in virtually every year ?
Mr. Gordon. We do, as a matter of fact, Mr. Chairman, have some
work going on in studying the capital items in the Federal budget.
Here again, you can easily develop a technical argument over the
precise budgetary concepts that ought to be used.
But I think it is a fair statement that the effect of introducing the
capital budget concept would either greatly reduce or eliminate the
deficit in the ordinary budget.
Chairman Douglas. My time is up.
Congressman Curtis ?
Representative Curtis. Mr. Director, what is the carryover of the
obligational authority as of, say, June 30, 1963, the beginning of
fiscal 1964 ?
Mr. Gordon. I will try to get that figure for you, Mr. Curtis.
As of the end of fiscal 1963, Mr. Curtis, in the administrative budget,
the total carryover is $46.2 billion obligated and $40.9 billion un
obligated, for atotal of about $87 billion.
Representative Curtis. Incidentally, what is your definition of “ob
ligated” ? Do letters of intent comprise obligation ?
Mr. Gordon. I am informed that letters of intent do not comprise
obligations.
Representative Curtis. How much deobligation and then reobli
gation went on last fiscal year ? Do you have any idea ?
Mr. Gordon. I amafraid we don’t.
Mr. Staats. We can supply that figure.
Representative Curtis. Could you? I know it would probably
be difficult to get, but I am trying to find out if we are talking in
terms of billions ox dollars, or hundreds of millions, or what.
ECONOMIC REPORT OF THE PRESIDENT
87
In reply to Mr. Clurtis’ request, the following material was subseFor fiscal year 1962, Government agencies reported recoveries (deobligations)
o f prior year obligations in the 1964 budget schedules as follow s:
In millions
Foreign assistance—-economic____________I— 11-------------------------------------- $120
Department o f Defense—military functions.— -------------------------- 341
Housing and Home fin a n ce Agency------- ---------—
---------------------------304
All other agencies,.-!-—
—*-------— -------- .------.----------------------—
.233
998
Total_________________________________________ ——----------------- —
The instructions covering thie above reports call fo r the agencies to report those
recoveries (deobligations) which are material in no-year or multiple-j^ear ac
counts. Therefore, the above figures exclude Recoveries in annual accounts
(which are not available fo r reobligation), and exclude small downward adjust
ments m other accounts*
The figures are not applicable to deobligations o f amounts previously obligated
within the same fiscal year. Such deobligations and' reobligations are often only
technical in nature; fo r example, they often involve only the substitution o f one
supplier for another with no change in program or requirements.
It is not possible to determine in any one fiscal year amounts o f recoveries which
have been reobligated in the same fiscal year since, normally, such deobUgated
amounts become a part of the amounts available fo r obligation, along with other
sources o f money, and thus lose their identity^
Mr. Staats. This is a very difficult thing, as you know, Congressman
Curtis, because of the change-order problem in handling of defense
contracts, particularly.
Eepresentative Curtis. This is one area, I might say, where Con
gress loses complete control over expenditures.
Mr, Staats. This is one reason why we do not consider it a contract
until----Representative Curtis. In other words, letters of intent are ex
cluded.
The request for new obligational authority is roughly $108 billion;
right?
Mr. Staats. Right.
Representative Curtis. So we will have $197 billion for obligational
authority in the hands of the Executive for fiscal 1964.
Now, the first part of the budget message to the Congress sets up in
charts, at any rate, the summary of Federal receipts from the public
and payments to the public; correct?
Mr. Gordon. That is correct, sir.
Representative Curtis. This is an area over which,the Congress has
no authority.
Once it has appropriated the moiiey to the Executive, the spending
rate is in the control of the Executive.
Mr. Gordon. That is essentially correct; but subject to provision of
substantive law and other factors.
Representative C u r t is . So, the real item as far as the request to the
Congress is concerned, begins on page 40 of the budget docipaent; the
request for new obligational authority.
Mr. Gordon. It is summarized, Mr. Curtis, in the budget message on
page 28.
Representative Curtis. It begins on 28, and the details are on 40.
Now, I notice, just to point ujvan item, in the payments to the
public, the general impression might be given that we are cutting
88
ECONOMIC REPORT OP THE PRESIDENT
back in the field of agriculture, because the 1963 estimates are $6.7
billion and the 1964 estimates are $5.7 billion, a difference of a billion
dollars; correct ?
Mr. Gordon. That is correct, sir.
Eepresentative Curtis. Before I go on, let me ask, why wasn’t
there a double entry made of $2.5 billion additional receipts from
the public, which, I understand, is what you are estimating for the
Commodity Credit Corporation, and an increase of $1.5 billion in the
expenditures, because your net is $1 billion. Actually, if you are net
$1 billion, or minus the net here, to reduce it a billion, it has been
increased or will be increasing $1.5 billion.
The only reason you get a minus is because you hare had a $2.5
billion increase; right ?
Mr. Gordon. I believe the answer? Mr. Curtis, is that like other
public enterprise funds, the Commodity Credit Corporation is shown
on a net basis.
I think this is generally true of public enterprise funds throughout
the budget.
Eepresentative Curtis. But actually, it would have increased the
expenditures by $1.5 billion. I am curious as to where those expendi
tures are.
Mr. Gordon. In the special analysis, relating to public enterprise
and trust funds, which is what we are talking about here, gross ex
penditures-----Senator P r o x m ir e . What page is that?
Mr. Gordon. Page 333 of the budget; the table at the top of page
333 shows a decline in gross expenditures for the Commodity Credit
Corporation—I think that was the concept you were using—from
$10.6 to $9.5 billion. That is 1963 to 1964. That is a gross reduc
tion.
Representative Curtis. Yes; but that is what I am getting at.
Actually, the increase is $1.5 billion, because the net reduction of $1
billion comes from the sale of $2.5 billion. Otherwise, it would be a
$2.5 billion reduction. That is what I am pointing out.
But let me go on to the next point. I simply wanted to stress that
item.
The real indication of what we are doing in the field of agriculture,
as far as the Congress is concerned with its control over expenditures,
actually shows an increase, because the 1963 estimate, and I am now
reading from the table on page 40, for agriculture, is a $6.7 billion
new owigational authority, and a request for $8,144 billion for 1964,
or actually an increase of $1.4 billion additional authority for the
President to spend. He could spend this as far as the Congress
is concerned; right?
Mr. Gordon. That is correct, sir. Once it is appropriated.
Representative Curtis. I f we vote it, he can spend it.
The front part of this budget, payments to the public, and receipts
from the public, is purely within the discretion of the Executive.
That is what I am showing.
Mr. Gordon. That is essentially correct, sir; but within the limits of
tax and other laws.
Representative Curtis. Also, if we go through these items of non
defense expenditures, we find that there is considerable increase in
ECONOMIC REPORT OF THE PRESIDENT
89
the budget requests. HEW shows an increase from $5.3 billion in
1963 to $7.1 billion, an increase of $1.7 billion, almost $1.8 billion in
1964. This is quite a different picture, I might say, from that given
the public by the impression that the administration is holding to
1963 levels as far as budgetary authority to spend is concerned.
The President has simply said that he is going to spend at the rate
of $98 billion.
Mr. Gordon. Mr. Curtis, I ----Representative Curtis. A s far as the Congress is concerned, the
the President is asking to increase these programs by considerable
amounts.
Now, let me ask another question.
Mr. Gordon. May I make a comment on that, Mr. Curtis ?
Representative Curtis. Certainly.
Mr. Gordon. I think it is quite appropriate to pay close attention
not only to projected expenditures but to the new obligational author
ity, as you were doing.
Representative Curtis. And call the public’s attention to it, too.
Mr. Gordon. Correct. And I would call your attention to the fact
that the 1963 estimate of new obligational authority for all functions
in the administrative budget other than defense, space, and interest, is
$35.1 billion. In 1964, $35 billion, a reduction of $100 million.
Representative Curtis. I am glad you mentioned that, because I
now want to ask you about this item of $2 billion, a fiscal 1963 non
recurring item for the Export-Import Bank. Of course, since it was
nonrecurring, it is not included in this request.
That certainly should not be used as a matter to balance off, and
hide, I might say, these increases in nondefense expenditures.
Now, is that not a fair observation?
Mr. Gordon. I certainly do not think that there is any intention to
hide it, since it is clearly stated in the budget, Mr. Curtis.
Representative Curtis. I s that not a nonrecurring item?
Mr. Gordon. This is, and of course there are other nonrecurring
items.
Representative Curtis. I am talking about a $2 billion item which
is a one-shot proposition. That is the reason you have a $2 billion
leeway which permits you to increase other areas, with recurring
items. I was going to get to this point of mingling nonrecurring
items in your budget with recurring items. It seems to me, that the
way you have held this budget down is by taking nonrecurring items,
minuses, and imposing recurring items to take their place. This is
going to hit us in the ensuing year. I certainly think in a forthright
presentation, there should be this distinctions made between recur
ring and nonrecurring items.
Mr. Gordon. May I comment on that statement, Mr. Curtis ?
Representative Curtis. Certainly.,
Mr. Gordon. I question very seriously the presumption that a total
figure for a new obligational authority in 1 year gives a clear indica
tion of what expenditures are likely to be in the next year, as you have
just indicated.
If you look at the various components of new obligational authority,
I do not think it would support this conclusion. You have a variety of
types, Mr. Curtis, of new obligational authority.
ECONOMIC REPORT OF THE PRESIDENT
90
In the case of new obligated authority for the Commodity Credit
Corporation, NOA tends to be related not to future expenditures but
to past expenditures.
NOA is appropriated to the Commodity Credit Corporation to re
imburse them for past losses. So it relates to past expenses, not future
expenditures.
Representative C u r t is . I am talking right now about the ExportImport Bank, the $2 billion item. You have done the same thing with
th e^
-
~
are
sector.
Actually, even in FNMA, what you are going to do is pay out these
bonds, but you have simply accelerated the payment.
Let me say further, you have employed the same techniques in re
gard to balance of payments. After accelerating the payments of
foreign debts of Germany and others, which are nonrecurring items,
you then boast that you have cut the balance of payments from roughly
a $3 billion rate down to about a $2 billion rate.
Yet you have nearly $700 million a year, which is from nonrecurring
items. It is not so much that we who are used to dealing with figures
cannot dig all this out, because it is here. But the administration has
presented this in narrative form to the public and has been hammering
home something that gives the public and the Congress, I might say,
a very erroneous impression of what is going on.
You actually are increasing the rate ox expenditure in recurring
items in nondefense areas at a very handsome clip. And that is the
point the Congress and the pubilc are concerned about.
Mr. Gordon. Mr. Curtis, I tried to satisfy myself on one of the
points you made. The question of the extent to which one can rely on
this year’s NOA figures as a forecaster of next year’s expenditures—
I think this is implicit in what you have been saying. What I find
is that NOA figures in one year are a very unreliable guide to expendi
tures in the next year. I would like, if I may, to give some examples.
Representative Curtis. Might I point out that I am saying that
when Congress gives the obligational authority it then loses control.
So as far as the Congress is concerned, and we are the people’s repre
sentatives, we lose the authority. I grant you that when the authority
is turned over to the Executive, there are good legislative reasons
why you cut back on your original estimates ox expenditures, but some
times the Executive freezes funds—sometimes he slows a program
down.
I agree with you, there are many reasons for that. And inci
dentally, because the authority does exist, I am going to try to see
to it, when you request, as you are going to request, us to continue
the debt ceiling at $308 billion, that we cut your request so that the
President will exercise some discipline in this area of expenditure
rate. He can cut his expenditure rate from a $98 billion to a $96 or a
$93 or $92 billion rate, if he would put his mind to it.
Mr. Gordon. I might say, Mr. Curtis, this year’s budget is abundant
evidence that the President has in fact exercised some discipline. You
will recall that in looking at the 1963 NOA figures, many persons were
predicting that 1964 administrative budget expenditures would sub-
ECONOMIC REPORT OF THE PRESIDENT
91
stantially exceed $100 billion. This, of course, has not been borne out.
This reflects, I think, the kind of restraint in expenditures to which
you are referring.
Eepresentative C u r t is . My time has run out and my colleagues
have been very generous, because it went over 5 minutes. I will come
back.
Mr. Staats. Could I add, Mr. Chairman, just a brief point on the
matter of carryover funds on unobligated authority? The figure on
that is $87.2 billion. You are quite correct in pointing out that you
add that to the $107.9 billion, which is new obligational authority
requested.
However, I would like to point out that we anticipate that the
carryover out of 1964 into 1965 and further years will also increase.
So it is not quite accurate to compare these figures by themselves.
That figure will be, instead of $87.2 billion, it will go up to $95 billion.
Representative C u r t is . The point I am trying to make is that the
Executive has this leeway, or authority, and we must view it in the
total. Now, I would agree that, in many areas, the Executive doesn’t
really have much leeway, because these are fixed sums and obligations.
But there is a considerable area of leeway.
Chairman D o u g la s . Senator Sparkman ?
Senator Sparkman. Thank you, Mr. Chairman.
Mr. Gordon, I shall askyou a very few questions.
I have read your statement since coming in. I appreciate your
presentation.
I notice from the chart, and I have noticed from the budget pre
sentation, one item about which I would like some clarification, that
is, “Substitution of Private for Public Credit.”
Now, it sounds very good, but I wonder if we are really going to
realize the $1 billion that you hope to save by reason of that.
Now, there is one item that I have had some experience with that
is in here, and I want to use this as an example. That is farm housing
loans. I believe that the President’s program calls for $400 million
for the farm home loan program, but provides that only $50 million of
that shall be in the form of direct loans. The other $350 million is
to be shifted to insured loans. That is correct, isn’t it ?
Mr. Gordon. I will check the figure, Senator.
The basic point is correct.
Senator Sparkman. I think the figures are correct. Now, we have
had insured loans for farm housing for a good many years.
I think it was put into effect back about 1953-54. I am under the
impression that it has been almost wholly unsuccessful, and I wonder
how we are going to make it work here.
The direct loan program has been highly successful. It was dis
continued for a considerable period of time. There were several years
in which there was no activity. Finally, a couple of years ago, we
picked it up again and made available $450 million for direct loans, in
varying amounts, as was required.
^It has been a highly successful program. Losses have been prac
tically nil.
I am just wondering what assurance we have that an insurance pro
gram now can be made to work when it actually did not work in past
years?
03762— 63— pt. 1------ 7
92
ECONOMIC REPORT OF THE PRESIDENT
I think it is still on the statute books and has not worked, and 1
believe the record will showthat to be true.
Mr. Gordon. Well, Senator, I certainly agree that you can never
be certain about the likely success of a new program, and although 1
am not intimately familiar with the details, I do have a general
familiarity with them. I think perhaps the answer to your question
is that there will be some new characteristics in this program, which
may not have been the case in the past.
Insured farm housing loans in the past have been good investments,
but for the most part, I would think highly illiquid investments.
What is proposed in the new budget is to make these insured housing
loans eligible for purchase in the FNMA secondary market.
I believe this has not previously been the case. This makes the
asset a much more attractive asset from the point of view of the lender,
because he is readily able to convert it into cash through a highly or
ganized secondary market if he has access to FNMA.
I think perhaps this is one of the principal differences in the pro
posed situation, as compared with the present one.
Senator Sparkman. Well, I hope you are right. I hope there will
be careful attention to that so as to make it work. I have no objection
to the change. I would be in favor of that. Actually, I would like
to see the private credit resources used rather than direct loans from
the Federal Government. But I do believe that it is a program that
will bear watching.
Mr. Gordon. In many cases, Senator, as I understand it, the hous
ing loans will be made by the Farmers Home Administration and
sold to private investors with FNMA eligibility and Farmers Home
will service the loan.
So that from the point of view of the lender, it becomes a particu
larly attractive asset, with servicing through the FHA instrumentality.
Senator Sparkman. Now that you have brought FNMA into the
picture, let me ask you about some of the operations in that field. I
was talking yesterday to an official of the Veterans’ Administration
and I was told that there is a rather vigorous sale of mortgages out
of the VA portfolio to private investors. I wonder if there is much
activity with FNMA’s portfolio?
Mr. Staats. The budget contemplates increased sales in 1964 of
$150 million—to a total of under $200 million—out of the FNMA
portfolio.
Senator Sparkman. What is the total holding, do you know
offhand?
Mr. Schttltze. Senator, I believe it is about $3 billion. But this
is a guess.
Senator Sparkman. I wanted to highlight that figure, because it
seems to me $150 million is not a veij large disposal out of $3 billion
worth of holdings, particularly at a time when I understand conditions
are pretty good for selling these mortgages.
Mr. Gordon. I think perhaps, Senator, part of the difficulty, one
of the problems at least in FNMA disposal of its holdings out of the
special assistance portfolio is that many of these mortgages bear face
interest rates considerably below present market levels, which would
mean if they were sold publicly, they would have to be sold at a
discount.
ECONOMIC REPORT OF THE PRESIDENT
93
I understand there are rather strong views held on that question
in the Congress.
Senator Sparkman. Well, we have had rather strong views, but
they have not been very well regarded so far as granting discounts
when the taking of mortgages was concerned, so I think we might
waive our strong views if FNMA could find a favorable market for
getting rid of some of these, even if discounts have to be given for
the low interest rate mortgages, provided the thing is going to happen
that I anticipate—that is, that rates will increase in the future.
I am not an expert in this area, but I have been wondering why
we did not take advantage of the present market situation to unload
a great part.
Mr. Gordon. I am very glad to hear you say that, Senator, because
I have been puzzled for a long time as to the basis for the objection
to the sale of mortgages bearing low face interest rates at prices below
par in a situation in which prevailing market rates are substantially
above the face rate. It seems to me that sale of a 4-percent mortgage
in a 534-percent market at a price which would make it as attractive
to the buyer as a 514-percent mortgage is a favorable sale, even though
it may reflect a sale below the face value of the mortgage.
Senator Sparkman. Certainly that would seemto be true if rates are
going to rise, as has been indicated is likely to be the case.
That is all, Mr. Chairman. Thank you.
Chairman Douglas. Senator Javits ?
Senator Javits. Mr. Gordon, I did not have the benefit of hearing
all of your testimony. I have been downstairs fighting about the
filibuster.
But I did want to ask you just one or two questions which interest
me greatly.
What effect do you gentlemen assume there will be on the public
debt by the economic or by the policy, the fiscal policy, which is en
compassed in your statement which anticipates a calculated deficit?
What will be the effect on the public debt ?
Mr. Gordon. It is anticipated the public debt will rise at the end
of fiscal 1964 to $315.6 billion.
Senator Javits. What will that add to the carrying charges; do
you estimate, on the public debt?
Mr. Gordon. About $300 million in 1964.
Senator Javits. When you say it will rise to $316 billion, from a
figure of what?
Mr. Gordon. $303% billion at the end of the current fiscal year.
Senator Javits. So that you will add about $13 billion to the public
debt----Mr. Gordon. About $12 billion, sir.
Senator Javits. At an interest cost, you figure, of $300 million; a
quick calculation being what—3 percent ?
Mr. Gordon. I am not sure how the average rate would work out>
Senator. I think this takes account of the likely change in total
interest payments on the entire debt.
Senator Javits. Well, now, does it assume any change in interest
rates?
94
ECONOMIC REPORT OP THE PRESIDENT
Mr. Gordon. The method by which these estimates are made as
sumes that the general level of interest rates prevailing currently
will persist throughout fiscal 1964.
Senator Javits. Do you think the fact that we are embarking upon
an adventurous program, trying to accelerate an economy which is
advancing, but not rapidly enough, do you think that that ought to
increase or reduce interest rates, or leave them where they are ? With
that fundamental policy, which we will assume?
Mr, Gordon. This depends, of course, Senator, on the policies pur
sued by the Treasury and the Federal Reserve System and the require
ments of our balance-of-payments situation. It certainly seems to me
that on the way up to full employment with substantial slack and un
employment remaining in the economy, there is no inherent reason
why the general level of interest rates should rise.
And I would hope, consistent with the necessities of our balanceoi -payments situation, that they will not.
Senator Javits. Now, in the consideration of running this cal
culated risk to which I am sure the Bureau of the Budget was a party,
was there any consideration of other measures which had to be asked
from us, as having a major impact on the economy ?
For example, we have not been asked for all substantial purposes
to do anything about national emergency strikes, yet that could have
a very significant impact on the economy. In short, in the one package approach of a tax reduction, was there also any consideration of
adding other legislative aspects to it in the Bureau of the Budget?
Mr. Gordon. I would point out, Senator, that the proposed tax pro
gram comes on top of a legislative program, some of it enacted, and
some not enacted, which has implications for the general problem
of prosperity and growth*
For example, the very substantial things that have been done in
the readaptation field, in the field of manpower training and develop
ment, in the field of area redevelopment, in the provisions for facilitat
ing adaptation of capital and labor under the Trade Expansion Act,
and under the proposed youth employment opportunity legislation.
These are all measures either on the books or proposed which have a
very close bearing on the problem of expansion in the productivity of
our economy, in an efficient and noninflationary manner.
Senator Javits. Is it therefore the position of the Bureau of the
Budget that what the President said doesn’t stand alone? The Presi
dent said—he asked the Congress, as the principal means for accelerat
ing the pace of the economy, to make this tax cut. Now is it the posi
tion of the Bureau of the Budget that other, these other, measures are
also essential to accelerate the economy, or do you hold with the
President that if we pass the tax cut we have done it ?
Mr. Gordon. I would certainly maintain the position, Senator, that
the principal means, the most important means for solving our broad
est economic problem is a policy designed to help in the expansion
of aggregate demand. And this is essentially what the tax program
is designed to do. But the expansion of aggregate demand, although
it seems to me a prerequisite for the achievement of our economic ob
jectives, obviously doesn’t solve every problem, as I am sure Mr.
Curtis would testify. There are structural problems in the economy
of a very important sort which we think are being attacked in a very
ECONOMIC REPORT OF THE PRESIDENT
95
promising fashion by some of the other programs that I have men
tioned.
I would maintain, however, that the kind of economic climate which
would be created by an expansion in total demand would be the kind
of climate in which it would be much easier to solve many of these
structural problems we are talking about.
Senator Javits. Now, let’s approach this a little differently. Did
you make assumptions in these estimates, and, if so, what did you as
sume as to strikes andman-days lost because of strikes ?
Mr. Gordon. Although we have to make a startling number of
assumptions in putting together a budget, I am not aware, Senator,
that this is an explicit assumption which underlies the budget.
Senator Javits. What did you assume, with respect to our foreign
trade ?
Mr. Gordon. Here again, Senator, I think the effect of foreign trade
developments, although extremely important for our balance-of-pay
ments position, would not have a major impact on the calculations of
the budget. Foreign trade would have, for example, some effect on
customs revenues, but, in general, I would not think these would be a
jnajor impact.
Senator Javits. What did you assume with respect to those who
might be displaced because of automation, which would be encouraged
by all the policies we have just adopted, lower depreciation, the
7-percent credit for equipment, and so on ?
Mr. Gordon. Well, I think here the answer would have to run in
terms of the necessity for achieving a considerably higher and rising
level of total economic activity so that the demand for goods and
services would require the services of virtually the whole of our labor
force. The automation problem is a problem of location, of skill, of
age, and so forth. All of these are matters which are being attacked
through the various sectoral measures I have mentioned.
Senator Javits. But you cannot give us any assumption which you
have made as to those who would be displaced by automation?
Mr. Gordon. As to numbers?
Senator Javits. A s to any quantum, as to its effect on your estimate.
Mr. Gordon. A s to its effect on our assumptions with respect to the
number of workers who will have their skills improved and upgraded
through the manpower development and training program and other
such programs?
Senator Javits. But not—but you can’t give us any test you applied
as to what automation would do to your work force and its earnings.
Mr. Gordon. I would think the answer, Senator, must be that the
quantitative question is unanswerable.
Senator Javits. And finally—excuse me, I didn’t mean to interrupt.
Mr. Gordon. What happens to persons displaced by automation
depends largely on the state of employment opportunities generally
in the economy. He may either be displaced into employment or he
may be displaced into a new trade or new skill or new area in a
climate of rising economic opportunity.
Senator Javits. Was any assumption made as to the impact of anti
trust policy on the willingness or unwillingness of business to invest
in new equipment or new expansion or the like ?
96
ECONOMIC REPORT OF THE PRESIDENT
Mr. Gordon. I am not aware of any explicit assumption on that
point, Senator.
Senator Javits. Thank you, Mr. Chairman.
Chairman Douglas. Senator Proxmire?
Senator Proxmire. This is a remarkably clear exposition of the
most complicated and difficult document which our Government has
each year. I think it is also amazingly short and concise. I think it
is a fme presentation.
These charts are very helpful, too, in understanding it.
Mr. Gordon. Thank you, sir.
Senator Proxmire. I was happy, Dr. Gordon, that you were ap
pointed Director of the Bureau of the Budget because I felt as I am
sure other members of this committee felt, it is good that an economist
with the particular and peculiar experience that you have had as a
member of the Council of Economic Advisers should be in charge of
the budget. And I note in your third paragraph you talk right off
the bat of economic assumptions underlying the 1964 budget.
However, I would like to pursue just for a minute the question that
was so much emphasized by Senator Javits. After all, if we are going
to attack our economic problems primarily on the basis of tax reduc
tion, shouldn’t we on the spending side, on the budget side, simply
proceed to meet those necessary costs which we have to meet as eco
nomically, as efficiently as we possibly can, and rely on tax adjust
ments to stimulate the economy?
I take it from your emphasis here, and from what you have told
us, that maybe there is more consideration on economic stimulation,
on the spending side than I thought we had before your presentation
this morning.
Mr. Gordon. I don’t think so, Senator. I would agree with your
original statement, that at all times, but particularly at this very junc
ture, it is imperative that Government expenditures be held to the
minimum level consistent with the protection of the national security,
and the discharge of the Federal Government’s responsibilities with
respect to the economy.
Senator Proxmire. And yet, you say here, the economic assumptions
underlying the budget take into account the fact we have seven quar
ters of economic expansion since the recession trough, and then you
go on in the next sentence to say you are also influenced by the fact
of the rate of expansion being slower.
Now, I am just questioning whether or not this is sensible under
these circumstances to give weight to the economic picture to this de
gree in building your budget?
Mr. Gordon. I wish that it were not, Senator. The problem of pro
jecting economic activity 18 months ahead, which is involved in every
budget preparation, is one of the most taxing and difficult and per
plexing of the problems of the budget. But it doesn’t seem to me
that you can ignore it. There have to be economic assumptions in a
budget mainly, of course, to provide a basis for the estimate of reve
nues, but even to some extent to provide a basis for the estimate of par
ticular items, of expenditures, and ever since we have been preparing
budgets there have been economic estimates or projections underlying
them.
ECONOMIC REPORT OF THE PRESIDENT
97
Senator P r o x m ir e . That is excellent. In other words, you have to
know the economic estimates to determine how much money is coming
in, and to cope with such economic problems as automation, develop
ing new skills, providing additional education and manpower training.
This is another consideration based on the economic considerations but
any further than that I wonder if we should go.
Mr. G o r d o n . Well, now on the revenue side----Senator P r o x m ir e . I am asking you if we should in your judgment.
Mr. G o r d o n . Well, let me repeat, that there have been economic
assumptions in every budget and in every budget message the United
States has had. For most of this period these assumptions were
implicit; they were not stated. But they had to be there because,
if they are not there, there is no way of guessing or estimating what
the revenues will be.
What we have tried to do, I think, is to come clean and say ex
plicitly what our assumptions are. TTiey are there whether we say
it or not. They have to be there, and it seems to us a lot more useful
to make clear our assumptions so that those who don’t agree with our
assumptions will be able to come to different conclusions.
Senator P r o x m ir e . In your statement you say something that would
seem to me the President has assumed also. You say:
As I indicated earlier, expenditures fo r programs other than defense, spacer
and debt service, have been held slightly below last year’s level.
There is no discussion of or justification of the increased spending
for defense, space, and interest, and I would question spending in
creases in all three areas.
It seems to me they have all become sacred cows. They could all
be reduced and I think we could make a stronger case in defense than
in any other area and also make a very strong case in space.
Let me ask this specific question: Last year I was told that the
Budget Bureau or NASA informed the House Appropriation Com
mittee, that the NASA budget was not touched by the Budget Bureau;
that it came to the Congress exactly as it was proposed by NASA,
there were no cuts in it and no reductions in it.
Mr. G o r d o n . May I refer this historical question to Mr. Staats?
That was before I was in the Budget Bureau.
Senator P r o x m ir e . Yes.
Mr. S t a a t s . I don’t recall the particular information that you
referred to. I would like to say this, though, that technically this is
correct. The defense budget was not formally revised, because it was
a matter of working out a budget jointly with our respective staffs
and coming to an agreement. We did not have a formal submission
which we formally reviewed and reduced by a specific amount of
money. This has not been the case this year, however, with respect
to the space budget. It is still true with respect to the defense budget
this year.
Secretary McNamara’s formal request to the Budget Bureau really
was a product of a long series of meetings and common staff work,
and conferences with the President, where the decision was finally
reached. Thus, when we get into the question of what is formally
recommended as against what is formally submitted, we have to take
these things into account.
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ECONOMIC REPORT OF THE PRESIDENT
This year, however, the budget that was submitted to the Congress
in the space area was reduced by the President from the levels re
quested by the space agency. I will say, though, just so we are not
unclear about it, that there were three levels proposed by the space
agency this year in terms of its new obligational authority.
The figure that you see here represents a program which is designed
to keep the original schedule of the manned lunar landing, but which
does represent a considerable reduction in the other space programs.
Senator Proxmire. Are you telling me that the manned lunar landing program is $4.2 billion roughly, something like that?
Mr. Staats. The total expenditures for fiscal year 1964 are $4.2
billion for the space agency. As for the manned lunar landing part
of it I would have to checkthe figure on it.
[Expenditures estimated in 1964 for manned space flight are $2.7
billion of the $4.2 billion total.]
Senator Proxmire. Then you say the manned lunar landing part of
it was accepted with the recommendations of 1STASA. There was not
a paring or reduction.
Mr. Staats. That is right. Because it was designed to proceed on
schedule.
Senator Proxmire. Isn’t the function of the Budget Bureau to exer
cise an independent viewpoint and to make their recommendations in
view of the total overall ability of the Government to pay, and fitting
the priorities into the President’s overall program? Shouldn’t there
be, in other words, an independent determination in space and defense?
Mr. Staats. Not independent of the President, if that is your ques
tion.
Senator Proxmire. No, I mean independent of the agency. You
said you sat down with the Space people and with the Defense people,
and came to an agreement. On the other hand, when we are dealing
with education programs and you are dealing with other programs, it
was a more objective, if I could use that word, independent, kind of
an approach.
Mr. Staats. No, I wouldn’t draw this distinction at all. I think
it goes purely to the question of how the staff work is conducted. In
the case of the space agency this year, our staff has been working
jointly with the staff of the Administrator for the past 4 months. So
that when his recommendation was made with respect to the needs for
the manned lunar landing program, it was very largely a product of
trying to achieve its schedule at the least possible cost.
Hence, what I meant to say a while ago was that we did not change
the schedule established by the agency and approved by the Congress
last year with respect to the manned lunar landing program.
Senator Proxmire. And you have the same kind of collaboration,
close work together, in Defense ?
Mr. Staats. Yes. And I want to say here for the public record that
the Secretary of Defense has really been extremely cooperative with
the Bureau.
Senator Proxmire. I think he is doing a marvelous job. I think
we have never had a better Secretary of Defense or one more conscious
of the necessity to keep costs down but, at the same time, this is such an
enormous agency, the spending is so great, examples of waste are
bound to come to our attention and here once again it seems to me that
ECONOMIC REPORT OF THE PRESIDENT
99
an indepednent appraisal, an objective appraisal would be very helpful
to Congress, rather than this kind of----Mr. Staats. Well, it does represent an independent appraisal I
must assure you, because we had many differences of views with Sec
retary McNamara and many of those had to go to the President for
his resolution.
Senator Proxmire. Now, I just want to ask one more thing in this
turn.
We have been told by the President this is a tight budget and we
have been assured by Dr. Heller that in his judgment it was a tight
budget with regard to the other elements of spending.
I notice, however, that looking on page 59 of the Budget in brief,
59 and 60, it seemed to have been possible, at least in 1 year in the
last 7 years, to reduce spending and to cut it sharply and cut it in
almost every category despite the increases in population, the increased
demand on our Nation, in defense and in other areas.
I am talking about the year 1960, when there was a reduction in
spending from $80 billion down to $77 billion. This in spite of the
fact we had a big increase in research and development of nearly $2
billion, we had an increase in educational appropriations and yet it
was possible that year to cut defense, to cut greatly in international
affairs and finance, to cut agriculture, to reduce natural resources, and
so forth. These are actual expenditures also, not estimated.
Why is it so difficult now or so almost impossible in the view of
experts who come before us, to reduce spending when it was in fact
accomplished in 1960, a year when we also had great demands.
Mr. Gordon. To answer that in detail, Senator I would want to look
much more closely at the 1960 figure. It certainly seems to me as an
approach to the answer that it is not unrelated to the very sharp
increase of expenditures which occurred in the prior year.
Now, fiscal years are quite arbitrary things. The total administra
tive budget expenditures rose from $71.4 billion in 1958 to $80.3 billion
in 1959. That was a very substantial increase, and the decline in 1960
still left 1960 a good $5 billion above 1958. I think if you look at
the trend there, the behavior in 1960 would have to be related to the
very sharp increase that occurred in the prior year. It may be that
expenditures were pushed forward and made in the year 1959 and
had the effect of reducing expenditures under ongoing programs
in 1960. I can only speculate about the details but I suspect this is
the basic approachto the answer.
Senator Proxmire. Well, let me just—I don’t want to impose on
my colleagues. I do want to ask you, however, on page 48 you show
something that I think is pretty irrefutable as far as increasing ob
ligations of the taxpayer. We have this administrative budget which
has complexities and unfortunate complications that make it hard
to understand, the national income accounts budget, the cash budget,
all have defects, capital budget, too.
But on page 48 it shows that virtually every single department of
Government is going to have an increase in personnel, in employment,
in employees in 1964 as compared to 1963 except Defense and some
of those increases are very great. The Department of Labor is 14
percent, General Services Administration 9 percent increase in 1 year,
and I am wondering if this isn’t perhaps one of the best indications
100
ECONOMIC REPORT OF THE PRESIDENT
of the fact that we are increasing our Federal obligations and our
Federal spending.
Mr. Gordon. Could I call your attention, Senator, to the last chart
in this collection of charts that I think you have before you ?
Senator Proxmire. Yes.
Mr. Gordon. It shows for a 14-year period the change in executive
branch civilian employment. It shows a sharp rise, of course, during
the Korean conflict, a decline at the end of that period, a leveling off
period and then a rise that started in 1959 or 1960. It seems to me
very revealing, however, to take account of the fact that this is a
rapidly growing country with a rapidly rising population, and to re
late the size of civilian Federal employment to the population. The
bottom line is a measure of that relationship. It shows that since the
Korean conflict the percentage of the population employed by the
Federal Government has diminished, and it has been essentially stable
since 1959.
Actually, although it does not show up here, between fiscal 1963
and 1964, there is a slight decline. The population, if I remember
correctly, will rise about 1.7 percent; Federal employment about 1.4
percent. It does seem to me important to relate the growth in Fede growth in the size of the country and in the
like to take a minute to point out some of the
effects of tlie expansion in the population and m the demands on the
Federal Government as background for appraising this rise of 35,000
in Federal employment from 1962 to 1963. I have a number of ex
amples which seem to me very persuasive.
In the Department of Defense, for example, the average number of
retired military personnel will increase by 30 percent between 1962
and 1964, necessitating an expenditure increase of $250 million. This
is a built-in increase in retirements.
The number of veterans or survivors receiving payments will rise
by 10 percent between 1962 and 1964, adding $160 million to outlays,
and will have some effect on Federal employment.
Between 1962 and 1964 school enrollment will increase by 7 percent,
increasing the expenditures of the school lunch and milk programs by
$22 million. The number of passports issued increased by 25 percent
from 1959 to 1962, and is expected to increase another 25 percent by
the end of 1964. The number of patents issued will increase from
50,000 to 60,000 over this 1962-64 period. Between 1961 and 1964
visitors to the national parks will increase by almost 20 percent. I
could go on. I have a very long list.
But I think it is this kind of thing which gives you a sense of what
the expansion in the size of the country means to the provision of
Federal services and the growth in Federal employment. And it
seems to me very impressive that there has been this decline in the
ratio of total Federal employment to the population over the last
decade.
Senator Proxmire. My time is up, Mr. Chairman.
Chairman Douglas. Congressman Reuss.
Representative Reuss. Mr. Chairman, Director Gordon, I would
like to join my colleagues in welcoming you here today. You did a
remarkable job on the Council and I know you will, too, on the Budget
Bureau.
ECONOMIC REPORT OP THE PRESIDENT
101
My questions will concern regional economics, which is also a prob
lem confronting the Joint Economic Committee. It may be that you
will want to refer this to one of your associates.
Particularly, I am concerned with the lag in industrial growth in
recent years in the Midwest, that great area of our country between
Detroit and St. Louis, and Ohio, and going up through Chicago and
Milwaukee to Minnesota. Not only has the growth rate of this gen
eral area of our country tended to lag behind that of most other areas,
but when you look at the policy of the Federal Government you will
find that civilian payrolls, military payrolls, the giving of research
grants, have likewise tended to neglect the industrial interest of the
Midwest.
This, let me hasten to add, is due to a complex of factors and cer
tainly willed action by the Federal Government is not the only factor.
But just within this last year we have had recognition by the Defense
Department, for which I praise it, that there tends to be a distorting
concentration of national research and development energies in such
areas as the Boston area, the Washington area, and California. We
of the Midwest notice this particularly because we produce most of
the scientific Ph. D.’s in the country, yet we tend to lose them to other
areas of the country, notably these three.
I notice in this year’s budget that at least two enormous new in
stallations are contemplated, one the Environmental Health Center
set up by the Department of HEW, which is to be plunked right down
in the suburban sprawl of the Washington area, on the ground that
there are a lot of scientists in Washington already and we might as
well put this center there. I think it is ultimately to cost $70 million.
And then along comes NASA and proposes to plunk down a multi
million dollar electronic center right in the heart of the Boston elec
tronics complex. Again the ground given is that there are a lot of
electronics people aroundthere already.
Where will all this end? Does the Bureau of the Budget have a
policy for the Federal Government with respect to some equalization
of industrial growth in this country, and if so, what is that policy?
This is where you may want to refer it to those who have been in the
Bureau longer than you.
Mr. Gordon. I am very fortunate, Mr. Eeuss, in having at my left
a colleague who has spent a good part of his time in the heartland—
at Indiana University—and I think perhaps he is prepared to say
something about the special problems of this area in relation to the
issues you raise. Mr. Schultze.
Mr. Schultze. There are only j>arts of your question that I have
any direct knowledge of, but I think one piece of research that we
carried out at Indiana is relevant. It turns out for that State and I
suspect also for Michigan, certainly Ohio, and probably Wisconsin,
that the answer in large part may be traced to the industrial mix, the
industrial composition ox these States. If you look at recession after
recession, you find that whenever economic activity falls below capac
ity, these States with very heavy durable goods manufacturing in
them are affected more severely than others. If you then examine a
growth trend from 1947 to 1957, you find these States doing rather
well compared to the rest of the economv. But from 1957 on, given
the gap we have had in our economic performance, the economic prob
102
ECONOMIC REPORT OF THE PRESIDENT
lems in these States reflect the slowdown in our rate of growth and
are perhaps even more attributable to the growing gap between our
Nation’s capacity and our actual production.
I think this is the explanation to your question; by no means all of
it, but a very good part of it.
In other words, an increase in aggregate demand back to levels of
4 percent unemployment would, I think, find in a lot of these States,
a more than proportionate increase certainly in industrial employ
ment. This is clearly the case in Indiana and I suggest might be true
of the area in general.
Eepresentative Reuss. Does the Bureau of the Budget in its func
tion of riding herd on the executive branch, have a policy with respect
to the industrial growth of various segments of the Nation?
Mr. Staats. If you are referring here to the second part of your
question a moment ago with respect to the location of Federal in
stallations ?
Eepresentative Reuss. Yes, and let me broaden that a little bit, Mr.
Staats, to include general policy in research grants, and whatever the
Federal Government does.
Mr. Staats. Eight. Well now, I would like to make about three
points here. One is with respect to new civil public works programs
included in the 1964 budget this year. We tried to give preference,
wherever projects were equally meritorious, to the projects going into
the underdeveloped areas, the redevelopment areas, and the areas of
labor surplus.
Now, this was applied rather carefully to all the public works
programs, the Corps of Engineers, Bureau of Eeclamation, General
Services Administration, all through the whole budget.
Second, with respect to specific locations of the type that you men
tioned a while ago, the Environmental Health Center and this new
Electronics Eesearch Center announced by NASA, I must say in these
kinds of considerations, the technical capability of the agency to per
form its function has tended to play a predominant role.
The environmental health center question as you know has received
a good deal of discussion in both of the last two sessions of Congress.
In this case the proposed center has been reviewed by two Secretaries
now, in coming to the same conclusion, that it would be a mistake to
locate it elsewhere.
It is therefore shown in the budget to be located in the Washington
area, although this, I must say, still has to be reviewed by the Congress
again. No action has beentaken.
We have been very conscious of the need to locate Federal buildings
outside of the Washington area and we do have a very carefully de
veloped policy, thanks in part of the interest of you and others in the
Congress, to locate outside the Washington area any building that can
function equally well.
For example, in this budget we have a proposed new Patent Office.
The present facilities are terribly cramped and it is reducing the em
ployees5capability to a great extent. But we did find, working with
the Commerce Department, and they, in turn, with the Patent Associa
tion, that they were able to agree to have the building located outside
of the Washington area.
ECONOMIC REPORT OF THE PRESIDENT
103
Similarly, we are currently studying a proposal from the Depart
ment of Interior on the Geological Survey building which faces a simi
lar problem. There has been no decision taken on this one but it is
offered as an example again of the kind of thing we are trying to do
wherever we possibly can.
Representative Reuss. For which, incidentally, I have the greatest
praise for you and the Budget Bureau. It seems to me in the last 2
years there has been real progress, at least with respect to whether you
put something in the Nation’s Capital in Washington or whether you
put it elsewhere in the country.
I was raising, however, a somewhat broader question. The Depart
ment of Defense, which has been praised for some things by Senator
Proxmire this morning, should also be praised, I think, for setting up
a division which is quite conscientiously looking at our nationwide
problem of industrial development in all its aspects, and making sure
that whatever tendencies are encouraged by the Federal Government
are tendencies that are in the national economic interest. I will ask
you, Mr. Director, to include when you correct the record an answer
to the following question: Will you review what the Department of
Defense is doing with respect to the dispersion of industrial develop
ment, and comment on whether it may not be possible to generalize that,
through the Budget Bureau, throughout the entire operation of the
Federal Government ?
I have the impression that while the Department of Defense is doing
a good and thoughtful job in this, the people at HEW, at NASA, at
Atomic Energy, just haven’t heard of this, that it just doesn’t occur
to them that they should do anything but make the rich richer, so to
speak. I am wondering if this isn’t a proper function of the Bureau
of the Budget.
Mr. G o r d o n . I would be very happy to look into this, Mr. Reuss, and
submit a report.
(The material referred to follows:)
The Office o f Economic Adjustment is the division in the Department o f
Defense to which reference was made. It was established in May of 1961
to minimize the economic impact on communities resulting from adjustments in
defense programs. The early work of this office was almost exclusively devoted,
to working with the communities affected by base closures in seeking to find’
substitute economic activity to offset the losses to the community from the
defense closure o f a base or depot. Since that time, the work o f the officehas been expanded to include analyses o f the economic effects of changes in
procurement programs.
The basic approach taken by the office is to energize local leadership, be it
community, region, or State, to analyze its resources and relate them to both*
short-term and long-term economic growth, whether in the fields o f education*,
science-oriented industry, transportation, and so forth.
The office works with an interagency committee under the chairmanship o f
Secretary Hodges, which is advisory to the Secretary o f Defense on problems
o f this type. The office works closely with selected agencies which can be
o f help, depending upon the particular problem involved. NASA and Atomic
Energy are not at this time members of this committee and it may well be
that extension o f this committee or some similar arrangement may be helpful
We intend to pursue this question to determine what is most appropriate to
secure the benefit of this type o f activity.
Chairman Douglas. Would the Congressman suggest an emenda
tion in the case of space and atomic energy, make the desert blossom
as the rose ? [Laughter.]
104
ECONOMIC REPORT OF THE PRESIDENT
Representative R e u s s . I approve that not only substantively, but
figuratively. My time is up.
Chairman Douglas. Mrs. Griffiths.
Representative Griffiths. Thank you, Mr. Chairman.
Mr. Director, if you will look at your statement where you say:
Second, a reduction in the proposed level of Federal expenditures, not matched
by a larger tax reduction, would be self-defeating under present conditions.
Would you care to estimate what kind of a tax increase would be
necessary to cover this year’s budget so that there would be no deficit?
Mr. Gordon. What kind of a tax increase would be necessary to----Representative Griffiths. Increase.
Mr. Gordon. To cover this year’s budget so there would be no
deficit? Offhand, Mrs. Griffiths, I am afraid I cannot give you a
quantitative reply to the question.
Clearly it would have to be very substantial because one would
have to take into account the fact that an increase in tax rates would
so depress private spending and investment as to cause the general
level of activity of the economy to decline so that you would have to
get a larger total tax take out of a smaller economy than you have
now.
You would have these two effects working against you. It would
have to be, I am afraid, an enormous sum.
Representative Griffiths. Would it be, for instance, $300 per
taxpayer ?
Mr. Gordon. I think it could come to a great deal more than that.
Representative Griffiths. It would ?
Mr. Gordon. A great deal more than that.
Representative Griffiths. If such atax----Mr. Gordon. Because, if I may say so, because one has to assume
that you are collecting this higher level of taxes from a smaller num
ber of people since the effect of the policy, of course, would be greatly
to reduce employment and economic activity.
Representative Griffiths. Well, that was going to be the second
question of mine. How many people do you think would be unem
ployed, added to the unemployment rolls, by a tax increase sufficient
to cover the deficit ?
Mr. Gordon. May I hold a rump conference here on that question ?
Well, you ask very hard questions, Mrs. Griffiths. I am reluctant,
of course, to answer this because it involves a large number of variables
which have to be very crudely estimated.
Let me say it would not surprise me if the consequence of this
policy were a rate of unemployment approaching 10 percent of the
labor force as compared with the present rate of about 51/2 percent.
Representative Griffiths. And an estimated tax rate of how much ?
Mr. Gordon. Well, this might entail an increase in tax receipts at
present levels of income—that is, an increase in tax liability at the
present levels of income of, perhaps, something in the neighborhood
of $20 to $25 billion a year.
I am afraid these get into quite astronomical figures, and I am
very uneasy about making judgments of this kind off the top of my
head.
But it does seem to me quite clear that to achieve this purpose by
increasing taxes sufficient to balance the budget at present levels of
ECONOMIC REPORT OF THE PRESIDENT
105
expenditure would so depress production, employment, and purchas
ing power that it would not be an extravagant estimate to say the
unemployment rate migth move up toward 10 percent.
Representative G r i f f i t h s . N o w , if you reduce by a shotgun ap
proach the expenditures to meet the income, how much would you
have to reduce it, that is, you could not just reduce it the present
estimated amount, could you, to meet the income ?
Mr. G o r d o n . Y o u are talking, Mrs. Griffiths, about reducing total
expenditures----Representative G r i f f i t h s . To meet your income.
Mr. G o r d o n (continuing). To meet the present estimated income?
Representative G r i f f i t h s . No, to meet the income you are going to
get if you reduce the expenditures.
Mr. G o r d o n . I am not sure that I follow the question. Will you
state it again, please ?
Representative G r i f f i t h s . If you reduce by a percentage basis the
expenditures, how much would you have to reduce it to meet the
income you would get if you reduced the expenditures?
Senator P r o x m ir e . H o w much would you have to reduce them
to balance the budget ?
Representative G r i f f i t h s . Yes.
Mr. G o r d o n . The answer, Mrs. Griffiths, I think, would be sym
metrical with the answer I have just given you or closely symmetrical,
but not exactly. There are some technical differences to the answer
I have just given you with respect to the increase in taxes.
This would, I think, tend to produce a sharp decline in gross na
tional product which might even get as high as $50 or $60 billion a
year, and might yield a rate of unemployment more or less in the
same order of magnitude as the rate of unemployment I was just
referring to in connection with the other strategy, the tax increase
strategy.
Representative G r i f f i t h s . I think you can tell from the questioning
even of this committee that if you tried the second route you would
have those people who would want to point out that the decline must
be made here, you can cut here safely, some would say cut out all
foreign expenditures; some would say reduce the prices that are paid
on defense items. So that in this you would get into some questions
once you begin that.
But the point I want to make is that we began this administration
with a call for sacrifices, and when you offer a tax cut it sound like
you are not asking for a sacrifice. But all you have to do is listen
to us and know you are asking people to sacrifice long-held prejudices
and beliefs on what taxes are for and what they do, and what expendi
tures are for and what they do.
Now, if you are going to switch the rules I think that the least you
can do is to make more specific your statement and tell us with more
exactness what will happen if you increase taxes to balance the budget
or you decrease the expenditures to balance the budget.
Mr. G o r d o n . I think, Mrs. Griffiths, that with some thought and
calculations, more precise answers could be given to this question
than the one I gave off the top of my head today, but I would certainly
agree that these are relevant questions.
Representative G r i f f i t h s . Then, Mr. Chairman, may I ask that
he supply the answers for the record?
106
ECONOMIC REPORT OF THE PRESIDENT
Chairman Douglas. I think that would be excellent. Without
objection.
Eepresentative Griffiths. Thank you.
(The information referred to follows:)
The following estimates are the results of an aggregative analytical approach
to the question o f the economic effect of a tax increase or a cut in expenditures
in the fiscal year 1964. They are not intended to be more than illustrative o f
the general orders o f magnitude involved. Because o f the presence o f many
unknown and unpredictable factors, the estimates can be no better than very
rough approximations. In all cases, the changes in tax liabilities, GNP, and
unemployment are measured from levels consistent with the President's 1964
budget; that is, from estimated levels which assume enactment of his tax pro
posals, reflecting a net revenue reduction of $2.7 billion in 1964.
Moreover, the estimates are addressed, not to the question o f the desirability
o f achieving a balanced budget, but to the size o f the tax rate increase or ex
penditure decrease which might be needed in present circumstances to balance
the proposed 1964 budget. Indeed, one o f the major objectives of the adminis
tration’s tax proposals is to eliminate the deficit in a constructive way by
generating the kind o f increases in the level of production and income which
would, in a few years, yield tax revenues sufficient to balance the budget.
To balance the fiscal year 1964 administrative budget, assuming currently
estimated expenditure levels, it would be necessary to increase total tax col
lections by $11.9 billion over the amount estimated in the 1964 budget. Raising
tax rates to achieve higher collections of this amount would, of course, reduce
GNP, employment, and income. This decrease in the tax base would reduce
the yield from both new and existing taxes, as compared with their yield at
current income levels. Hence, the increase in tax liabilities—based on current
levels o f income—would have to be larger than $11.9 billion in order to achieve
a net increase of that amount in actual tax collections.
Specifically, the estimates below assume (1) an increase in taxes which would
have the bulk o f its immediate effect on consumers’ spendable income and con
sumption, (2) a total impact on GNP averaging during the first year 1.5 times
the initial effect on consumer expenditures and rising to a higher level toward
the end of the year, (3) an estimated marginal tax rate on GNP o f 25 percpnt
during the period of substantial tax increase and changing economic climate,
and (4) a lag in tax collections behind the accrual of liabiUties averaging 20
percent, or something less than one calendar quarter. On this basis, it is
estimated that a tax increase to cut the presently estimated administrative
budget deficit by $11.9 billion might involve—
An increase in tax rates in fiscal year 1964 sufficient to raise total tax
liabilities, at unchanged! levels o f national income, by approximately $20
billion.
A decrease in GNP of some $25 billion for the year, and a decrease in the
annual rate of GNP at the end of the fiscal year o f roughly $40 billion.
An increase in unemployment averaging perhaps 1% miUion workers for
the year, with the increased unemployment reaching 2 to 2% million by the
end of the year. These numbers would be approximately equivalent to a
rate of unemployment o f 7% to 8 percent o f the civilian labor force fo r the
year as a whole and to a rate o f 8% to 9% percent by the end of the year.
Alternatively, if it were sought to reduce Government expenditures suffi
ciently to eliminate the estimated 1964 deficit—
The required cut in expenditures and the effect on GNP and unemploy
ment would be about the same as for the tax increase if the expenditure
reductions were all made in transfer payments such as veterans pensions
and compensation) or grants to States for transfer payments (such as
public assistance) to individuals.
If the required expenditure cut were all in Federal purchases o f goods
and services (which generate taxable income almost immediately), a larger
reduction would be needed: this would reduce GNP and increase unemploy
ment by more than the amounts previously estimated.
I f either the tax increase or the expenditure reduction policy were adopted,
the reduced level o f GNP and employment would mean a lower tax base for fiscal
1965 and the prospect of a sizable deficit for that year.
ECONOMIC REPORT OF THE PRESIDENT
107
Chairman Douglas. I hope you will forgive me if I take a worm’seye view of some of these issues.
On page 16 of the big budget, under the heading of “Expenditures
under the direction of the Architect of the Capitol,” I find a budget
outlet of $7,530,000 for underground garages.
Now, this has been an old interest of mine, because the previous
garages have been a terrific expense per car, and I dug up the previ
ous report of the Assistant Architect of the Capitol contemplating
the expenditure in 1957 prices of $42 million for approximately 1,900
cars at a cost of something over $22,,000 a car.
Now, I am curious to see the garage-building game continuing, and
I would like to ask if you have figures indicating the number of cars
that would be sheltered and housed in this underground garage at
a cost of $7,500,000.
Mr. Gordon. I am afraid, Mr. Chairman, that I cannot give you
that information.
A few minutes ago the question was raised as to whether the Budget
Bureau was exercising its proper review function with respect to the
Defense Department and the Space Agency. We said we thought
we were, but we plead innocent here with respect to estimates from
the Congress and the Judiciary. The Budget Bureau does not exercise
review functions.
Chairman Douglas. So you merely pass on recommendations from
the Architect ?
Mr. Gordon. That is right.
Chairman Douglas. I s my information correct that about 1,000
cars will be provided for in this garage, which would mean an average
cost per car of about $8,000 ?
Now, I have collected statistics on underground garages all over
the Nation and the cost is usually about $3,000 a car.
The average is, I think, somewhere around $2,400 a car. Somebody
should ride herd on this.
You say you do not ride herd on the Architect of the Capitol, but
I think this is the responsibility then for Congress, and I am glad
to see that there is no mystic significance attached to the fact that you
include this in the big budget. You merely reprinted something that
the Architect of the Capitol requested; is that true?
Mr. Gordon. That is correct.
Mr. Staats. That is correct.
Chairman Douglas. If I may skip from a minuscule subject to
overall subjects, I take it that the theory behind the tax cut is that
what is called aggregate consumer demand is inadequate and is neces
sary to build up aggregate consumer demand.
Now, an inadequacy of consumer demand simply means to me that
the sum total of price tags on goods now produced or which could be
produced with idle labor and capital is in excess of the sum total of
monetary purchasing power in the pockets of consumers. I think
that is merely a more precise way of stating what is said to be in
adequate consumer demand.
If you wish to produce equilibrium, there are two ways of dealing
with this: One is to bring prices down to the level of consumer mone
tary purchasing power; the other is to raise consumer monetary pur
chasing power up to the level of prices.
93762— 63— pt. 1------ 8
108
ECONOMIC REPORT OF THE PRESIDENT
Now, I am very frank to say that my own preferences would be in
favor of the first method, which would call for a vigorous antitrust
pjolicy and the extension of the competitive system into various areas of
life where it is not now prevalent. But I suppose you reached the con
clusion this would take too long. There would be doubtful public
support for it. The legal processes would be difficult, and so on. So
the method which you have adopted is to pump monetary purchasing
power into the economy, through the injection of additional bank
credit, up to the level of prices; is that true ?
Mr. Gordon. In a sense these are logical alternatives, Senator.
It does seem to me, however, that the position that the purpose can
be achieved by a reduction in prices—and this, I think, is apart from
the question of the merits of antitrust policy—but the question of
whether this can be achieved through reduction of prices must, it
seems to me, rest on what will be the effect on wage payments of price
reductions.
You are assuming a compression of the margin between the two, so
that the level of money income payments which are spent on consump
tion goods will not be unduly depressed by the policy. I would simply
raise a question here as to whether experience leads us to believe
that there is, in fact, much compressibility or expansibility in margins
for the total economy as between wages and pieces.
I do not doubt there is some compressibility or expansibility here,
but I would wonder whether there is a sufficient amount to do the
job you have in mind.
Chairman Douglas. What would you say to a reduction in excise
taxes ?
Mr. Gordon. I would think, Senator, that a reduction in excise
taxes would have an economic effect not very different from the re
duction in other kinds of taxes. There would be some differences.
It does seem to me, however, that given inherent limitations on the
amount of tax reduction which is consistent with our present economic
situation, that we are much wiser to attack this problem via the in
come taxes rather than the excise taxes.
Chairman Douglas. With a reduction in excise taxes, of course
assuming a competitive economic system which we may not have, the
benefits would go immediately to consumers.
Mr. Gordon. With respect to those types of goods which are sold
to consumers, that is correct.
Chairman Douglas. That is right, and if the tax reduction were con
centrated on durable goods, and local telephone service, for instance,
that will be a direct return, and----Mr. Gordon. I would think that this would have the effect of in
creasing the disposable income. I am not sure you could assume
that the tax reduction would be spent on the particular service in
question, but I think it would be a fair presumption that a large part
of it would be spent on some goods and services.
Chairman Douglas. And wouldn’t it be concentrated primarily in
the lower and middle income groups rather than in the upper?
Mr. Gordon. This would depend on the particular excise tax you
are referring to, Senator. I can think of some excise taxes which
would have very little effect on lower income groups.
ECONOMIC REPORT OF THE PRESIDENT
109
Chairman Douglas. Well, yon could pick out those commodities
which are primarily consumed by the great mass of families.
Mr. Gordon. Of course, some excise taxes, as you all know, are im
posed for quite different reasons, for consumption control reasons.
Chairman Douglas. I am not in favor of reducing the excise tax
on spiritous liquors.
Mr. Gordon. Some people would make a similar argument on to
bacco where the purpose is more complex than the raising of revenue.
Chairman Douglas. No, not even that.
Mr. Curtis.
Representative Curtis. I am very happy to have the Senator call
attention to that because these are Korean excise taxes which we well
might forgo extending by ignoring them.
I want to open up a new area for discussion, particularly now that
the Federal income tax has taken the center stage as the villain. I
want to discuss the entire picture of taxation.
We, at the Federal level, have a great tendency to think of the Fed
eral Government as the prime mover, and forget the State and local
governments. It is quite interesting that it is the Federal Government
which is primarily dependent on its revenues for the profits tax, or
from economic transactions that result in profits, for which are meas
ured in profits.
The States largely rely on transaction taxes ; the local governments
have the best tax of all, in my judgment, which is the property tax
based on economic value.
But it is the mix in our entire society that makes the difference.
I have been very interested in your presentation and the presenta
tion of the President in his economic message, especially where you
relate the percentage of State and local debt and, incidentally, private
debt, to the public debt.
The thing that intrigues me—it does not intrigue me because I think
I know the answer—is the use of the starting point of 1946 which,
of course, was----Mr. Gordon. 1947, Mr. Curtis.
Representative Curtis. Well, 1947, but the President has used 1946.
At any rate, it is the period right after the very heavy Federal defi
cit of World War II.
Mr. Gordon. That is correct.
Representative Curtis. And, of course, we know that the Federal
Government is primarily responsible since its primary responsibility
is in defense.
What I think is more important, and certainly will give us the
accurate picture, is to take a look at the relationsmp of private debt,
of State and local debt, and Federal debt in years prior to that, the
1930’s, the 1920’s, the 1910’s, and the 1900’s. I might add that the
same is true of expenditures, because expenditures and debt seem to
run similarly. I have inserted a chart like that into the Congressional
Record yesterday, on page 1102, showing that the total adjusted Gov
ernment debt for 1960 was $301 billion. Of that total, $240 billion
was Federal, $60 billion was State and local; 79.7 percent Federal, and
20.3 percent State and local.
Before World War II, similar to tax receipts the ratios were al
most the reverse. In 1912 the total Government debt was $5.7 billion;
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ECONOMIC REPORT OP THE PRESIDENT
$1.2 billion was Federal; $4.5 billion, State and local; 21 percent Fed
eral, and 79 percent State and local. You see, almost the reverse.
World War I reversed the percentages. In 1922 the Federal debt
had gone down to 79 percent, and the State and local debts were raised
to 31. By 1932 the ratio had shifted still further for State and local
debt, 50 percent State and local, and 50 percent Federal. World War
II brought that ratio to 94 percent Federal and only 6 percent State
and local, and it is from this high point that we have been seeing
this decline.
It strikes me that this is a normal and a very healthy decline. Cer
tainly it should not be put in the context that we have had increases
in local and State debt at higher expenditures. We should expect this.
This brings me back to a very key part of the budget—Federal aid to
local governments. If the Federal income tax is to take more of this,
and I happen to think it is because it gets right into the warp and
woof of our economic system when it is a tax on profits, then we should
not be relying as heavily upon it. We are making a very grave error
in this Federal aid to local and State governments. This is an area
where we ought to rely more heavily on the transaction tax and, cer
tainly, the property tax.
Fortunately we are. The property tax, the unheralded hero since
World War II, has not received the attention that it deserves to see
how it has responded.
This is an area very few people have studied. Should we reform
Federal income tax laws or examine this very question of expenditure
policy of the Federal Government ?
It seems to me that we ought to rely less heavily on the Federal
income tax, and more heavily, as we are continuing to do, on bringing
a balance back into these local areas.
This is a matter of expenditure policy, I think you will agree. You
have pointed it out very nicely in the amounts of money that the
Federal Government is actually spending for local matters, whether
it is education, sanitation, community facilities such as courthouses,
or public works.
So I think the question I should ask, and leave the record open so
that you can comment at more depth on this, is what consideration has
been given in the Bureau of the Budget to the use of State and local
taxes in lieu of the Federal income tax to bear these costs?
Couldn’t we reduce our expenditures very nicely in these areas so
that we could rely more heavily upon local and State governments to
provide these programs.
Mr. Gordon. Well, Mr. Curtis, this is a question that I think Secre
tary Dillon, who will be testifying later, will be better equipped to
handle than I am.
Our side of the budget responsibility, of course, relates more heavily
to the expenditure side than to the receipt side.
Representative Curtis. That is what I am talking about. Let us
take the expenditure side, these grants-in-aid programs. Traditionally
these have been taken care of by property ana transaction taxes.
Let me add another point. I hope this idea of putting a large por
tion of health costs on the back of the most regressive tax in our whole
collection, the payroll tax or social security tax never takes effect*
This is part of the concept of this budget.
ECONOMIC REPORT OF THE PRESIDENT
111
So I think if we are going to talk in terms of the economic impact
of tax systems, we must relate our expenditure policy—both present
and future—to the methods of taxation. This is where I want to see
more discussion.
I happen to feel, as you can tell from the way I have presented this,
that our economy could be much healthier if it were based more
heavily on what I would say is the economic value tax, the property
tax.
Can we leave the record open because if you do have any comments
to make on this, I would like to have them?
Then I want to call attention to something that to me has gone al
most unnoticed.
We talk about the need to increase the amounts spent for educa
tion, and I could not agree more. The President in his campaign in
1960 said that we have to double the amount we are spending on edu
cation in the next decade. My reply was, Why does he want us to slow
down? We almost tripled it in the previous decade.
I want to call your attention to the January 1963 Health, Educa
tion, and Welfare Indicators. On page 25 there is a chart of public
educational construction, bond elections, bond sales, and contract
awards. This is shown in total dollars, dollars of the bond issues
passed, and the percentage of those that passed.
On page 27 the results of the previous bond issues, educational con
struction value put in place, are shown.
We had been running at a rate of over $1 billion worth of new
bond issues passed, beginning in 1957, rising to the peak of $1.8 bil
lion in 1960.
In 1961 the figure dropped by $1 billion to $854 million. This is
where school construction for 1963 and 1964 is going to come. These
are the bond issues passed.
The actual construction put in place is still holding up very nicely
in 1961 at $3.6 billion.
It is this kind of breaking down into component parts, I think, that
needs to be done to understand expenditure policy.
I might say also, looking forward to local and State expenditures,
that here is an amount of $1 billion that must come from somewhere.
This is a $1 billion drop in construction that is going to hit us, and
I have heard no one even comment on it. Have you noticed that ?
Mr. Gordon. That has not been called to my attention, Mr. Curtis,
no. I didn’t know that.
Representative Curtis. Well, I wanted to make this point, and if
you care to comment on this area, the record will be open. This is
one area I hope to fully develop in the Ways and Means discussion of
tax reform.
In my judgment, this is why the Congress must examine expendi
ture policy. We must decide at which level to spend. Policy must
not be made on the basis that one group is interested in people and the
other is not. I think we all are.
The issue is not that we want more education and more health. It
is a question of what tax system and what procedures we can best use to
gain these ends.
Thank you.
Chairman Douglas. Senator Proxmire.
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ECONOMIC REPORT OF THE PRESIDENT
Senator Proxmire. I hate to get off the same trolley as Tom Curtis
because I admire him. He is a wonderful fellow.
But the worst part of this budget, the worst part of this tax pro
posal, is that it does increase our reliance on the income tax and does it
sharply and leaves the sales taxes as they are, and is going to impose
a greater burden on our already overburdened State and local govern
ments which, I think, is most unfortunate, because those State and
local taxes are more regressive—there are few taxes more regressive
than the property tax, and I think if we continue to cut income taxes,
let other taxes remain at their same level or increase, and try to absorb
these expenses, we are going to have a far more regressive system in
the future than we have had in the past.
Mr. Gordon. Senator, I do not follow your statement that the enact
ment of this tax bill would increase the burden on State and local
governments. I would have thought that the stimulus to economic
expansion which enactment of the tax bill will bring, will sub
stantially increase the tax revenue of the States, many of which are
quite proportionately----Senator Proxmire. I find myself often arguing against myself.
But let me explain what I mean. If we hold down these aid to local
government programs as Congressman Curtis so eloquently argued a
minute ago, on the ground that we cannot afford it, or because we have
to cut our Federal taxes, then I say that this burden has to be picked
up by State and local governments that already are having a terrible
time.
We can talk about tripling our educational expenditures, but these
people are not voting for the school bond issues now, and if we are
going to cut feeble aid programs to local governments, it means edu
cation is going to suffer and we are just closing our eyes to the grim
facts of life if we adopt that policy.
Mr. Gordon. There is another extent, Senator----Senator Proxmire. Also I wanted to indicate that the main thrust
of my argument is that you’re not lowering the taxes that Paul
Douglas referred to, the excise taxes, which are sales taxes, and I
think pretty regressive compared to the income tax—yet you’re not
touching them although, as Mr. Curtis acknowledged, these were
emergency wartime taxes put on for the purposes of retarding demand,
put on for the purpose of discouraging people from spending money.
We are leaving them on, though, and reducing other taxes that are
generally more progressive.
Mr. Gordon. Of course, some have been reduced or eliminated, the
tax on transportation, for example.
Senator Proxmire. Only partly eliminated. It was not eliminated
on airlines. It is 5 percent.
Mr. Gordon. Fifty-percent reduction in the case of airlines, but
100 percent in the case of trains and buses.
Senator Proxmire. Now, the telephone tax is 10 percent, the tax
on watches, which is a necessity for many people, is still 10 percent.
Mr. Gordon. Correct.
Senator Proxmire. There is another part of this budget that I
think is most unfortunate and discouraging. The whole philosophy
is to rely on taxes to stimulate economy.
ECONOMIC REPORT OF THE PRESIDENT
113
Senator Douglas said that it was his understanding that instead
of reducing prices we were stimulating the economy by putting more
purchasing power into the hands of the people through additional
bank credit. I wish we could do it this way.
It seems to me this is exactly what we are not doing.
In fact, the provision you explained this morning would do exactly
the reverse. What I am talking about is instead of emphasizing so
much tax reduction you ought to emphasize reducing interest rates
and providing an increase in the money supply.
You told us this morning that you are advocating selling capital
assets, selling FNMA bonds, for example, to the public, which has
exactly the same effect as the Federal Reserve Bank selling their
Federal obligations, which will soak up money, which will raise inter
est rates, which will tend to retard the economy and have exactly the
opposite effect of the tax cut which is promoted to stimulate the
economy.
Mr. Gordon. May I comment on that, Senator?
Senator Proxmire. Yes, indeed.
Mr. Gordon. It is quite true that taking these sales of financial
assets like mortgages alone, and looking at nothing else, it is quite true
that the sale of a very substantial volume of mortgages would tend
to tighten monetary conditions.
But I think one has to take into account that this is, in effect,
substituting for the sale of an equal amount of Treasury debt.
Senator Proxmire. We hope so.
Mr. Gordon. If you did not sell these mortgages you would sell an
equal amount of Treasury debt, so that the mortgage sales looked at
in the whole spectrum of Federal financial activity would have no
net effect.
Senator Proxmire. That is a mighty big assumption though, that
depends on what Mr. Martin does, andMs colleagues.
Mr. Gordon. That is correct.
Senator Proxmire. And Mr. Martin is notoriously independent.
Mr. Gordon. I think what I have said is true, Senator, without re
gard to what Mr. Martin does; basically and ultimately, of course,
what happens to credit availability and interest rates is determined
largely by the policies of the Federal Reserve system, in part by some
of the auxiliary policies of the Treasury; and no matter what the
monetary effects of particular Federal programs may be, they can be
either accentuated or offset or unaffected, depending on what the gen
eral monetary climate is.
But I think if you are just looking at this one aspect of the budg
etary program, the sale of a little over $1 billion in financial assets,
they are simply substituting for the equal sale of Treasury bonds and,
hence, taken alone they have no general monetary effect.
Now, it is quite true that the Federal Reserve policies going on at
the same time might have a monetary effect upward or downward.
But I think it is important to recognize that the sale of these assets
in themselves would have no monetary effect.
Senator Proxmire. Well, if everything else is exactly the same as
it would have been without this sale, it seems to me that they would
have a monetary effect. You have to take compensating action, the
Federal Reserve has to.
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ECONOMIC REPORT OF THE PRESIDENT
Mr. Gordon. Yes.
Senator Proxmire. On the basis of my brief experience with Mr.
Martin, I do not believe they will.
Mr. Gordon. Even if the Federal Reserve made no change in this
policy as a result of this action, it would still have the effect of re
ducing by an equal amount Treasury sales of bonds to finance the
deficit.
Senator Proxmire. But the sale of these mortgages does tend to
drive mortgage prices down and interest up.
Mr. Gordon. So that entirely apart from monetary policy, I think
it can be said that this action is neutral.
Senator Proxmire. Y ou see basically what I am concerned with is
the philosophy that has been announced by many fine commentators
and writers such as Sylvia Porter and others who are very eloquent
and very bright in this area, but they enunciate a policy which seems
to be the administration’s, and which is most unfortunate if it is, and
that is, we are going to stem inflation by raising interest rates.
If we suffer inflation because of this unbalanced budget, in other
words, loose fiscal policy, and tight monetary policy; and what this
means is that the tax cut is likely not to be as effective as it might
otherwise be, No. 1, what it means; No. 2 is that the debtor class is
hurt and hurt badly. I am talking about the farmers who get no
benefit at all from the cut in income taxes as 85 percent of them pay
no income taxes.
On the other hand, they are debtors, and they pay high interest
rates. This is true of many other older people, retired people, and so
forth. So that I think we ought to take a long, hard look at the equity
implications of this program and of its apparent reliance on interest
rates to stem inflation and, particularly, the alibi that is aways given—
I think you might have given it this morning and that Dr. Heller
gave yesterday—we ought to challenge it every time, and that is we
have to do this because of the international balance of payments.
We have not had one single study before this committee that showed
we have to raise interest rates because of the international balance
of payments.
Every study made—Dr. Bell, for example, of Haverford, last year,
and others showed that lower interest rates do not adversely affect our
balance of payments; he documented it and documented it very
carefully.
Furthermore, we have evidence to show that our interest rates are
lower than they are in West Germany, the United Kingdom, and other
areas on the short-term part of the market, which is crucial.
At any rate, although we have challenged Secretary Dillon and
Mr. Martin to show us studies, they have yet to show us studies. The
Roosa study showed a nonsignificant effort on balance of payments
from lowering our interest rates.
Mr. Gordon. Did the Bell study to which you referred relate to
both long-term and short-term rates ?
Senator Proxmire. Yes, it did. It was a very comprehensive study,
as I recall.
Mr. Gordon. I amsorry to say I amnot familiar with it.
Senator Proxmire. Of course, its main thrust was in the short
term area which would be most pertinent. I put it in the record.
ECONOMIC EEPORT OF THE PRESIDENT
115
Mr. G o r d o n . I think it is important to point out, Senator, as you
well know, the behavior of long-term interest rates in the last couple
of vears has been downward, if mere has been any movement.
Senator P r o x m ir e . Yes.
Now, Dr. Heller said that yesterday, it has been downward very
slightly, an upturn right now, according to documentation that Con
gressman Reuss put in the record yesterday. And, furthermore, we
have had a slack in our economy, and interest rates ought to be down
ward. We are not talking about a vigorous expanding economy.
The economy has not been moving ahead.
We have unemployed facilities and unemployed people. Under
these circumstances the interest rates should fall. It is still high
compared to any period back to pre-World War II. It is exceedingly
Mr. G o r d o n . The area of interest rates with which I was most
closely associated when I was on the Council and which, I think,
are enormously important are, of course, mortgage rates. Here I
think we have had a very reassuring record of a gentle but steady
downward movement in lending rates on new mortgages for the last
2 years, a virtually uninterrupted decline, although a slow decline,
and I think this has been stimulated and encouraged by policies that
the Federal Government has pursued, designed to make credit easier
for the financing of construction, particularly residential construction.
Senator P r o x m ir e . It could be worse. I just wanted to indicate
that I think the decline in interest (a) has been slight; (6) if you
take a ratio of the money supply to the gross national product, the
job money has to do, it is as tight now as it has been since the middle
twenties'.
It is true, even if you include time deposits, it still is not very
encouraging.
Thank you, Mr. Chairman. My time is up.
Chairman D o u g la s . Senator Javits.
Senator J a v it s . Thank you.
(The following was subsequently received for the record:)
E x e c u t iv e O f f ic e o f t h e P r e s id e n t ,
B u r e a u o f t h e B udget,
Washington, D.C., January 17,1963.
P r in c ip a l
F ed er al S t a t is t ic a l P
rogram s
I ncluded
in
the
1964
B
udget
This statement describes in greater detail than was possible in Special
Analysis I, “ Principal Federal Statistical Programs,” pages 417-420 of the 1964
budget of the U.S. Government, the subject matter content o f the new projects
included in the recommended programs.
The program® in the 1964 budget designed to collect statistical information
for the use o f the Government and the public are described in two categories:
current and periodic. A summary description o f the new projects included
in the principal current statistical programs and the activities proposed under
the periodic programs in 1964 follows.
R
aym ond
T. B
owman
,
Assistant Director for Statistical Standards.
116
ECONOMIC REPORT OF THE PRESIDENT
E x e c u t iv e O f f ic e o f t h e P r e s id e n t ,
B u r e a u of t h e B u dget,
Washington, D.C., January 17,1963.
PRINCIPAL FEDERAL STATISTICAL PROGRAMS INCLUDED IN THE
1964 BUDGET
The 1964 budget recommends the expenditure of $109 million to produce
statistics fo r the use o f business, Government and the public at large, compared
to an estimated expenditure of $87.7 million in the present fiscal year. Of the
total amount recommended, $91.9 million is for the regular or current programs
o f Federal statistics, compared with an estimated $74.3 million outlay this year,
a 24-percent increase. Provision for periodic statistical programs— the largescale census type surveys usually taken once or twice a decade—amounts to
$17.2 million in 1964, $3.8 million more than that available in 1963.
The objectives of the Federal statistical system are to provide accurate,
comprehensive, and timely data needed for the operations of the Government,
to achieve efficient utilization of Government statistical resources with minimum
burden on respondents, and to furnish the public with information about the
functioning o f the economy and the welfare of the people.
In planning the Federal statistical program for 1964, the continuing need
for prompt, reliable information was a primary consideration. In addition,
greater emphasis than heretofore was placed on meeting the needs fo r data
which cast light on the sources and character o f economic expansion—growth
studies— and on the problems o f local areas, particularly metropolitan areas.
This emphasis in the 1964 statistical programs results not only in the main
tenance of the present level of activity in growth studies as such, but also in
increased support of activities which are essential to economic projections and
the analysis o f growth patterns: the strengthening of basic statistical data on
manpower, production, distribution, capital outlays, and related activity.
The needs o f metropolitan areas and other localities for more detailed statistics
are recognized in recommendations to improve State and local estimates of
employment and unemployment, and to initiate programs which will obtain
a wide range of data for metropolitan and other local areas, including annual
estimates of income by source, current estimates of population and migration,
projections of future population, housing vacancy statistics, monthly retail sales
estimates and data on the finances o f local government units.
The statistical program for the coming fiscal year will also implement a num
ber o f the more important recommendations o f the President’s Committee to
Appraise Employment and Unemployment Statistics, which issued its report in
September 1962. Provision is made to extend and improve information not only
on the levels o f employment and unemployment in the Nation at large and on
employment in States and local areas, but also on a wide variety o f related
inform ation: employment estimates by occupation, job vacancy statistics, causes
o f labor force fluctuation, and more comprehensive data on hours o f work. An
increase o f about $4.0 million is recommended for employment and unemployment
statistics in fiscal 1964, about $2.6 million for the Bureau o f Labor Statistics,
about $1.0 million for the Bureau of Employment Security. Also included are
the funds shown below, under demographic and social statistics, fo r the Census
Bureau’s methodological research which will support efforts to strengthen em
ployment and unemployment statistics. Of the funds provided for the Labor
Department, about $1.5 million will be transferred to the Census Bureau for col
lection and tabulation o f household statistics.
The amounts recommended as obligations for current statistical programs in the
coming year (compared to estimated outlays this year and actual outlays in
fiscal 1962) are shown by broad subject matter areas in table 1. These amounts
are shown by agency in table 2 which also shows obligations for the periodic pro
grams, most o f which are conducted by the Bureau of the Census in the Depart
ment of Commerce. The increases shown for 1964 over 1963 reflect higher costs
o f existing programs in 1964, resulting from pay increases, as well as the costs of
the program additions or improvements. The figures do not include all current
Federal statistical activity, since some cannot be separated from operating pro
grams, but the coverage has been expanded over that o f last year’s special
analysis to include statistical activities o f the following agencies:
Bureau of Mines (Interior).
Bureau o f Old-Age and Survivors Insurance (H E W ).
Corps o f Engineers (DOD).
ECONOMIC REPORT OF THE PRESIDENT
117
Civil Aeronautics Board.
Interstate Commerce Commission.
Federal Home Loan Bank Board.
Housing and Home Finance Agency.
National Science Foundation.
Economic Research Service (Agriculture)— additional coverage of pro
gram.
Office o f Education (H E W )— additional coverage o f program.
A summary description of the new projects for 1964 included in the principal
current statistical programs and the activities proposed under the periodic pro
grams follows.
C u rren t P rogram s
LABOR STATISTICS
This area includes statistics on employment, hours, and earnings, by industry;
number and characteristics o f persons in the labor force, whether employed or
unemployed, labor turnover, wage rates, industrial relations, industrial hazards,
foreign labor conditions and productivity. Programs of the Bureau of Labor
Statistics in these areas and statistical programs o f the Bureau o f Employment
Security and the Bureau o f Old-Age and Survivors Insurance are included, as
well as the estimates o f farm labor requirements and supply prepared by the De
partment o f Agriculture and research on scientific manpower resources carried on
by the National Science Foundation.
Manpower and employment data
A general expansion o f statistical investigation in the field of manpower and
employment statistics reflects in large part the impetus provided by the recom
mendations of the President's Committee to Appraise Employment and Unem
ployment Statistics. In 1964, emphasis will be placed on experimental work to
sharpen labor force concepts, such as the criteria to be used in determining when
a person is unemployed; studies o f the factors affecting labor force participation;
methods of strengthening State and area manpower estimates, improving esti
mates of hours and worker productivity; and planning for a new series on job
vacancies.
This 1964 program to implement the Gordon Committee recommendations
does not represent the full cost of the Committee’s recommended program. Not
all the projects have been included at full scale for the first year, less urgent
projects have been postponed entirely until later years, and the methodology and
cost of carrying out other recommendations can be determined only after some
results have been obtained from the preliminary research and development work
provided for in this budget.
Experimentation and research in concepts and methods will be carried on
in part through setting up a panel o f households in addition to that now used
in the present current population survey. This new panel will be a representa
tive sample of the population, capable o f providing national statistics inde
pendently o f the current monthly series o f labor force estimates. Proposals for
addition to the present labor force questionnaire will be tried out on the new
panel ($1,320,000 B LS ).
The coming fiscal year will also see the beginning o f a long-range effort to
test and improve the reliability of State and local estimates of employment
and unemployment, now based only in part on current data. Data drawn from
administrative records o f unemployment insurance programs will be supple
mented by an increasing amount o f information drawn from special surveys
o f households and investigation o f employer records. Experimental work will
be conducted in at least two local labor market areas in the coming year
($700,000 B ES).
The monthly estimates o f employment and hours based on reports of employers
to State employment security agencies and the Bureau o f Labor Statistics will
be strengthened over a period o f 2 years. Samples o f reporting employers will
be enlarged for some industries, especially in the service trades, and increased
emphasis will be placed on obtaining estimates o f weekly hours. The employer
reports on employment and hours, now available for States and more than 100
major metropolitan areas, will be extended to an additional 50 urban centers
($525,000 B L S ; $230,000B E S ).
Among other projects provided for in the 1964 budget are—
(a)
Studies and analyses o f reasons for persons entering or leaving the labor
force ($190,000 B LS).
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ECONOMIC REPORT OF THE PRESIDENT
(6 ) Development o f estimates o f employment by occupation in major industries
($220,000 B L S ; $30,000 BES).
(c)
An annual survey o f hours and earnings o f supervisory, clerical, and other
nonproduction workers in manufacturing ($175,000 B L S ).
Planning for the initiation o f job vacancy statistics will be undertaken.
Analyses will be made o f the reliability and uefulness o f scattered data already
available on job openings, and an investigation made to determine whether
employer's records permit meaningful reporting o f vacancies ($50,000 B L S ;
$100,000 B E S).
Funds will also be provided both to the Census Bureau and the Bureau o f
Labor Statistics for major methodology research in different aspects o f manpower
statistics and in seasonal adjustment techniques.
An increase of about $400,000 for the National Science Foundation is included
to permit expansion o f the National Register o f Scientific and Technical Per
sonnel. In addition to providing for normal growth o f the register, these funds
will permit a wider coverage o f engineers and social scientists, and provide
current addresses for the registrants. This increase will also provide fo r addi
tional scientific manpower studies, with particular emphasis on solving problems
o f estimating the demand for scientists of various types.
Measurement of productivity
To improve the information on productivity and on the impact o f technological
change on employment, it is proposed to expand the present program by (a ) ini
tiating studies for important industries not now covered, such as construction,
trade, transportation equipment, chemicals, and machinery; (b ) undertaking
surveys o f producers and users of new equipment to obtain information on the
spread of new technology; and (c ) conducting exploratory work on the relation
ship of average industry productivity to “best plant” productivity ($125,000 B L S ).
Occupational outlook program
Research in occupational trends and outlook will be stepped up in fiscal 1964
to keep pace with the rapidly changing requirements o f the economy. Since 1957
both the content of the occupational handbook and the number o f inquiries about
the outlook for particular occupations have increased without a corresponding
increase in underlying research. The “ Occupational Outlook Handbook” and
related publications are depended on as the major sources of employment outlook
information in schools ($85,000 B LS).
Wage statistics
Community wage surveys will be made in an additional seven urban areas and
the sample coverage will be expanded in the 80 areas in which surveys are now
made each year. These changes are necessitated by the increase in the number
o f metropolitan areas and by industrial growth and population changes. It is
essential that these surveys be maintained on a sound technical basis in view o f
their wid*> use for private and governmental wage and salary adjustments, and
particularly their use in the appraisal of Federal pay scales ($80,000 B LS).
Fringe benefits expenditures
Additional funds are provided for accelerating and expanding the present pro
gram for collecting data on employer expenditures for employee fringe benefits
and on the composition of payroll hours—paid leave and hours at work. Fringe
benefits are an increasingly important part o f total compensation, and data on
hours at work are needed for more refined productivity measures. Information
will also be collected from private employers in connection with analyses of Fed
eral fringe benefits ($330,000 B LS).
Technical assistance and services in labor disputes
This project involves establishment o f a small staff to provide technical assist
ance and services to the Secretary of Labor, the Federal Mediation and Concilia
tion Service, public factfinding boards and special study commissions in connec
tion with major labor disputes. These services would include the preparation o f
background material ($80,000 B LS).
Employee benefit plans
Analytical studies o f the benefit, administrative, and financial aspects o f health
and insurance and pension plans will be started in the next fiscal year, utilizing
particularly the file o f such plans in the Office o f Welfare and Pension Plans o f
the Department o f Labor. Some studies will also be made o f other types o f em
ployee benefit plans ($55,000 B L S ).
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119
DEMOGRAPHIC AND SOCIAL STATISTICS
An increase o f about $3 million is recommended for demographic and social
statistics, raising total obligations to $13 million for this program in fiscal 1964.
Demographic statistics measure the population growth o f the Nation and its
political subdivisions and provide basic information on characteristics o f indi
viduals and fam ilies; included is the body o f data generally referred to as “ vital
statistics,” i.e., births, deaths, marriages, and divorces. Social statistics are con
cerned primarily with data on the well-being of people, their health, education,
and welfare.
Principal statistical programs included here are those relating to the above
activities in the Bureau o f the Census, the National Center for Health Statistics,
the Office o f Education, the National Science Foundation, and the Bureau o f Old
Age and Survivors Insurance.
Much of the information in this category, particularly with respect to popula
tion statistics, comes from periodic census programs, covered later in this report
Population statistics
Work on population statistics next year will proceed along a number of lines
in the Census Bureau as follow s:
(а ) In recognition o f the growing problems related to planning for cities
and areas, an annual series of population estimates covering about 100 local
areas in 1964 will be inaugurated by the Census Bureau, and assistance will
be furnished to other localities desiring to make their own estimates. Field
surveys will be used in a general effort to improve the methodology o f the
annual State estimates ($350,000).
(б ) Work will go forward on projections o f population growth through the
year 2000 under various assumptions. These estimates are basic fo r economic
and labor force projections and most forms of social and business planning
($105,000).
(c) Intensive work will be undertaken on population problems of urban
areas. These will include detailed surveys and studies o f causes of population
movements in and among cities, patterns o f family formation and growth,
shifts in the characteristics o f the population from day to night in central
cities, etc. ($270,000).
(d) Methodological research dealing with methods o f sampling and inter
viewing households, and other techniques for obtaining data will be greatly
expanded, with primary emphasis on methods for improving demographic,
housing, and labor force statistics ($530,000).
Health and vital statistics
An increase o f approximately $500,000 is recommended for the National
Center for Health Statistics, including about $200,000 for the national health
survey, $200,000 for vital statistics programs, and $100,000 elsewhere, principally
for electronic data processing.
The national health survey covers a wide range of health and health-related
topics through interviews, physical examinations, and records of institutions
providing hospital and other medical services. These data are compiled through
three major activities: the health interview survey, the health examination
survey, and the health records survey.
The recommended program provides for continued full-scale operation of
the health interview survey including support for methodological and develop
mental studies.
The health examination survey program for 1964 will, for the first time, cover
children aged 6 to 11. In addition, data resulting from the completed cycle
o f examinations for the population, aged 18 to 79, will be analyzed and pub
lished. The budget provides for development o f plans and procedures for the
next subsequent cycle of examinations looking toward a stabilized operation
in which simultaneously there are carried out (1) analysis o f data from one
cycle; (2) collection of data in a second cycle; and (3) planning for a third
cycle.
The health records survey in a series o f new steps will provide information
on the health of the institutionalized population, and especially for the aged
population in places which provide nursing, personal, and residential care.
Preliminary data will be assembled from records o f hospital discharges.
The recommended increase for vital statistics provides for (1) support on
evaluation and development of methodology and data to improve their quality,
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ECONOMIC REPORT OF THE PRESIDENT
utility, and timeliness; (2) a continuation o f census-related studies such as
the construction of life and actuarial tables; (3) assistance to the States in
improving methods of registration; (4) development o f more adequate statistics
on marriages and divorces; and (5) development and analysis o f additional
basic data relating to births and deaths utilizing followback techniques on
probability samples.
The increase recommended for the other activities o f the National Center
includes provision for more effective operation of newly installed electronic
data processing equipment and for analytical studies o f trends in general and
infant mortality.
Educational statistics
The Educational Statistics Division o f the Office of Education is making
progress in developing a more adequate system of reporting on current educa
tional statistics. In 1964, more effective control of statistical operations will
be established, the field staff working with State offices of education will be
strengthened and pilot projects initiated for improving data on teachers in ele
mentary and secondary schools, on school facilities, and on faculty in institutions
of higher education. In 1964 more projections of data will be made ($300,000).
Statistics on physical and social sciences
Programs o f the National Science Foundation, concerned primarily with
statistics and their analysis in the social sciences and the relationship o f the
physical to the social sciences, would be increased by $500,000. These addi
tional funds will permit the collection and analysis of data on the impact of
scientific advances and improved technology on the national economy, studies
of the effects on the economy o f the dissemination of scientific information, and
the development o f statistical projections of selected economic sectors.
Social security statistics
A net reduction of about $300,000 in the social statistics program of the Bureau
of Old-Age and Survivors Insurance for fiscal 1964 will result from the com
pletion in 1963 of a large-scale nationwide study of the health status and social
and economic characteristics of senior citizens. The decrease in this aspect of
the Bureau’s program offsets increases for actuarial studies and for activities
included under labor statistics.
PRICES AND PRICE INDEXES
This program area includes the collection and processing o f data for four
major price index series. The Bureau of Labor Statistics prepares the Con
sumer Price Index and the Wholesale Price Index. The Statistical Reporting
Service, Department o f Agriculture, compiles the indexes of prices paid and o f
prices received by farmers. About $5.6 million is provided in the 1964 budget
for current programs on the major indexes. (In addition, $1.3 million is
provided under periodic programs to complete the revision of the Consumer
Price Index.) Funds have also been provided to the Bureau of the Census for
preparation of an index of the prices o f new houses, for which data will
be collected as an integral part o f construction statistics program. Explora
tory work will also be done by Census on indexes of costs of land for residential
development.
Research being carried on by the Statistical Reporting Service on methodology
and the study of data collection problems peculiar to the areas of prices paid and
received by farmers is continued, as is also the price and index number research
for which the Bureau of Labor Statistics received appropriations this year.
Work initiated this year on restructuring the Wholesale Price Index on an
industry basis will continue. Additional funds ($112,000) are requested for the
Bureau of Labor Statistics to prepare indexes of prices paid for Governmentpurchased goods, beginning with GSA procurement; to develop techniques for
more accurately measuring changes in prices o f commodities imported and
exported; and to develop practical methods for obtaining more realistic wholesale
prices of commodities for which the differences between quoted and actual trans
action prices are significant.
ECONOMIC REPORT OF THE PRESIDENT
121
PRODUCTION AND DISTRIBUTION STATISTICS
This broad area, the largest of the groups used in this classification of Federal
statistics, includes the data gathering and analytical work o f the Statistical
Reporting Service and Economic Research Service in the Department of Agricul
ture on agricultural production, marketing, and distribution, and the statistical
activities of the Bureau of the Census in the Department of Commerce on
industrial production, distribution and service trades, foreign trade, transporta
tion, and related topics. This presentation also includes for the first time the
statistical activities pertaining to transportation in the Corps of Engineers in
the Department of Defense, the Interstate Commerce Commission, and the Civil
Aeronautics Board, and the mineral statistics in the Bureau of Mines in the
Department of the Interior.
Statistical reporting fo r agriculture
Nineteen hundred and sixty-four is the fourth year in the long-range plan for
improving crop and livestock estimates through the use of enumerative surveys
and objective measurements of yields on a probability sample basis. Work in 11
Western States in which pilot operations are carried on in 1963 will be placed on
a full scale and pilot work will be conducted in the remaining 13 States in the
East. One more year will, thus, be required before the long-range plan will be
in full-scale operation in all of the 48 contiguous States. An increase of $1,045,000
is included in the 1964 budget o f the Statistical Reporting Service for this
program.
A request for $106,000 is also included to provide for the development of new
and improved systems of automatic data processing. This action is necessary
to insure that the tabulations and calculations which are required for maximum
utilization of the new survey data are made within the stringent time schedule
which must be met for the official crop reporting board estimates and forecasts.
Agricultural economic research
Costs of expanded work in the three projects described below are partially
offset by a reduction of some $200,000 in the funds used to support research and
analysis in marketing economics.
Provision is made for expanding work underway in the Economic Research
Service on analyzing land requirements and potential production nationally,
and for selected land resource areas throughout the country. This additional
research will lead to estimates o f the acreage required to satisfy national
requirements for various products in the future, the optimum regional distribu
tion o f particular products as related to consuming centers and productive
capabilities of the land, and the acreages in each region which could be trans
ferred to new uses. Approximately $200,000 for research is recommended for
this work in order to provide a basis for more effective formulation and admin
istration of development and conservation programs dealing with millions o f
acres of farmland which are surplus for crop production purposes.
The current outlook and situation reports of the Department of Agriculture,
which provide appraisals o f economic prospects, demand, and prices for farm
products can be improved by strengthening the basic economic and statistical
analysis of agricultural commodities. The commodity research which backs
up these reports must take into account various alternative proposals for farm
programs In terms of their impact on farm output, prices, and incomes. An
additional $125,000 is allocated in the budget for expanded work in this area.
The budget also includes additional support ($185,000) fo r analysis o f foreign
agricultural production and consumption, country by country, and evaluation of
the impact of foreign activities on agriculture in this country. In this research,
particular emphasis will be placed on trade of the Common Market countries in
farm products and the impact o f changes in trading arrangements on U.S. agri
cultural exports.
Business statistics
This budget reflects the continuation o f efforts to improve statistical informa
tion on trade, particularly at the retail level: $110,000 is requested to produce
data on retail sales of all general merchandise, apparel, furniture, and appliance
stores for 40 additional metropolitan areas. This represents an increase from
the 20 largest areas for which such a program was initiated in the 1962 budget.
The weekly retail sales series, also initiated in 1962, on a small scale, requires
improvement. This series, which provides national estimates of total retail
sales with subtotals for sales of durable and nondurable goods stores, for general
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ECONOMIC REPORT OF THE PRESIDENT
merchandise, apparel, and food stores and for several other m ajor kind of
business groups, is based on a fixed subsample o f the larger sample included in
the monthly retail trade survey. This subsample needs to be expanded in
order to avoid the loss o f accuracy which follows deterioration in coverage.
About $85,000 is provided fo r this purpose.
Initiation of a new program to provide measures o f the physical and dollar
volume o f retail inventories of large consumer durables is recommended.
Initially the program aims at monthly measures o f the physical volume and
value of all large consumer durable items. Further development in subsequent
years would be expected to show data for such separate classes o f merchandise
as furniture, various types of appliances, and automobiles; $105,000 is requested
fo r this program in 1964.
Many important purposes served by retail trade data are not being met by
the kind of business statistics now published because o f the trend in recent years
for retail establishments to sell many different and almost unrelated lines of
merchandise. An amount of $50,000 is recommended to do the developmental
and experimental work needed to determine how best to collect such data.
Manufacturing and industrial statistics
New work is planned in the compilation and analysis of data on industrial
capacity and its utilization. Data on individual establishments available in the
files o f the Census Bureau can be tabulated and analyzed to provide measures
o f capacity or measures related to capacity, such as past peak output or physical
volume indexes fo r individual industries or product classes. The feasibility
o f obtaining direct estimates of capacity from industry in conjunction with
some o f the regular industry surveys will also be explored; $230,000 is included
in the 1964 budget for the Census Bureau to undertake this capacity statistics
program. Of this amount, approximately $100,000 is needed to organize and
analyze the historical data already available.
A series of monthly surveys of consumption and stocks of primary metals and
other basic materials will be initiated. These data showing changes in manu
facturer's inventories of basic materials will provide a sensitive measure of
business conditions and a leading indicator o f cyclical movements o f business;
$40,000 is requested fo r this project.
The program o f the Bureau of Mines provides for a survey of water use in the
mineral industries.
Foreign trade
The Bureau of the Census plans to adjust import statistics from f.o.b. (free
on board) values to c.i.f. (cost, insurance, and freight) values. The resulting
statistics will make our import figures comparable with those o f most other
countries o f the world who already report their imports c.i.f. This undertaking
is budgeted for $100,000.
Transportation
The Census Bureau proposes to compile a guide to sourccs o f transportation
data which will be useful to business and Government data users; $30,000 is
requested for this undertaking.
A series o f indexes o f the volume o f commodities transported by truck, water,
oil pipelines, and air—transportation sectors not now covered—is to be initiated
as part o f the transportation statistics program o f the Census Bureau; ultimately
a composite index o f all commodity movements reflecting the relative importance
o f and trends in all modes o f transportation will be available. Much o f the
essential basic information is already collected—for example, rail carloadings
are compiled by the American Association o f Railroads. In the case o f inland
waterways, pipelines, and air transportation, data can be obtained during fiscal
1964 through arrangements with other Government agencies or carrier associa
tions. Compilation o f data for other segments o f transportation such as inter
city trucking not reported by the American Trucking Association will require
study and exploration and $85,000 is included in the Census budget for this
undertaking.
The budgets of the following agencies also provide fo r some strengthening of
their statistical activities: Civil Aeronautics Board— a request o f $85,000 to per
mit additional economic research and to develop and partially implement plans
to improve the Board's origin and destination statistics program; Interstate
Commerce Commission—a request for an additional $145,000 to enable its eco
nomic research staff to handle a greater workload and to provide an economic
ECONOMIC REPORT OF THE PRESIDENT
123
counsel staff to aid the Commission in its major merger and rate cases; Depart
ment of Defense, Army Corps o f Engineers—a request for an increase o f $65,000
to produce ton-mile statistics by type o f carriage and to handle the added work
load resulting from increased domestic waterborne commerce.
County 'business patterns
The “ county business patterns” report, now compiled at intervals o f 2 or 3
years, is to be prepared and published on a regular annual basis. The report
provides county figures on the number o f establishments in operation by kind of
business, the quarterly payroll and employment during the week ending nearest
the 15th of March. Regular annual publication will permit a more realistic and
timely analysis of regional and local problems as they affect individual in
dustries and overall economic activity. An additional $160,000 is provided for
the Census Bureau to carry out this project.
CONSTRUCTION AND HOUSING STATISTICS
An increase o f almost $3.7 million, which would more than double the size
o f this program, is recommended for 1964. Construction and housing statistics
have not kept pace with other fields; the program proposed in this budget would
permit significant gains in the Improvement of existing series and in the de
velopment of hew data, particularly with respect to reporting current trends in
the housing market.
Provision is made fo r an increase o f $1,400,000 in funds available to the Bu
reau o f the Census to make essential improvements in the present housing starts
and value of work-in-place series ($315,000) ; to initiate quarterly series on
housing vacancies which will ultimately cover 35 standard metropolitan statisti
cal areas, and to provide technical assistance to localities wishing to make their
own estimates o f vacancies ($675,000) ; to begin publication o f construction price
indexes for new homes and to explore the possibility o f developing price indexes
for residential land ($105,000).
An increase o f $2,100,000 is recommended for the statistical and research
activities of the Housing and Home Finance Agency. The major part o f this
increase, $1,400,000, is for basic and analytical data concerning housing markets
and costs. It would permit extension o f the current new sales housing survey
to obtain data on new rental housing and on the characteristics of purchasers
and renters; the initiation of a statistical program for existing housing similar
to that for new housing; and the conduct o f analytical studies o f families in
relation to housing demand and o f the impact o f new construction and turnover
on the existing housing supply. Another $300,000 is provided to obtain data
on the housing problems of special groups such as the aged and minorities. An
allocation of $300,000 will permit inauguration of analytical studies in depth
on urban development and community services, o f which about a half would
be devoted to the collection of data on the impact o f relocation upon families.
Finally, $100,000 o f the increase is intended to be used for area economic studies
including development of techniques for the establishment o f metropolitan data
centers and the preparation of economic base studies.
Full-year operation o f the series on interest rates charged on conventional
mortgages and further strengthening o f the statistical program staff o f the
Federal Home Loan Bank Board are involved in the approximately $100,000
increase recommended for this agency.
NATIONAL INCOME AND BUSINESS FINANCIAL ACCOUNTS
About $9.5 million, an increase o f $1.6 million over the amount appropriated
for fiscal 1963, is recommended in 1964 for strengthening statistics relating to
national income, business, and financial accounts. Increasing emphasis is being
put on studies of factors affecting economic growth, on region detail, and on
international trade.
This area o f statistics embraces measurement and analysis o f business fluctua
tions, estimates o f national income and the gross national product, and the
compilation of data on the financial structure o f industry. Summary accounts
of the economic activities o f consumers, business, governmental units, and inter
national transactions are prepared.
In addition to all o f the activities o f the Office o f Business Economics, this
area includes the work o f the Internal Revenue Service in compiling statistics
from personal and corporate income tax returns; estimates o f farm income by
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ECONOMIC REPORT OF THE PRESIDENT
the Economic Research Service in the Department o f Agriculture; statistics on
the financial and other operations of State and local governments compiled by
the Bureau o f the Census; the financial reports program conducted jointly by
the Federal Trade Commission and the Securities and Exchange Commission;
and other economic statistical series compiled by the Securities and Exchange
Commission.
A number of the projects for which increases are being recommended in 1964
are part o f a long-range program set forth in a comprehensive review o f our
national accounts by the National Accounts Review Committee (a committee
organized by the National Bureau of Economic Research at the request of the
Bureau o f the Budget).
National income and 'business accounts
Estimates o f changes in national income and output, o f interindustry sales
and purchases, and o f U.S. balance o f payments are prepared in the Office of
Business Economics, Department o f Commerce. This Office also provides detailed
data on a monthly and quarterly basis on business trends.
The increase recommended for the work o f this Office would bring up to
an effective level three projects which had been initiated in fiscal 1968 and launch
three additional projects in 1964. Three projects to be brought to an effective
level this year a re :
(a ) Analysis of the impact of Government operations on business activity
and development of a functional classification for Government spending; a study
o f the time lag between Federal obligations and outlays will also be made
($30,000).
(b) Improvements in data measuring international transactions permitting
more accurate estimates o f the balance o f payments ($45,000).
(c) Development o f an annual series of estimates o f income for about 100
metropolitan areas, showing industrial sources o f income ($40,000).
Three new projects scheduled to begin in fiscal 1964 a re :
(а) Estimates of the distribution of personal income from the 1960 Popula
tion Census and other sources. This project is expected to provide more detail
on income sources and recipients than the 1953 study based on the 1950 census
($65,000).
(б ) A study of capital formation and use, involving (1) a study of how
capital gains and losses influence business decisions and (2) estimates o f the
value of capital stock by types and industry and an analysis of the relation of
investment to capacity and economic growth ($90,000).
(c) An assessment of factors influencing the demand for consumer goods and
services ($90,000).
State and local government accounts
(u) The Census Bureau will strengthen its program o f assistance to and
cooperation with State and local governments with the objective of achieving
better and more uniform Government statistics. The possibility o f a coopera
tive inservice training in the Federal Government for statistical personnel of
State and local governments will be explored ($86,000).
(6)
Annual data will be collected by the Census Bureau for 122 o f the largest
metropolitan areas covering local government employment and finances for each
area and its component counties. Thus far such data have been available
only at 5-year intervals from the census o f governments. Annual surveys will
provide information needed for the study o f government operations, and will
make possible comparisons from year to year and from area to area ($165,000).
(c) An annual directory of the more than 90,000 local governments will be
initiated. Information on local government units is now collected only once
in 5 years as a part o f the census o f governments. The number o f school
districts has been declining by an average o f 3,000 each year, while several
hundred new municipalities and special districts have been established. A
current directory will be o f use to both business and government, and will
facilitate taking the quinquennial census o f governments ($65,000).
National vmentory o f wealth
An exploratory and testing program will be undertaken by the Bureau of
the Census looking toward a census or national inventory o f wealth. A census
of wealth would provide, for the first time in our history, comprehensive bench
mark data on the types, uses, and age distribution o f structures and equipment,
as well as characteristics o f other tangible and intangible items o f wealth. The
amount o f $60,000 is recommended to cover the first phase o f planning.
ECONOMIC REPORT OF THE PRESIDENT
125
Financial accounts
Increased funds for the statistical program o f the Internal Revenue Service
are being recommended to handle (a) an increasing load of tax returns, (ft)
changes in tax laws and regulations, (c ) the need for better and more detailed
income statistics, and (d ) increased technical service furnished by the IRS
statistics staff to other groups and agencies. The enlarged flow o f data will
not only assist the Secretary o f the Treasury in the effective administration o f
the tax laws, but will make an important contribution to financial and income
statistics ($480,000).
A study will be made by the Census Bureau of methods by which quarterly
balance-sheet and income statistics can be developed for nonmanufacturing
industries, particularly retoil trade, wholesale trade, and the service industries.
$60,000 is recommended for this study.
The Securities and Exchange Commission will initiate statistics on the financial
position o f broker-dealers and make other improvements in statistics on the
securities markets ($38,000).
Economic growth studies
Interagency studies o f economic growth initiated in 1963 will continue. A
major objective of the studies is to provide projections o f the national economy
under alternative assumptions to determine the key variables in economic
growth. Studies of consumer and investment demand and capital formation
are included.
About $500,000 is included in the 1964 budget fo r growth statistics (th d sanr e
as in fiscal 1963). Use o f this amount will be as follow s: approximate.v tw<>
fifths for the Bureau o f Labor Statistics, two-fifths for the Office o f Business
Economics, and one-fifth for other agencies.
P e r io d ic P r o g r a m s
The periodic statistical programs for 1964 include provision for the major
censuses scheduled by law at 5- or 10-year intervals, and the revision o f the
Consumer Price Index. Funds are also included for preparatory work on the
national housing inventory to be conducted the following year and for the
second year of the 2-year program to modernize the automatic data processing
equipment in the Census Bureau.
Census of governments, 1962
The sum o f $0.4 million is requested to complete the tabulation and publica
tion of data obtained from some 90,000 local governments. The census o f
governments covers four broad subjects: Governmental organization, public
employment, taxable property values, and governmental finances (revenue, ex
penditures, debt, and financial assets). The total cost of this census, over a
4-year period, is estimated at $2.6 million. Emphasis is being given in the pub
lication program to the presentation o f more data on all subjects for metropoli
tan areas.
Economic censuses, 1963
These censuses cover business, manufactures and mineral industries, and
transportation. Preparatory work for them was started in 1962. The total
cost is estimated at $19.6 million, o f which $8.6 million is provided fo r 1964.
For the census o f business approximately 70 different report forms, tailored to
the 412 different kinds o f businesses, will be mailed to nearly 2% million estab
lishments engaged in the retail, wholesale, and service trades. Sample surveys
will be designed to obtain supplementary information on capital expenditure,
retail credit, value added, and other items not requiring reports from all estab
lishments in the various trades. Completed reports will be received and the
initial editing and electronic computer processing will begin. The main part
o f the work of tabulations and preparation o f data for publication will be done
in fiscal 1965.
The census of manufactures covers some 300,000 manufacturing plants in
430 separate manufacturing industries; the census of mineral industries in
volves obtaining reports from 35,000 establishments in 55 individual mineral
industries. The work schedule for these censuses is similar to that in the
business censuses, i.e., printing and mailing o f report forms, followup o f com
pleted reports, editing, coding, and preparation for computer processing.
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ECONOMIC REPORT OF THE PRESIDENT
The census o f transportation consists o f four major segments: (a ) A com
modity transportation survey will provide data on the transportation and
geographic distribution o f products by manufacturers, showing the means o f
transport, origin, destination, type o f commodity and weight o f shipments; (6)
a national travel survey will collect data on selected factors o f passenger
transportation of major significance in local or urban transportation, as well as
information on the volume and nature o f trips beyond the local area; (c) a
survey to obtain data on the inventory and use of private and for-hire trucks;
and (d ) a bus and truck carrier survey will obtain data for those carriers not
subject to the economic regulations o f the Interstate Commerce Commission.
The census o f transportation, as required by the census law, is designed to pro
vide information which is not compiled and published by regulatory agencies
and will thus provide for the first time data not otherwise available.
Census o f agriculture, 1964
This is the second year for which funds are budgeted fo r work in connection
with the census of agriculture to be taken in the fall of 1964. In addition to
the usual work on preparing forms, training materials, administrative controls,
and pretesting plans call for a sample survey to be conducted in the fa ll of
1963 covering certain items o f information not required for small area tabula
tions and not necessary or feasible to be included in the full-scale enumeration.
nineteenth decennial census
Funds for 1964 in the amount of $700,000 are requested to do research and field
testing o f procedures intended to permit effective use o f a list of household
addresses in the conduct o f the 1970 census o f population. This project, to
be carried on during the next 2 years, will test the feasibility of a plan to
use a list o f households, initially available from the 1960 census and maintained
on a current basis, as a principal means of distributing questionnaires to be
used in the 1970 census. I f feasible, the use of mailing lists and related pro
cedures will reduce the cost and improve the quality and timing o f the 19th
decennial census.
National housing inventory
The national housing inventory to be taken in fiscal 1965 will require prep
aratory work in 1964. This inventory will provide data on the number, size,
quality, and characteristics o f the Nation’s housing, and of the housing in 25
standard metropolitan statistical areas. During fiscal 1964, planning activi
ties, for which $210,000 is recommended, will be concentrated on the development
and field testing of enumeration schedules and procedures, sample design, and
development o f processing methods.
Modernization o f computing equipment
The sum o f $4.6 million is provided to complete the 2-year program fo r which
funds were initially appropriated in 1963 for the Bureau of the Census to
modernize its electronic computing facilities. During 1964 an additional largescale computer and necessary peripheral equipment will be installed and the
training o f personnel and the conversion o f procedures necessary for the use
o f the new computers will be completed.
Revision of Consumer Price Index
This budget provides $1.3 million as the final installment on the 5-year
program for the revision o f the Consumer Price Index. Work on test indexes
will be carried on until compilation and publication o f the Index on the revised
basis begins in January 1964.
In addition to providing the revised weights necessary fo r the CPI, the
information collected in the survey of consumer expenditures will be tabulated
and published so as to permit detailed analysis o f the patterns o f consumer
spending in relation to incomes, occupations, sizes of families, and other family
characteristics.
The funds requested for fiscal 1964 include $300,000 for conducting consumer
expenditure surveys in 6 additional areas which, with the areas already sur
veyed, will provide the weights necessary to publish price indexes fo r all 22
standard metropolitan statistical areas with 1960 population over a million
persons.
ECONOMIC REPORT OF THE PRESIDENT
T a b l e 1. —Direct
127
obligations for principal current statistical programs, by broad
subject areas
[In millions of dollars]
Program
1962 actual
Labor statistics (Departments of Agriculture, HEW , Interior,
and Labor; National Science Foundation).............................
Demographic and social statistics (Departments of Agricul
ture, Commerce, and HEW ; National Science Foundation).
Prices and price indexes (Departments of Agriculture and
Labor).......................................................................................
Production and distribution statistics (Departments of Agri
culture, Commerce, Defense, and Interior; Civil Aeronautics
Board; Interstate Commerce Commission)..... .......................
Construction and housing statistics (Department of Com
merce; Federal Home Loan Bank Board; Housing and
Home Finance Agencv)............................................................
National income and business financial accounts (Depart
ments of Agriculture, Commerce, and Treasury; Securities
and Exchange Commission, Federal Trade Commission)._ .
Total, principal current programs.......... ..........................
N o t e .—
1963 estimate 1964 estimate
16.6
18.6
23.9
8.1
9.9
13.0
4.4
5.2
S. 6
26.7
30.0
33.5
2.3
2.7
6.4
6.4
7.9
9.5
64.4
74.3
91.9
Detail will not necessarily add to totals because of rounding.
T a b l e 2.—Direct
obligations for principal statistical programs, by agency
[In millions of dollar?]
Agency
1962 actual
1963 estimate 1964 estimate
C U R R E N T PRO G RAM S
Department of Agriculture:
Economic Research Service___________________________
Statistical Reporting Service__________________________
Department of Commerce:
Bureau of the Census_________________________________
Office of Business Economics__________________________
Department of Defense: Army Corps of Engineers: Water
borne commerce statistics_______________________________
Department of Health, Education, and Welfare:
Bureau of Old-Age and Survivors Insurance: Statistical
activities- ................................................................ ...
Office of Education: Educational statistics............
Public Health Service: National health statistics__ —___
Department of the Interior: Bureau of Mines: Mineral sta
tistics_________________________________________________
Department of Labor:
Bureau of Employment Security: Statistical activities___
Bureau of Labor Statistics.
_
Treasury Department: Internal Revenue Service: Statistical
reporting_______________ _________________________ _____
Civil Aeronautics Board: Statistics said research____________
Federal Home Loan Bank Board: Statistical reporting______
Federal Trade Commission: Financial reports_____________ _
Housing and Home Finance Agency: Urban studies and hous
ing research__________________________________________ _
Interstate Commerce Commission: Transport economics and
statistics_____________________ ______ ______ ____ __ _____
National Science Foundation: Statistics and research............
Securities and Exchange Commission: Operational and busi
ness statistics, ......................................... ........................ ........
Total, current programs_____________ _______________
9.1
8.7
9.5
10.0
10.4
11.6
10.7
1.6
12.8
1.9
17.3
2.4
.9
.9
1.0
2.8
1.1
4.5
3.4
1.3
5.2
3.3
1.8
5.9
2.0
2.2
2.3
1.5
12.7
1.7
14.6
2.6
18.7
3.4
.4
.4
.3
4.4
.5
.5
.3
4.9
.5
.7
.3
.4
.4
2.5
1.3
2.3
1.4
3.0
1.5
3.9
.3
.3
.3
64.4
74.3
91.9
P E R IO D IC P R O G R A M S
Department of Commerce: Bureau of the Census:
1958 economic censuses________________________________
18th Decennial Census________________________________
1962 Census of Governments____ ____ __________________
1963 economic censuses................................... ............ .........
1964 Census of Agriculture.................. .............. ..............
Modernization of computing equipment___ _____ _______
Preparation for 19th Decennial Census_________________
National housing inventory............... ............ ........... .........
Department of Labor: Bureau of Labor Statistics: Revision
of Consumer Price Index..........................................................
0.2
6.7
.9
1.0
2.1
2.8
1.3
3.1
.7
4.0
1.5
.4
8.6
1.3
4.6
.7
.2
1.3
Total, periodic programs_______ ______ ______________
10.9
13.4
17.2
Total, principal statistical programs.*________________
75.3
87.7
109.1
128
ECONOMIC REPORT OF THE PRESIDENT
Chairman Douglas. Unless someone else has a question which they
feel they must ask, we thank Mr. Gordon and his associates. We
appreciate your coming. Your testimony was excellent and I enjoyed
the questioning.
We will meet this afternoon at 2 o’clock when Secretary Freeman
will be the witness.
(Whereupon, at 12:30 p.m., the committee adjourned to reconvene
at 2 p.m. this same day.)
AFTERNOON SESSION
Chairman Douglas. We are very happy to have you, Secretary
Freeman. We appreciate your coming.
I see that you have a very brief statement, so will you start in,
please?
STATEMENT OP HON. ORVILLE L. PREEMAN, SECRETARY, U.S.
DEPARTMENT OP AGRICULTURE
Secretary Freeman. If I may, sir. Thank you, Mr. Chairman.
Mr. Chairman and members of the Joint Economic Committee,
the situation in American agriculture—the progress we have made in
the past 2 years as well as our need to consolidate and extend that
advance—calls for full support of the principles and policies ex
pressed in the Economic Report of the President.
I should like to summarize the significance of the President’s report
as it relates to agriculture under four headings.
I. The improvement of the past 2 years in farm income, and the
effect of this rising farm income on nonfarm employment and sales.
II. The potential effect on farmers of the tax reduction proposed
by the President.
III. The significance for agriculture of other measures proposed
by the President to promote faster growth, especially measures for
education and manpower development.
IV. The overall importance to agriculture of full employment and
accelerated economic growth.
In addition, I should like to call to your attention the emphasis
given by the Council of Economic Advisers, in its annual report to
the President, of the importance of the role of agriculture in our in
ternational trade position.
Improved farm income: The past 2 years have seen a meaningful
increase in farm income. Net farm income in 1962 was a billion
dollars more than in 1960. Even of more personal interest to each
farmer was the average increase in net income per farm of about
$450.
This figure, incidentally, is a national average and would be sub
ject to local differences which might be the product of special local
conditions.
This is a significant average increase of nearly 15 percent, raising
the average income of $3,075 per farm in 1960 to an average of $3,525
in 1962.
ECONOMIC REPORT OF THE PRESIDENT
129
This trend is encouraging. The need for further improvement is
highlighted by the fact that average per capita farm income is still
under 60 percent of the average nonfarm income.
More prosperity on the farm very quickly is translated into greater
prosperity in our towns and cities.
This fact is sometimes overlooked and I think can be and should be
properly emphasized.
Between 1960 and 1962 gross farm income increased over $2*4
billion. This has had a pervasive stimulating effect on the economy,
and particularly in the smaller rural communities that are closely
associated with agriculture. The increased flow of income to farmers
in the 2-year period generated roughly 200,000 additional jobs, ranging
from the rural trading centers to the large industrial centers such as
those where much of the farm machinery industry is concentrated.
USDA is now studying the effect on Main Street of increases in farm
income. Some preliminary estimates of this study now underway are
presented here.
Increased farm income brings more jobs in industry; for example,
the increase in farm purchasing power was translated into increased
sales of farm machinery. Between 1960 and 1961, the value of tractor
shipments for domestic use rose 23 percent. The domestic shipments
of other farm machines and equipment increased only slightly in 1961.
But in the first 9 months of 1962, the value of shipments both of
tractors and of other farm machinery ran some 8 percent above the
same period in 1961.
This increased activity in farm machinery, flowing out of the en
larged farm purchasing power, showed up in increased employment
and a sharp reduction in unemployment in the important farm
machinery industrial centers.
In Peoria, 111., the unemployment rate dropped from 5.6 percent in
September 1960 to 3.4 percent in September 1962.
In Rockford, 111., the rate dropped from 4.6 percent in September
1960 to 3.7 percent 2 years later.
In the Davenport-Rock Island-Moline area, the unemployment rate
dropped from 4.6 to 2.9 percent.
In Racine, Wis., unemployment in September 1960 was 4.9 percent
of the work force. In September 1962 it was down to 4.1 percent.
Chairman Douglas. Mr. Secretary, I notice that you forecast very
accurately which members of the committee would be here this after
noon.
Secretary Freeman. Thank you, Mr. Chairman. This is one of
the main efforts of any Cabinet officer.
Representative Griffiths. Mr. Chairman, may I say something?
Chairman Douglas. Mrs. Griffiths.
Representative Griffiths. I would like to point out that Rockford,
111., is going to take some business away from Detroit. Under the
circumstances he has presented here, I do not think it is necessary
for themto get it.
Secretary Freeman. Mr. Chairman, may I please not get involved
in that?
These recent rates of unemployment in farm machinery centers are
significantly below the rate for the Nation as a whole and are generally
at levels associated with full employment.
130
ECONOMIC REPORT OF THE PRESIDENT
The events in the farm machinery industry are clear illustrations of
the beneficial effects of the increase in farm income on employment
opportunities in industrial centers substantially removed from the
farm production line.
Increased farm income invigorates the small town: The attached
table shows the increase in farmers’ expenditures between 1960 and
1962 for some important catejgories of goods and services used in farm
production and in farm family living.
According to a survey of farmers’ expenditures made some years
ago, most of farmer purchases of these items are made in small towns
and cities. Based on that survey, it is estimated that more than $1.1
billion of the increased farm income between 1960 and 1962 was spent
in towns with populations of less than 5,000 and more than $1.5 billion
in places of less than 30,000 people. These figures are probably low
since no information is available on the distribution of certain cate
gories of expenditures.
It is evident that the increased expenditures by farmers for the wide
variety of things they buy has been directly of benefit to the mer
chants of Main Street whether they deal in tractors, automobiles, feed,
fertilizer, building materials, food, clothing, gas and oil, and so forth.
This development has invigorated the small merchant and the rural
community which were subjected to increasing economic pressures
during the 1950’s essentially as a result of declining farm income.
There is other evidence of an improved situation in rural commu
nities stemming from the increase in farm income. In 618 selected
agricultural counties, total deposits in insured commercial banks on
December 31,1961, rose $408 million, or 6 percent, from a year earlier.
In these selected agricultural counties, there was $7.2 billion on de
posit December 31, 1961, in insured commercial banks.
Also, in trading centers under 15,000 in population, deposits in in
sured commercial banks on December 31,1961, was $37.4 billion, $2.2
billion, or 6 percent higher than on December 31, 1960. Thus, local
funds have been built up to provide the means for increasing invest
ment and more rapid economic growth in rural areas.
I have some specific county illustrations, where the close relation
ship between farmers and Main Street is illustrated by the following
developments which occurred in 1961 as compared with 1960 in se
lected farm-oriented counties in different types of farming areas dis
tributed around the Nation.
I won’t burden you to read those to you. Suffice it to say they are
widely distributed and they show a repeating relationship between in
creased cash income on various kinds of farm enterprises and county
retail sales.
Conversely, the relationship works the other way. Where there
has been a decline in farm income, there has been a decline in trade.
On top of page 6 there are some examples, where a decline in farm
income for a number of reasons, primarily weather, drought, has
resulted in fewer sales on Main Street.
This study, I hasten to add, is not completed, but it is one we are
going to try to complete and keep up to date, because if I might
repeat, I think the very significant relationship between agriculture
and other employment and economic activity, with labor and people
working in the shops, and with small merchants and the dollars that
ECONOMIC REPORT OF THE PRESIDENT
131
flow through their tills, is very often overlooked. Agriculture has
a very strong and persuasive effect on the Nations economic well
being.
No. II, the effect of tax reduction on farmers: The most immediate
impact of tax reduction on agriculture is the cut in tax payments.
Farm people now pay about $1% billion in Federal income taxes.
Most of this comes from taxpayers in the lower brackets. We esti
mate that the 3-year reduction m tax rates will reduce the tax liability
of farm people by $250 to $300 million, or about 20 percent, with a
corresponding increase in the amount of income, after taxes, that
farmers have at their disposal.
Besides providing some relief from the continuing cost-price
squeeze, this tax saving will enable farmers to increase their purchases
of farm machinery, equipment, and other industrial products. It
will also enable them to increase their purchase of consumer goods
so as to enjoy a higher level of living.
Capital gains: Reduction of the rates on capital gains will be of
significant benefit to farmers. Over the years, a large part of the
total profit in farming has taken the form of capital appreciation in
land.
A man who bought a farm in 1940, for example, and sold it in
1962, would realize a very substantial capital gam. Reports of the
Internal Revenue Service indicate that roughly 100,000 returns filed
in 1959 showed capital gain or loss from sale of farmland.
Tax benefits to the aged: Almost 10 percent of the rural farm popu
lation—about 1.3 million persons—are 65 years old or older. Another
1.3 million will reach that age within 10 years.
The proposed changes in the tax treatment of older people thus is
of direct concern to these farm people.
Under existing law a taxpayer can take an additional $600 exemp
tion. The proposed change would eliminate the additional $600 de
duction and replace it with a $300 credit against taxes otherwise
owing. Nearly all farm taxpayers over 65 will realize a tax saving
from the substitution of a $300 tax credit for the $600 extra exemption.
Many will be exempt altogether.
Averaging of income: Returns from farming in many areas of the
country vary greatly from year to year, depending on the vagaries of
the weather, changes in farm prices, and other factors. For exam
ple, a typical Winter wheat farmer in the Southern Plains had a net
income in 1957 which was three times his net income in 1956.
Farmers in these areas must therefore depend on their earnings in
good years to carry them through the bad years. Present revenue
laws discriminate against individuals whose incomes fluctuate in this
fashion. A proposal for averaging incomes over a period of years,
which the President has indicated will be submitted, would relieve
many farmers of this tax penalty.
Depreciation reforms: while not part of the President’s 1963 tax
proposals, the depreciation reforms put into effect last year have
been of notable benefit to farm taxpayers. According to Treasury
Department estimates, the annual tax saving to farmers from liberal
ized depreciation rules approximates $90 million.
Education and manpower development: interdependence in the
American economy is such that all measures designed to promote
132
ECONOMIC REPORT OF THE PRESIDENT
faster growth in general will be reflected, in the long run, by ad
vantages to agriculture. But two proposals in the President’s Eco
nomic Report are of especial significance.
Improving educational opportunities by measures to insure a more
adequate flow of resources into education are of particular concern
to rural areas. In much of rural America there is great need for
greater educational opportunity, for both children and adults.
The proportionate number of people needed in farming is steadily
declining. Underemployment prevails in our depressed rural areas.
Technical and vocational training is needed to provide nonfarm op
portunities for many who cannot find opportunity in agriculture to
earn an adequate living.
The President’s recommendation of a Youth Employment Oppor
tunities Act, to develop the potential of untrained and inexperienced
youth and to provide useful work experience is one in which we are
also especially concerned. Farm youth, as well as young people in
the cities, will gain from increased opportunities to qualify for and
to find constructive employment.
I might add, there is almost unlimited opportunity for constructive
and sensible investment in the Nation’s forests, of which 186 million
acres are within the jurisdiction of the Department of Agriculture,
and a lot of which we would like to get to work on.
Probably the most significant benefit to agriculture is that flowing
from the general economic stimulation this tax reduction will produce.
Each year a large number of farm people, many of them youths just
entering the labor market, go into nonfarm occupations.
The nonfarm-economy benefits from this influx of trained and pro
ductive workers, agriculture benefits from reduction in underemploy
ment and unemployment in that sector, and all workers, farm and
nonfarm, benefit in being able to earn more satisfactory income.
A lagging economy, with large-scale unemployment, can make only
limited use of the workers an increasingly efficient and productive
agricultural sector is making available. By stimulating economic
activity throughout the country, this tax reduction can open up jobs
for farm youth, aid in the development and revitalization of the local
economy of rural areas, and enlarge part-time employment opportuni
ties off the farm.
Agriculture and international trade: I would like to call your atten
tion to the recognition given to the role of agriculture in international
trade by the Council of Economic Advisers, particularly in chapter 4
of its report. USDA’s program to promote the export of agricultural
products and commodities is noted. Support is given to the position
this Nation has taken to try to keep open the market for our farm
products in the EEC. Its importance is indicated by this paragraph
from the CEA report.
How the community implements its common agricultural policy will deter
mine, more than anything else, how the nations o f the free world develop their
agricultural policies—whether these policies are internationally or nationally
oriented, whether they promote efficient production and competitive trade or
lead to protected national and regional markets in which resources are used
inefficiently. The community’s agricultural policy will also affect the entire
course of free world commercial policy. Industrial and agricultural trade are
closely interrelated and it would be difficult and shortsighted to try to maintain
highly protective barriers in one and free competition in the other.
ECONOMIC REPORT OF THE PRESIDENT
133
(The unread portion of the statement of Secretary Freeman is as
follows:)
S p e c if i c C o u n t y I l l u s t r a t io n s
The close relationship between farmers and Main Street is illustrated by the
following developments which occurred in 1961 as compared with 1960 in selected
farm-oriented counties in different types of farming areas distributed around
the Nation.
Cash farm income on representative dairy farms in Sullivan County, N.Y.,
increased 2 percent in 1961 over 1960; retail sales in that county over the same
period increased 1 percent.
On typical dairy and hog farms in Dodge County, Minn., cash income was up 6
percent; county retail sales up 3 percent.
Cash income on typical egg farms in Cumberland County, N.J., was up 1 percent
from 1960 to 1961; county retail sales moved fractionally higher.
In Desha County, Ark., cash income on typical cotton farms rose 15 percent;
retail sales were up 2 percent in the county.
Cash income on typical sheep and cattle ranches in Greenlee County, Ariz.,
was up 16 percent in 1961 over 1960; retail sales were 13 percent higher.
On representative cattle ranches in Johnson County, Wyo., cash income rose
38 percent; retail sales rose 2 percent in that county.
Cash income on representative hog fattening and beef raising farms in Linn
County, Mo., was up 11 percent; retail sales in the county were up 2 percent.
On typical hog and dairy farms in Clayton County, Iowa, cash income rose
14 percent; county retail sales were about 2 percent higher.
Cash income on typical cash grain farms in Jasper County, 111., rose 8 percent *y
retail sales were up 4 percent in that county.
On representative tobacco farms in Jones County, N.C., cash income increased
5 percent; retail sales went up 3 percent.
In Early County, Ga., on typical peanut and cotton farms, cash income went up
11 percent; retail sales in the area rose 3 percent.
But the relationship also works the other way. That is, a decline in farm
income diminishes trade.
On typical wheat and small grain and livestock farms in Bottineau County,
N. Dak., cash income dropped 49 percent due to drought conditions; retail sales
in the county declined 4 percent from 1960 to 1961.
Cash income on typical wheat and com and livestock farms in Dickey County,
N. Dak., was down 5 percent; county retail sales were also down 5 percent
In Lincoln County, Wash., on typical wheat and fallow farms, cash income was
down 2 percent; retail sales in the county dropped about 5 percent.
In the Winter wheat area, cash income on typical farms in Rawlins County,
Kans., dropped 3 percent; retail sales in the county were down 2 percent from
1960 to 1961.
How and where farmers spent their additional income in 1962 (increases of
expenditures by farmers, by item and by size of place where purchases were
made)
[In millions of dollars]
Expense item
Feed_______________________________________
Tractors___________________________________
Automobiles________________________________
Fertilizer, lime, and pesticides_____ - _________
New construction___________________________
Repair and operation of buildings____________
Food_______________________________________
Clothing___________________________________
Household furnishings_______________________
Subtotal_________________ ____________
Other and savings__________________________
Total................ ..........................................
Total increase
1960-62
Estimated expenditures in towns with
population of—
Under 5,000
5,000-29,999
438
131
185
63
133
152
330
160
95
337
86
98
47
96
109
234
67
55
88
34
57
13
31
35
75
56
29
13
11
30
3
6
8
21
37
11
1,687
892
1,129
418
140
2,579
30,000 and
over
134
ECONOMIC REPORT OF THE PRESIDENT
Chairman Douglas. Thank you, Mr. Freeman. I want to commend
you for coming without a bevy of assistants and associates at your
elbow and being willing to face this committee, simply equipped with
your knowledge and information.
I am going to ask Congressman Reuss to begin the questioning.
Representative Reuss. Thank you, Mr. Chairman.
Mr. Secretary, I want to congratulate you on the forthright and
aggressive job you have been doing in connection with the last point
you mentioned, maintaining and trying to expand our agricultural
exports.
You have said many times, in Brussels and other places, in the last
year and a half, how vital this is, and I think your performance
before various international bodies could well be a model for other
representatives of the United States, even though so far, as who knows
better than you, you have not----Secretary Freeman. Moved mountains.
Representative Reuss. You have not been able to bring back the
bacon.
I would like to ask you this: Under Secretary Murphy testified be
fore a subcommittee ox the Joint Economic Committee in December,
last month, on just this question—the impact of the proposed Common
Market variable levies on our U.S. exports. His testimony was to
the effect that the ultimate imposition of those levies in their most
exclusionary form, particularly if the Common Market were ex
panded, could have an almost catastrophic impact on our farm exports.
A figure as large as half a billion dollars a year was mentioned as a
possible loss in our present export level.
Is that substantially your estimate of the magnitude of the
problem ?
Secretary Freeman. If you combine the fees with the establishment
of a high internal price structure, which would encourage additional
production, it would have exactly that effect.
Representative Reuss. And much of the production, as the Eco
nomic Report points out, would be not only close to disastrous for
this country’s agricultural picture and balance-of-payments situation.
In the long run, it would be bad for the very countries that were
attempting it, because it would divert workers from doing that which
they can do most productively to doing that which they do relatively
inefficiently.
Isn’t that an additional point?
Secretary Freeman. Yes, sir; I certainly think it is. In a number
of the countries where the agriculture is based on small and generally
inefficient units, and where they face at the same time a literal labor
shortage and are actively recruiting labor from outside countries, it
seems to be economically unsound to continue this kind of relationship
and to exclude more efficient agricultural production which could
come in at a lower cost.
Representative Reuss. Let me ask you this question. Fortunately,
you are a lawyer, and since this question is----Secretary Freeman. Did you say “fortunately” ?
Representative Reuss. Since this question is somewhat legalistic,
the Common Market was allowed to be set up under a section of the
General Agreement on Tariffs and Trade which says that a customs
ECONOMIC REPORT OF THE PRESIDENT
135
union or free trade area is permissible when, and only when, its
tariffs and other arrangements after the union has been set up are no
more restrictive than was the situation beforehand.
Secretary Freeman. Right.
Representative Reuss. That is article 24 of GATT.
Now, in fact, if the Common Market starts reducing agricultural
imports from the rest of the world, including the United States, in
any way so as to disadvantage this country or any other signatory
country in GATT, below the 1957 level when the Common Market was
set up, this constitutes a violation of the GATT agreement itself,
does it not ?
Secretary Freeman. I think it does; yes.
Representative Reuss. I am glad to hear you say that, because that
is the way I read the agreement, too.
So far, you have not actually tried to press that point.
You have sort of thrown yourself on the mercy of the Common
Market members.
Secretary Freeman. That is not, Congressman, completely accurate.
As a matter of fact, one of the reasons why the President insisted,
before the 24-6 agreements were signed, that there should be a
standby agreement, which we have, which Mr. Murphy went to
Europe to negotiate before that was closed which provides that our
rights in the variable fee items as of September 1960 are continued,
and those entitlements remain.
Now as you know, the question of comparing compensation and
rights under GATT rules is an extraordinarily complicated affair
and there will be quite a problem of trying to define precisely what
they are.
We have tried initially to impress upon the Commission and the
Six as a whole that, first, in the case of poultry, their fees should be
kept to a reasonable minimum; second, to urge that the application of
the gate prices they have applied is, we think, illegal under GATT
rules as well, and to urge a moderation in the application of these fees
where poultry is concerned, and a number of things have been done,
and some little things have been accomplished.
Where the grains are concerned, we have felt that our first target
ought to be to try to urge upon them the establishment of a reasonable
common internal price. This is vital because an arbitrarily high
price will obviously encourage more production. These have been
our initial points for pressing reasonable action on them.
We have also, at all times, reserved our legal rights. They don’t
necessarily agree as to the extent of those rights and this may very
well be a matter of actual litigation, as we plan our course of action in
the days immediately ahead.
Representative Reuss. I am delighted to hear you say that, not that
I want to suborn litigation, but I think it should be recognized that
here we are talking about a matter of legal rights. We are some
thing more than just a suppliant at the mercy of our bargaining
partners.
One more question on this whole matter of agricultural exports,
again, a very general question, I am afraid. By and large, recogniz
ing the differences that prevail between various commodities and hay
ing determined that we must see to it that the farm community of this
136
ECONOMIC REPORT OP THE PRESIDENT
country is not too far disadvantaged with respect to the rest of the com
munity, we would do better, in our exports, would we not, by a farm
program which supplements farmers’ incomes by production pay
ments direct to the farmer rather than by a system of high price sup
ports, or price supports of any sort ?
I realize that this isn’t an either-or question, but do the best you
can with it.
Secretary Freeman. I would rather respond to that question more
in terms of particular commodities, I think, and might I preface my
answer by saying I would like the record here to show, and I think the
committee is aware of this fact, that in terms of its agriculture, we are
a free^trade nation as compared to most nations of the world.
The restrictions on agricultural imports that we have are nominal
as compared to most nations.
There are only a very few commodities where we have other than
fairly low tariffs and those are ones where we do have price supports
which necessitate some kind of internal protections, or we would be
flooded from outside. As I say, most countries have many more pro
tections and many more restrictions than we do.
Representative Reuss. If I may interrupt you at this point, Mr.
Secretary, Would you furnish for the record at this point a summary
of the U.S. restrictions on agricultural products compared with that
of other leading agricultural countries ?
Secretary Freeman. I would be very pleased to, because this is a
point that is not generally recognized and it has been thought that we
were highly protective by many people who are generally well in
formed m the economical realm, and now as we are seeking to nego
tiate with some other countries, it becomes important that this is
understood. It is always, of course, important.
I would also like to make the point that what we are talking about
in terms of our markets are two things:
First, our ability to compete in other markets on a price basis, where
generally we can compete very well. This is not true of every com
modity. Then, there, in the Common Market, we are not talking
about price at all, we are talking about access to market, because the
items we are having difficulty with in the Common Market are the
items they produce themselves. In this instance, their internal prices
are higher than ours. If we had access to that market on a competi
tive basis, why, we would be in clover.
Now to come to your other question, I would say: Yes; this recog
nizes some of the very practical problems of putting into effect a
production payment program and we now see in our Federal grain
program where there are other payments and where there has been,
nor have we a need to have any export subsidy program under this
arrangement.
We on the other hand, to take wheat for a moment, do have. But
under the proposed program, the program called for in the wheat
referendum, we would be moving toward a world price through, in
this case, a two-price system.
Actually, the purpose of all farm programs is to bring about a
fair balance between supply and demand so the farmer will get a
fair price in the marketplace, not to give him any subsidy as such,
but to give him some tools with which he can work as do other seg
ECONOMIC REPORT OF THE PRESIDENT
137
ments of our economy, so that he can balance out his supply in relation
to demand, because there is a more inelastic demand for agricultural
products than almost anything else.
If you wish, while you can nave 10 houses and 10 cars and 10 lake
places and 10 motorboats, but if you eat 10 meals a day, you are not
long for this world.
So there is a very real difference. Therefore, when we seek to
establish this balance and do it through only the medium of a price
support without any adjustment mechanism by way of production,
this is where we then find the Government taking on substantial stocks
of commodities, because we have not accomplished the real purpose,
which is to bring about an effective balance between supply and de
mand, which generally is done by other prime suppliers in our free
enterprise economy.
Representative Reuss. Thank you, Mr. Chairman.
(The following was later received for the record:)
D e p a r t m e n t of A g r ic u l t u r e ,
O f f ic e o f t h e S e c r e t a r y ,
Washington, February 4, 1968.
Hon. P a u l H. D o u g l a s ,
Chairman, Joint Economic Committee,
Congress of the United States, Washington, D.C.
D e a r S e n a t o r D o u g l a s : Enclosed is the material which I promised to furnish
in response to a question by Representative Henry S. Reuss at the hearing on
January 29, 1963. It shows a comparison o f U.S. import restrictions on agri
cultural products and those maintained by certain foreign countries. W e have
limited the comparison to the restrictions maintained by the EEC since it is the
policies of the EEO thaJt are currently causing us the most serious concern. This
Department is preparing a more complete summary which wiU be ready at the
end o f next week and which I will be glad to send you at that time.
Our sales o f agricultural products to the EEC amount to $1.1 billion annually
and account for almdst one-third o f our total commercial doUar exports of
agricultural products. The policies o f such a great trading bloc are, therefore,
of major concern to us and will be the most important single factor in determining
the direction which trade policies take. It will be difficult to move forward
under a more liberal and open trading policy if the EEC insists on surrounding
its agricultural industry with a high waU o f protectionism. W e could not bar
gain away further reductions in our own tariffs on industrial imports if at the
same time we are denied access to major markets for our agricultural exports.
There are disturbing indications that the EEC is developing its agricultural
policies along lines that maximize self-sufficiency and insulate her farmers from
import competition. In the last round of tariff negotiations concluded with the
EEO in March 1962 the EEO refused to give fixed tariff bindings on most imports
that compete with its own production. These included products such as wheat,
feed grains, rice, and poultry, in which the United States has a major export
interest, as well as beef, pork, and dairy products. On aU of these items the
EEC plans to apply variable levies on minimum import prices. Regulations
for several products have already been issued. The effects o f these regulations
are to make foreign producers residual suppliers. Producers within the EEC
wiU be assured guaranteed prices. The variable levy simply provides that
imports will always be priced above the like product o f domestic origin. If
world prices faU the competitive position o f foreign suppliers is not improved.
The variable levy will simply increase. Producers within the EEC will thus
have unlimited opportunity to supply the domestic market at the guaranteed
price.
The United States by contrast follows a fairly liberal policy with respect to
agricultural imports. In past tariff negotiations conducted under the GATT,
the United States has exposed its agricultural industry to a substantial volume
of competitive agricultural imports. In these negotiations we have reduced
tariff barriers on competitive agricultural imports into the United States often
in exchange for concessions other countries gave us on industrial exports. About
$2 billion of competitive imports enter the United States each year. These in-
138
ECONOMIC REPORT OF THE PRESIDENT
elude fresh and frozen beef and lamb, pork, a large variety of canned meat prod
ucts, vegetable oils, fruits and vegetables, tobacco, and feed grains. These
products are permitted unrestricted entry into the United States and are generally
subject only to moderate tariffs.
Section 22 o f the Agricultural Adjustment Act, as amended, authorizes the
establishment of import quotas where imports render or tend to render in
effective or materially interfere with a price support or other program relating
to agricultural commodities.
There is a general misconception with respect to the restrictions imposed on
agricultural imports under section 22. Only our imports of peanuts, cotton,
wheat, and certain dairy products are now subject to import limitations under
section 22 and on these products, except dairy, we also limit our domestic produc
tion and marketing. Sugar imports are limited by quotas under the Sugar Act.
The United States obtained a waiver under the GATT, allowing it to invoke
section 22 upon proper notification of the GATT contracting parties. As a
practical matter, however, this waiver is at present needed only for dairy prod
ucts. Article X I of the GATT allows any contracting party to impose import con
trols if domestic production of the item in question is limited. Import re
strictions on cotton, sugar, peanuts, and wheat are thus permitted under article
X I o f the GATT.
Even where section 22 controls are applied, these imports cannot be restricted
to less than half of the quantities which entered during a recent representative
period. Existing quotas in many cases provide for entry of more than 100 percent
of trade during a representative period. Even on our dairy products, which are
extremely sensitive political items, our controls permit the entry o f certain
cheeses in quantities in as much as 400 percent of the base period. All U.S.
cheese imports now are 50 percent larger than 10 years ago. There is enclosed
the latest report on section 22 operations dated July 1902, showing a comparison
between base period quotas and actual import quotas for each product under
section 22 restrictions.
Problems of dairy surpluses plague almost every country of the world, in
cluding the EEC. The United States is not and never has been a major importer
of dairy products. In fact, we still have significant commercial exports o f some
products such as canned milk and dry whole milk.
The variable fee system o f the EEC contrasts sharply with the liberal import
policy practiced by the United States under section 22. Under the EEC system,
third country exporters would have no assurance of continued access to their
former markets in the EEC. Indeed, the very purpose of the variable levy
system is to assure that consumption will be supplied exclusively by domestic
producers if they can do so at the established internal price level. Clearly,
under the EEC system there would be no imports of a commodity that was in
domestic surplus.
If the United States were to substitute for section 22 restrictions an EEC-type
o f variable levy system, our imports o f section 22 commodities would in most
years be completely eliminated.
For other commodities, the United States has consistently maintained a liberal
trade policy— characterized by the absence o f quantitative restrictions on imports,
reductions in duties for most of the items over the past several years, and increas
ing volumes of imports. This policy contrasts sharply with that adopted— or
planned—by the EEC.
For example, in past tariff negotiations, U.S. import duties on beef and veal,
the major meat items imported, have been reduced to 3 cents per pound— less
than 10 percent ad valorem—and half the 1930 rate. No quantitative restrictions
are imposed on imports. U.S. imports o f beef and veal have grown steadily over
the past 10 years. In the past 3, they have averaged 6.5 percent o f domestic
production, compared with an average of 2.5 percent 10 years ago. In contrast,
the EEC is planning to establish a minimum import price— to which duties will
be added— to insulate the EEC market from the effects of world meat price levels.
For feed grains, U.S. import duties now are at half or less than half o f their
1930 levels, depending on the grain. Imports are negligible in relation to total
supplies, but at present are not subject to barriers other than the duties. In con
trast, the EEC has established support prices averaging roughly three-quarters
above the level o f prices to U.S. growers and maintains these with variable levies.
The United States, by legislation, reserves 41 percent of its sugar consumption
requirements to be supplied by foreign producers. The EEC, in contrast, gives
first priority to domestic producers, making foreign producers residual suppliers.
ECONOMIC REPORT OF THE PRESIDENT
139
The EEC is nearly self-sufficient in sugar production. The United States also
could achieve self-sufficiency if all restraints were removed and domestic pro
ducers were freely allowed to expand production.
Fixed duties are levied on U.S. imports of fruits and vegetables, with no quan
titative restrictions. In the EEC countries, practically all fruit and vegetable
items produced in the member countries are protected by quantitative restrictions.
In apples, for example, the U.S. duty o f 12^ cents per bushel is about 3 or 4
percent ad valorem and half of its 1930 level, with no quantitative restrictions
on imports. U.S. apple imports have remained relatively stable over the past
decade. France, Belgium, and West Germany continue to prohibit imports from
third countries of fresh apples each season until local supplies are largely sold.
Even after they remove their “prohibition,” they allow imports only if prices in
local markets are at “ satisfying” levels. Although these countries now allow
“ extra quality” apples to be admitted from their EEC partners, they authorize
imports from third countries only when shortages appear at home.
For wines, the largest EEC agricultural export to the United States, the policies
of the United States and the EEC sharply differ. The United States has cut its
tariffs consistently since 1930 until they now range from about 20 to 40 percent
of their 1930 levels. No other barriers to trade exist. EEC exports of wines to
the United States have increased steadily. In contrast, the EEC solves its trade
problems by prohibiting imports of U.S. wines.
Sincerely yours,
O b v il l e L. F r e e m a n , Secretary.
A nnex D
I m p o r t C o n t r o l s U n d e r S e c t io n 2 2 o p t h e A g r ic u l t u r a l A d j u s t m e n t A c t ,
a s A mended
(U.S. Department of Agriculture Foreign Agricultural Service Import Staff,
January 1963)
C ontents
Section 2 2 :
Authority.
H istory.
Commodities currently under c o n t r o l:
Cotton, cotton waste and certain cotton products.
W heat and wheat products.
Specified dairy products.
Peanuts.
Section 22, A gricultural A djustm ent A ct, as amended, reenacted, and extended.
Authority
Section 22 of the Agricultural Adjustment Act, as amended, directs the Sec
retary of Agriculture to advise the President whenever he has reason to believe
that any article or articles are being imported under such conditions and in such
quantities so as to render or tend to render ineffective or materially interfere
with any price support or other program, relating to agricultural commodities,
undertaken by the Department of Agriculture, or to reduce substantially the
amount of any product processed in the United States from any agricultural
commodity or product thereof with respect to which any such program or opera
tion is being undertaken. I f the President agrees there is reason for such
belief, he directs the Tariff Commission to conduct an investigation including
a public hearing, and to submit a report to him of its findings and recommenda
tions. The President is authorized, based on such findings, to impose such fees
or quotas in addition to the basic duty as he shall determine necessary. The
additional fees may not exceed 50 percent ad valorem and the quotas proclaimed
may not be less than 50 percent of the quantity imported during a previous rep
resentative period, as determined by the President. Furthermore, the President
may designate the affected article or articles by physical qualities, value, use,
or upon such other basis as he shall determine.
Whenever the Secretary of Agriculture reports to the President that a condi
tion exists requiring emergency treatment, the President may take action with
out awaiting the report o f the Tariff Commission. Any such action by the Presi
dent shall continue in effect pending the report and recommendations of the
Tariff Commission and action thereon by the President.
No trade agreement or other international agreement entered into at any time
by the United States may be applied in a manner inconsistent with the require
ments of section 22.
93762— 63— pt. 1------ 10
140
ECONOMIC REPORT OP THE PRESIDENT
The import quotas on specified dairy products and certain grain products,
as explained further in this bulletin, are administered by the Import Staff,
Foreign Agricultural Service, U.S. Department o f Agriculture, Washington 25,
D.C., through the issuance o f import licenses and special permits. The import
quotas for dairy products are prorated among, and import licenses are issued
to, eligible applicants who had imported the commodity during a specified period.
Import regulation 1, revision 2, issued by the Department of Agriculture, gov
erns the granting of the import licenses. Quotas on the other commodities not
requiring import licenses or special permits are administered by the Bureau o f
Customs, U.S. Treasury Department, Washington 25, D.C., on a first-come,
first-served basis. The authority to import commodities under section 22 does
not relieve the importer from compliance with other applicable laws and
regulations.
History
Section 22 was originally added to the Agricultural Adjustment Act o f 1933
by the act of August 24, 1935. It has been amended several times and was
revised in its entirety by section 3 o f the Agricultural Act o f 1948 and again by
section 3 o f the act o f June 28, 1950. It was further amended by sections 8 (b )
and 104 of the Trade Agreements Extension Acts o f 1951 and 1953, respectively.
Since the section was enacted, import controls have been imposed with respect
to 11 different commodities or groups o f commodities. These include: (1)
wheat and wheat flour; (2) cotton, certain cotton wastes, and cotton products;
(3) specified dairy products; (4) rye, rye flour, and rye meal; (5) barley,
hulled or unhulled, including rolled, ground, and barley m alt; (6) oats, hulled
or unhulled and unhulled ground oats; (7) shelled almonds; (8) shelled fil
berts; (9) peanuts and peanut oil; (10) tung nuts and tung oil; and (11)
flaxseed and linseed oil. All or a part of nine o f these commodities or groups
of commodities have been removed from import controls. These are, by type
of control and effective date, as follow s:
C o m m o d ity
(1) H arsh or rou gh c o tto n less th an % inches in staple
length.
(2) C a rd strips m ad e from c o tto n l ? i e inches o r m ore
in len gth .
(3) B a rley, h u lle d or u n h u lled, in clu d in g ro lle d bar
le y , grou n d barley, and b a rle y m alt.
(4) O ats, h u lled or u n h u lled an d u n h u llcd grou n d
oats.
(5) Shelled alm on ds, and blan ch ed, roasted, or other
w ise prepared or preserved alm on ds (n o t in clu d
in g a lm on d paste).
(6) S helled filberts, w h eth er or n o t b la n c h e d .................
Type of
c on trol
Q u o ta .
S ept. 20, 1946-Jan. 28, 1958.
. . . d o ........
Sept. 20, 1939-M ar. 31, 1942.
___do____
O ct. 1, 1954-Sept. 30, 1955.
— d o ____
D o.
F e e .........
O ct. 1 , 1951-Sept. 30,1955; O ct. 2 3 ,1957S ept. 30,1958.
. . . d o ____
O ct. 1 , 1952-Sept. 30,1953; O ct. 1, 1954Sept. 30, 1955.
J u ly 1, 1953-A p r. 5,1961.
(7) P ea n u t o i l_____________ - ____________________________ . . . d o ____
(3) T u n g n u ts an d tu n g o il:
( a ) T n n g oil .,
. . . . . , - . , .......... ......................... Q u o t a ...
(6) T u n g n u ts (oil e q u iv a le n t)________________ ___ d o ___
(9) Flaxseed a n d linseed o il____________________________ F e e _____
(10) R y e , r y e flou r, an d r y e m e a l..____________________ . Q u o ta __
E ffe ctiv e date
S ept. 9, 195 7-M ay 1,1962.
A p r . 2 8 ,1958-M ay 1, 1962.
J u ly 1 , 1953-A pr. 5,1961.
A p r . 1, 1954-June 30, 1961.
141
ECONOMIC REPORT OF THE PRESIDENT
Commodities currently under control
The commodities currently under control and the dates on which the initial
controls were imposed are discussed in the following sections I through IV.
I. COTTON, CERTAIN COTTON WASTE, AND COTTON PRODUCTS
Nonlicensed country quotas on long-staple and short-staple cotton and on
cotton waste were imposed on September 20,1939. Cotton having a staple length
of 111/16 inches or more was removed from the long-staple cotton quota on De
cember 19,1940, but was again included effective August 1, 1958, at which time
this quota was subdivided on the basis of staple length. The country quota
on long-staple cotton was changed to a global quota on July 29,1952. The global
quota on certain cotton products became effective on September 11, 1961.
Annual country and global quotas currently in effect are as follows:
A. Global quotas
[In pounds]
Representa
tive period
average an
nual imports
July 1,1928June 30,1933
1. Long-staple cotton (1£6 inch or longer)_____________
Subdivided as follows:
(a) 1% inch or longer______________________
(b) 1 inch or more but less than 1% inch____
Provided that of the 6,065,642 pounds,
not more than 1,500,000 pounds shall
consist of harsh or rough cotton (ex
cept cotton of perished staple, grabbots, and cotton pickings), white in
color and having a staple of 1H*
inch or more in length, and not
more than 4,565,642 pounds shall
consist of other cotton.
68,085,885
Quota
145,656,420
39,590,778
6,065,642
Annual quota
period
Aug. 1-July 31.
Do.
Jan. 1, 1940Dec. 31,1953
2. Cotton products produced in any stage preceding the
spinning into yarn (except cotton wastes).
(2)
3 1,000
Sept. 11-Sept. 10.
167.1 percent of base period.
* The exact quantity is unknown but adjudged to have been less than 1,000 pounds. See Tariff Com
mission Report to the President on “ Certain Cotton Product/’ TC Publication 31, of September 1961.
3100 percent of base period.
142
ECONOMIC REPORT OF THE PRESIDENT
B. Country quotas
[In pounds]
Kepresenta*
tive period
average an
nual imports
July 1, 1928June 30,1933
1. Short-staple cotton (less than
inches)...................
Subdivided as follows:
Country:
Egypt and the Sudan................................
Peru....... ................... ............................... .
India and Pakistan (first come, first
served)...................................................
China (Taiwan.).........................................
Mexico........................................................
Brazil....................................................... .
USSR........................................................ .
Argentina................................................. .
Haiti.......................................................... .
Ecuador ....................................................
Honduras...................................................
Paraguay..................................................
Colombia...................................................
Iraq............................................................
British East Africa................................... .
Netherlands East Indies...........................
British West Indies (other than Bar
bados, Bermuda, Jamaica, Trinidad,
and Tobago)........................................ .
British West Africa (other than Gold
Coast and Nigeria).............................. .
Nigeria........................................................
French Africa (other than Algeria, Tu
nisia, and Madagascar)..........................
Total....................................................
2. Cotton waste (card strips made from cotton under
m e-inch comber waste, lap waste, sliver waste,
roving waste).
Subdivided as follows:
Country:
United Kingdom........................................
Canada........... ...........................................
France.—..................................................
India and Pakistan (first come, first
served).
Netherlands................................................
Switzerland—.............................................
Belgium......................................................
Japan..........................................................
China (Taiwan).........................................
Egypt.........................................................
Cuba........................................................
Germany....................................................
Italy......................... —................ ..............
Total.
193.6 percent of base period.
15,504,403
Quota
114,516,1
Annual quota
period
Sept. 20-Sept. 19.
783,816
247,952
2.003,483
1,370,791
8,883,259
618,723
475,124
5,203
237
9,333
752
871
124
195
2,240
71,388
21,321
16,004
5,377
(2)
14,516,882
3 5,482,509
Do.
4,323,457
239,690
227,420
69,627
68,240
44,388
38,559
341,535
17,322
8,135
6,544
76,329
21,263
5,482,509
2 The annual average imports of 23,173,884 pounds of various types of cotton wastes during the repre
sentative period included receipts of waste types which were not put under quota. Data for all specific
types of waste are not available.
3 Not more than 33H percent shall be filled by cotton wastes other than comber waste made from cotton
of IMe inches or more in staple length in the case of United Kingdom, France, the Netherlands, Switzer
land, Belgium, Germany, and Italy.
ECONOMIC REPORT OF THE PRESIDENT
II.
143
WHEAT AND WHEAT PRODUCTS
Importations of wheat and specified wheat products, with the exceptions listed,
are subject to nonlicensed quota controls. The quotas were instituted by Presi
dential proclamation dated May 28, 1941. The basic quotas have not been
changed, although certain exceptions were made during World War II.
Annual country quotas are currently in effect as follows:
Representa
tive period
Annual quota
period
Quota
nual imports
Jan. 1 ,1929Dec. 31,1933
1. Wheat................
2. Wheat products.
1 800,000
8 4,000,000
125,923
8 237,137
Wheat
(bushels)
Subdivided as follows:
Country of origin:
Canada.....................
China (Taiwan).......
Hungary...................
Hong Kong..............
Japan........................
United Kingdom___
Australia................. .
Germany................. .
Syria.........................
New Zealand.......... .
Chile.........................
Netherlands.............
Argentina.................
Italy.... .....................
Cuba.........................
France......................
Greece......................
Mexico......................
Panama....................
Uruguay...................
Poland and Danzig..
Sweden...................
Yugoslavia...............
Norway....................
Canary Islands____
Rumania..................
Guatemala...............
Brazil........................
USSR.......................
Belgium....................
Total..
795,000
100
100
100
100
2,000
100
1,000
“” ioo
1,000
100
100
100
100
800,000
May 29-May 28.a
M ay 29-May 28.4
Wheat
products
(pounds)
3,815,000
24.000
13.000
13.000
8,000
1,000
75.000
5.000
5.000
1.000
1,000
1,000
14.000
2,000
12.000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
4,000,000
1 Bushels.
23,086.1 percent of base period.
8 Pounds.
* 1,686.8 percent of base period.
Wheat, wheat flour, semolina, crushed or cracked wheat, or similar wheat
products, classified as “unfit for human consumption,, are not subject to import
quota controls. Likewise, samples of wheat or specified wheat products in lots
of 10 pounds or less and certified or registered seed wheat in lots of 100 bushels
or less are not subject to import quota controls. Wheat or specified wheat
products in lots of 10 pounds or more for experimental purposes and certified
or registered seed wheat in lots of more than 100 bushels for seeding and crop
improvement purposes may be imported ex-quota if the importer requests such
import authority from the Secretary of Agriculture and if written approval
is granted by the Secretary. Such requests should be addressed to the Import
Staff, Foreign Agricultural Service, U.S. Department of Agriculture, Washing
ton 25, D.C.
144
ECONOMIC REPORT OF THE PRESIDENT
III.
SPECIFIED DAISY PRODUCTS
Im port con trols under section 22 becam e effective Ju ly 1, 1953, fo r tlie dairy
products N os. 1-10, as listed below . T he annual quota p eriod fo r these com
m odities is from Ju ly 1 through June 30. The Im port S taff, F oreign A gri
cu ltu ral Service, U.S. D epartm ent o f A gricu lture, W ashington 25, D .C ., issues
im port licen ses to in dividu al im porters. The quotas are apportioned generally
on the basis o f the proportion ate share o f tota l im ports im ported by each
in d ividu al im porter from supplying countries during a representative base
period w hen n o restriction s w ere in effect.
Q uota con trols on item s 11 (a ) and (b ) becam e effectiv e A p ril 15 and A ugust
7, 1957, respectively. The quota year fo r item 1 1 (a ) is the calen dar y ear and
the quota is adm inistered by the B ureau o f Custom®, U.S. T reasury D epartm ent,
W ashington 25, D .C . on a first-com e, first-served basis. B u tterfa t as defined in
1 1 (b ) m ay n ot be im ported. Im portation# not in excess o f 100 pounds in the
aggregate o f the listed dairy com m odities m ay be authorized ex-qu ota fo r
display and sam pling a t trade fa irs and fo r research, provided appU cation is
m ade to and w ritten approval is granted by the Secretary o f A gricu lture. Such
appU cations should be filed w ith the Im port Staff, F oreign A gricu ltu ral S ervice,
U .S. D epartm ent o f A gricu lture, W ashington 25, D .C.
T he foU ow ing table show s a com parison o f curren t quotas w ith im portations
during the representative periods. The representative period# are as in dicated
in parentheses. E ffective July 1, 1960, the P residen t's proclam ation increased
th e annual quota fo r Edam and O ouda cheese from 4,600,200 to 9,200,400 pounds
and on ItaU an-type cheese from 9,200,100 to 11,500,100 pounds.
Representative
period average
annual imports
(pounds)
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
Butter........................................................................
Dried whole milk......................................................
Dried buttermilk.......................................................
Dried cream.......................... ............................ ......
Dried skimmed milk.................................................
Malted milk, and compounds or mixtures of or
substitutes for milk or cream................................
Cheddar cheese and cheese and substitutes for
cheese contained or processed from Cheddar
cheese......................................................................
Edam and Gouda cheese..........................................
Blue-mold cheese (except Stilton) and cheese and
substitutes for cheese containing, or processed
from blue-mold cheese..........................................
Italian-type cheese made from cow’s milk, original
loaves (Romano made from cow’s milk, Reggiano, Parmesano, Provolone, Provolette, and
Sbrinz)_______________ ________- ____ ________
Articles with 45 percent or more butterfat:
(a) Butter substitutes, including butteroil
containing 45 percent or more butterfat..
(b) All articles containing 45 percent or more
of butterfat, except those articles already
subject to quotas, cheese, evaporated
and condensed milk, and products im
ported in retail packages__________ - ___
1,411,525
13,055
991,283
i
3,613,279
Quota as
percent of
base
Quota
(pounds)
(1930-34)
(1948-50)
(1948-50)
(1948-50)
(1948-50)
707,000
7,000
496,000
500
1,807,000
50.1
53.6
50.0
100.0
50.0
11,418 (1948-50)
6,000
52.5
5,490,262 (1948-50)
1,831,085 (1948-50)
2,780,100
9,200,400
50.6
502.5
2,066,000 (1948-50)
2 5,016,999
242.8
8,121,987 (1948-50)
11,500,100
141.6
1,800,000
*1,200,000
66.7
(4)
0
i Less than 500.
* Increased from 4,167,000 by Presidential Proclamation 3460, Mar. 30,1962.
* Quota for calendar year 1957 only, set at 1,800,000 pounds.
* Not available.
IV. PEANUTS
NonUcensed im port con trols w ere in stitu ted July 1, 1953. The quota on pea
nuts is the sam e as th at in itia lly im posed. The ad valorem fe e o f 25 percent on
im ports o f peanut o il in excess o f 80 m illion pounds w as term inated on A p ril 5,
1961.
ECONOMIC REPORT OF THE PRESIDENT
145
Annual global quotas are in effect as follows:
Representa
tive period
average
annual
imports
Jan. 1 ,1936Dec. 31,1939
(pounds)
Peanuts: whether shelled, not shelled, blanched,
salted, prepared, or preserved (including roasted
peanuts but not including peanut butter).
3,417,812
Quota
1,709,000 pounds
peanuts in the
shell charged
against this
quota on basis
of 75 pounds for
each 100 pounds
of inshell
peanuts.
Annual quota
period
Aug. 1-July 31.1
160 percent of base.
S e c tio n
22 o f
t h e A g r i c u l t u r a l A d j u s t m e n t A c t ( o f 1983), a s R e e n a c t e d a n d
A m e n d e d ( a s o f D e c e m b e r 15, 1959)
“ S e c . 22 (a) Whenever the Secretary of Agriculture has reason to believe
that any article or articles are being or are practically certain to be imported
into the United States under such conditions and in such quantities as to render
or tend to render ineffective or materially interfere with, any program or
operation undertaken under this title or the Soil Conservation and Domestic
Allotment Act, as amended, or section 32, Public Law No. 320, Seventy-fourth
Congress, approved August 24, 1935, as amended, or any loan, purchase, or
other program or operation undertaken by the Department of Agriculture, or
any agency operating under its direction, with respect to any agricultural
commodity or product thereof, or to reduce substantially the amount of any
product processed in the United States from any agricultural commodity or
product thereof with respect to which any such program or operation is being
undertaken, he shall so advise the President, and, if the President agrees that
there is reason for such belief, the President shall cause an immediate investi
gation to be made by the United States Tariff Commission, which shall give
precedence to investigations under this section to determine such facts. Such
investigation shall be made after due notice and opportunity for hearing to
interested parties, and shall be conducted subject to such regulations as the
President shall specify (7 U.S.C. 624 (a )).
“ (b) If, on the basis of such investigation and report to him of findings and
recommendations made in connection therewith, the President finds the existence
of such facts, he shall by proclamation impose such fees not in excess of 50
per centum ad valorem or such quantitative limitations on any article or articles
which may be entered, or withdrawn from warehouse, for consumption as he
finds and declares shown by such investigation to be necessary in order that
the entry of such article or articles will not render or tend to render ineffective,
or materially interfere with, any program or operation referred to in sub
section (a) of this section, or reduce substantially the amount of any product
processed in the United States from any such agricultural commodity or product
thereof with respect to which any such program or operation is being undertaken:
Provided, That no proclamation under this section shall impose any limitation
on the total quantity of any article or articles which may be entered, or with
drawn from warehouse, for consumption which reduces such permissible total
quantity to proportionately less than 50 per centum of the total quantity of
such article or articles which was entered, or withdrawn from warehouse, for
consumption during a representative period as determined by the President:
And provided further, That in designating any article or articles, the President
may describe them by physical qualities, value, use, or upon such other bases
as he shall determine.
“In any case where the Secretary of Agriculture determines and reports to
the President with regard to any article or articles that a condition exists re
quiring emergency treatment, the President may take immediate action under
this section without awaiting the recommendations of the Tariff Commission,
146
ECONOMIC REPORT OP THE PRESIDENT
such action to continue in effect pending the report and recommendations of
the Tariff Commission and action thereon by the President (7 U.S.C. 624(b)).
“ (c) The fees and limitations imposed by the President by proclamation under
this section and any revocation, suspension, or modification thereof, shall become
effective on such date as shall be therein specified, and such fees shall be treated
for administrative purposes and for the purposes of section 32 of Public Law
No. 320, Seventy-fourth Congress, approved August 24, 1935, as amended, as
duties imposed by the Tariff Act of 1930, but such fees shall not be considered as
duties for the purpose of granting any preferential concession under any inter
national obligation of the United States (7 U.S.C. 624 (c )).
“ (d) After investigation, report, findings, and declaration in the manner pro
vided in the case of a proclamation issued pursuant to subsection (b) of this
section, any proclamation or provision of such proclamation may be suspended
or terminated by the President whenever he finds and proclaims that the circum
stances requiring the proclamation or provision thereof no longer exist or may be
modified by the President whenever he finds and proclaims that changed circum
stances require such modification to carry out the purposes of this section
<7 U.S.C, 624(d)).
“ (e) Any decision of the President as to facts under this section shall be final
<7 U.S.C. 624(e)).
“ (f) No trade agreement or other international agreement heretofore or here
after entered into by the United States shall be applied in a manner inconsistent
with the requirements of this section (7 U.S.C. 624(f)).
Chairman D ouglas. Senator Proxmire?
Senator P roxmire. Mr. Secretary, you may not appreciate it fully,
but I have admired you for a long, long time for your eloquent pleas
for the farmer.
I know I have caused you a lot of distress by my difference from
your viewpoint on details of agriculture legislation. But I don’t know
anybody who has worked harder or done a finer job of representing the
interests of the American farmer, who has been Secretary of Agri
culture.
You have done a great job.
This presentation you have today is so typical, because you point
out how very important the farmer is to our economy, and I think
this is terribly neglected by Members of Congress as well as by the
general public.
However, I would once again differ with you on a few things and
I would like to ask you about these points of difference.
As a loyal member of the administration, you have made a fine case
showing the benefits to the farmer directly from tax reduction. I
contend that the farmer probably gets the least benefit of any group
in our societv—maybe the retired people get less.
But Mr. Patton of the Farmers Union last year argued that about
80 to 85 percent of our farmers pay no income tax at all.
Now, it is true that when farmers sell their farms, many of them
would come under the somewhat more relaxed capital gains pro
visions of the law, but recognizing this, it would seem to me that the
direct effect, beneficial effect to the farmer, most farmers, would be
very small from this method of trying to increase and improve na
tional income as compared to a method of directly trying to improve
and increase farm income.
Secretary F reeman . May I respond, Senator, to that by pointing
out that it is an old saw that farmers don’t pay any income tax.
Senator P roxmire. I know they pay the taxes they should pay.
I am just saying their income is so low that the income tax they
pay is nil in most cases, and small for the rest.
ECONOMIC REPORT OF THE PRESIDENT
147
I don’t question the figures you have here, $1% billion in Federal
income taxes, but I say there are an awful lot of farmers who don’t
pay any income taxes at all, although some of the rich farmers do pay
income taxes.
Secretary F reem an . This might be true. I think it would be worth
putting into the record a statement on this. I thought the question
might come up and I asked them to pull something together.
Completeness of income tax reporting by farmers: Comparison of
reports published by IRS with statistics on farm income suggests
that in recent years more than 90 percent of all cash receipts from
farm marketings show up on income tax returns.
In 1958, for example, farm business receipts reported on tax re
turns amounted to $31.6 billion. This was 91.6 percent of the year’s
total of $34.5 billion in cash receipts from farm marketings. Not
all the missing $2.9 billion necessarily represents underreporting
of income on tax returns. A substantial part can be accounted for
by the income to farmers who individually had gross incomes below
the filing requirement and to farmers who were legally subject to
filing but who had net incomes so low as not to be taxable. Rough
estimates based on the census of agriculture suggests that about 2%
million farmers fall in these two categories. Gross value of marketings
from these farms exceeded $4 billion.
I f gross income is substantially fully reported, there is reason to
believe the same is true of net farm income. The missing gross in
come is probably largely offset by operating expenses that are not
fully reported.
Operating expenses are disproportionately heavy on the low pro
duction farms where reporting is likely to be weakest. There is evi
dence, moreover, that inadequate bookkeeping leads many farmers
to underclaim their operating expenses.
Senator P roxmire. I understand. And then of the farmers who
do pay a tax, you pointed out in your statement that farmers’ income
is about 60 percent less than off-the-f arm income.
So I think the assumption would be that as far as the income tax
is concerned, and I stress income, that the taxes they pay would be
much less than most because their income is less.
However, the property taxes the farmers pay, on the basis of my
own experience in Wisconsin, is very heavy and this is the big tax
a farmer has to cope with.
Secretary F reeman . N o question about that. This is the tax that
finances local government. But the depreciation schedules are a very
important consideration, because a farmer has a great deal of equip
ment, and under new depreciation schedules, if he can write off a piece
of equipment in 3 years instead of in 7 years, this means a significant
difference.
Senator P roxmire. N ow , I am also somewhat concerned. I sug
gested to Senator Douglas that we ask you to testify before us be
cause—for many reasons, but partly because I was concerned by the
import of the President’s very brief dealing with the whole farm
problem in his Economic Report. I consider the farm problem one of
our top economic problems, perhaps one of the two or three along with
unemployment.
148
ECONOMIC REPORT OF TH E PRESIDENT
The report doc® deal with that briefly on pages 10 and 11 in this
foreign trade area, which has just been discussed so well by you
and Mr. Eeuss.
In other areas, as compared to what the Economic Eeport did last
year, it seems to me there just isn’t very much and there is no followup on the failure to achieve objectives which is set forth on page 9
of the 1962 Economic Eeport as follows:
Objectives of agricultural policy as it develops in the future should encompass
both (1) continuation of agriculture’s historic role as a major contributor to
national economic growth and (2) equitable distribution of gains in agricultural
productivity between farmers and consumers. Achievement of these two objec
tives will require continued rapid transfers of labor from the farm to the
nonfarm sector and reduction in resources devoted to the production, storage,
and disposition of surplus production.
The fact is, you chose 1960 and 1962 in describing farm incomes. I f
you chose 1961 and 1962 for the comparisons of farm income, it
appears on the basis of statistics I have, that there was no increase in
income last year.
Now, the fourth quarter was a better quarter than the other three.
But in aggregate, 1962’ was not any better than 1961. It was about the
same.
Secretary F reeman . The aggregate net was quite comparable. The
gross was up, but the per capita net was up between 1962 and 1961.
Senator P roxmire. Yes; farmers are tending to leave the farm. But
we still have, I think you might agree, failed dismally to achieve this
second objective of equitable distribution of gains in agricultural
productivity between farmer and consumer.
Secretary F reeman . We have a long, long way to go and I hope we
can continue the progress we have made until we get there.
Senator P roxmire. This morning, Mr. Gordon pointed out that we
are going to have stability in nondefense and nonspace Federal spend
ing and this was largely because of the cut in spending in the agri
cultural area.
I am wondering what proposals you have, very briefly, to improve
agricultural income in the coming year or two.
Secretary F reeman . Again, we get to a commodity by commodity
appraisal and programming here. I am hopeful and I know you share
this, that we can develop a program, particularly in dairy, that will
bring about an increase m dairy farmers’ income. The overwhelming
majority of dairy farmers are those who are very efficient operators.
Their per-hour return is very, very low indeed.
Specifically what recommendations the administration will make
are a matter yet of some debate and not necessarily because of the
economics of it, Senator, but because of the politics with which it
can pass through the Congress of the United States.
Senator P roxmire. The concern that I have is that the proposals
I have heard about—I am not saying you will come up with any of
these—but the proposals I have heard about would stabilize income,
perhaps increase it a bit, but would have its primary thrust at re
ducing the cost of supporting dairy farm income—would cut it.
Farm income would remain about what it is now. Now, I would
say that the first test of any agricultural legislation today ought
to be, does it improve farm income.
Secretary F reeman . I would agree with you wholeheartedly.
ECONOMIC REPORT OF THE PRESIDENT
149
Senator P roxmire. I f it doesn’t do that, it is no good, regardless
of the other advantages it may have.
Secretary F reeman . I agree, but I would emphasize the point that
I think a sound farm program will do both, increase farm income
and reduce Government cost, because its main point is providing
some mechanisms so that there can be a fair relationship between
supply and demand.
The farmers’ main problem has always been he has no bargaining
power in the marketplace. Other producers do. He sells in a sellers’
market, buys in a buyers’ market. In every country in the history
o f the world, the farmer has been low man on the totem pole. That
is one reason why we have so many restrictions in other types of farm
programs around the world. So we are not dealing with a new
problem. But fundamentally, this is a sound program that would
provide this, as we see it, in some commodities now. In some com
modities, the functioning of market orders, which are self-help, farm
er-administered programs, are returning a reasonable return to the
producers at a fair price to the consumer and at no cost to the tax
payer. This is the goal we seek to reach.
Senator P roxmire. I enthusiastically support the notion of getting
the farmers’ income in the marketplace, because with his diminishing
political influence, it is the only long-term hope for the farmer, and
I just hope and pray we can work out some method, as you say,
of self-help organization so that the farmer can achieve this end,
which he deserves so richly in view of his contribution.
My time is up but I might say that you have many times argued
this, and I think it ought to be stressed once again on the record, the
fact that the farmer is the No. 1 economic success story in this country,
and for that matter, in the world.
The American farmer’s contribution to our prosperity is perfectly
enormous. As you have said, as I understand it, the average family
now spends 20 percent of their income on food, whereas 10 years ago
they spent 26 percent. The food-for-peace program, demonstrating
our marvelous agricultural capacity compared to the dismal failures
of Communists in country after country—communism goes in, hunger
follows—is, I think, one of the great reasons for our successes, to the
extent we have had successes in foreign policy.
This is something I think people somehow have to be reminded of
because it is terribly hard, as you know better than I, to get this story
told broadly so the American public appreciates it.
Secretary F reeman . The Senator states it very well and I would
be happy to add to that 20-percent figure and state our latest economic
analysis shows it is now 19 percent, and this compares with 30 to 40
percent in Western Europe; to 50 to 60 percent that the take-home
pay goes for food in Russia; 80 to 90 percent in developing countries
around the world; that fewer than 8 percent of the American people
are involved in agriculture; that 1 farmer feeds 27 people; that fewer
than 8 percent provide the food and fiber for this country, and they
do it at the relative price, which actually, in terms of our diet of 25
years ago, would be about 12 percent of our take-home pay.
So it is a phenomenal, extraordinary accomplishment.
Senator P roxmire. They have made their contribution to the in
creased standard of living—people are freed that much income that
they can spend on other things.
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ECONOMIC REPORT OF THE PRESIDENT
Chairman D ouglas. Mr. Curtis?
Representative C urtis. There is great economic growth in this
area. Am I not right?
Secretary F reeman . Tremendous increase in productivity on a per
capita basis; yes, sir.
Representative C urtis. Are you familiar, Mr. Secretary, with the
administration’s economic gap theory ?
Secretary F reeman . I am not sure what the Congressman means
by the “gap theory.”
Representative C urtis. That is the term Dr. Heller arid others use,
saying that we are not meeting the economic potential in our society.
It is based upon our idle plant and idle manpower. They have
used the term tired blood” to describe it.
Secretary F reeman . I have not heard that description, but it is
very descriptive.
Representative C urtis. Y ou think it is? Do you think that i?
descriptive of the agriculture sector, then ?
Secretary F reeman . I did not say that, I think.
Representative C urtis. I hope not, because we have just agreed
that the growth has been dramatic, and we have had a lot of adjectives
to describe it.
I agree with you. It is just the reverse of tired blood. The problems
you have in agriculture are, to a large extent, the result of growing
pains.
For example, in the agriculture sector, there is a tremendous idle
plant. In fact, it is Government policy, not only under this admin
istration but also the previous one, to try to make more of the plant
idle. Am I not correct ?
Secretary F r e e m a n . N o; Congressman, you are not, really, and this
is a common misunderstanding. The policy of this administration is
not to idle acres but to use them.
Representative C urtis. What are you doing when you put them
aside? Let’s don’t get into semantics. W e want to retire these acres
and get them out of production.
Secretary F reeman . W ell, we want— what is production ?
Representative C urtis. That is right. W e are talking about pro
duction of money crops, because this is a money economy. I happen to
agree with the retirement program; do not misunderstand me. But,
if we had to produce more wheat, corn, or cotton, we would be doing
the reverse, would we not, of retiring lands that are perfectly capable
of growing these crops. What do you put them into, by the way—
grasslands or scenic parks ?
Secretary F reeman . I would suggest, and I am not trying to be in
any way argumentative or facetious about it, but fundamentally, what
we are really trying to do is to accomplish an adjustment to make an
economic use of land which is not being used economically if it is pro
ducing food and fiber for which we have no need.
Representative C urtis. That is right.
Secretary F reeman . A s such, then, it is actually the converse of
productive.
Representative C urtis. That is true.
Secretary F reeman . N ow , what are those other uses ?
ECONOMIC REPORT OF THE PRESIDENT
151
Representative C urtis. Let me ask another question. Are these
other uses money producing ?
Secretary F reem an . They may well be.
I am reminded of the rancher at our Land and People Conference
in Denver who told me he made $2,500 running cattle and $17,000 off
the elk hunters.
Representative C urtis. Well, recreation, all right. I f we are going
to get into recreation, that is a good diversion. But let me pick up the
next point of this so-called gap theory and tired blood theory; namely,
idle manpower. I f there ever is a place where we have people moving
out of an area, it is in farming and agriculture; is that not so ?
Secretary F reeman . That is correct, yes, sir.
Representative C urtis. In fact, I have often said that I think com
mercial agriculture is doing all right, but because it is doing so well, we
have created a very serious problem of rural unemployment.
People who used to be able to depend on agriculture for their liveli
hood fmd they can no longer, so we have idle manpower.
Now I come to the key point. The administration’s policy that has
been presented to this committee and the Congress is that the way to
take care of idle plant and idle manpower is to increase consumer
purchasing power. Consumer purchasing power would then increase
demand in the agricultural sector, I suppose, along with the others.
Now, let me ask you, do you think such a basic policy is going to help
the idle manpower in agriculture and the idle plant, or, rather, the
excess produce that we have ?
Is it going to make a dent or even any impression?
Secretary F reeman . No. 1, as I said earlier, the demand for food
is highly inelastic.
Representative Curtis. That is right.
Secretary F reeman . As such, increased income will not reflect itself
very heavily in terms of increased consumption of food in this
country.
Representative C urtis. That is right.
Secretary F reeman . On the other hand, a full employment economy
will obviously make much easier the adjustments in agriculture that
does not need as much manpower as that previously did.
Representative C urtis. Well, the adjustment is going out of agri
culture. In other words, all I am trying to point out, is that the
administration’s program to hit at the problems o f economy is cer
tainly not going to help the problems in agriculture.
I f anything, it is going to aggravate them, because you are putting
more effort—and I am glad we are, by the way—into research and
development to develop the efficiency in agriculture. But I think
it is about time that we recognized that by encouraging this kind o f
healthy economic growth, we are creating problems in our economic
system in another way.
But let’s not look for solutions to those problems on the theory
that it is tired blood. We are experiencing growing pains and I think
the agriculture sector demonstrates this more clearly than any other
I can think of.
Would you comment on that Mr. Secretary, because this is the
theory that the administration is following and the base on which
they are saying to the Congress that we must cut taxes—not expendi
152
ECONOMIC REPORT OF THE PRESIDENT
tures. The administration wants to hold expenditures to the 1963
level in nondefense areas, thus creating bigger deficits. This, they
say, is necessary to increase what they describe as a lagging consumer
demand.
But you have just said in agriculture it is inelastic.
Secretary F r e e m a n . Well. I have addressed myself to the question
of agriculture, and there will be, there would be an expanding market
with an increase of dollars in the pocket, because the choice of foods
would probably involve those that were more processed and con
ceivably more expensive, but certainly no solution to the agriculture
problem.
On the other hand, the solution would rest or would be significantly
helped in terms of an expanding industry producing a number of
things for which people would have demand, a part of which would
involve the location of new plants in rural areas to which people not
needed to produce food and fiber would find employment.
Representative C u r t is . I think that part is correct. In other words,
the shift of people retraining out of agriculture, which to me is the
key to this thing, and-----Secretary F r e e m a n . I thought you said out of agriculture and not
out of the country.
Representative C u r tis . I should say not out of the country, but
rather out o f agriculture.
I think one o f the significant factors in the agricultural sector is in
our economic indicators which reveal that the farmer, and I guess
the definition is still one who derives 51 percent of his income from
agriculture, obtains over 30 percent of his income from nonagricultural sources.
Secretary F r e e m a n . An increasing amount of it is, yes.
Representative C urtis. Yes; and I think I developed that point
the way I wanted the record to show it.
Now, let me ask about expenditure side, which to me is a very
disturbing aspect. The budget indicates that we are to cut $1 billion
from agricultural expenditures in 1964 over 1963, is that not correct!
Secretary F r e e m a n . That is correct.
Representative C u r t is . Actually, that’s not quite true, is it?
We are spending $1.5 billion more, but we are going to pick up about
$2.5 billion from the sale of Commodity Credit Corporation assets.
Isn’t that the real picture?
Secretary F r e e m a n . Some percentage of it is accounting, yes, sir.
Representative C u r t is . Well, it is in the budget. The arithmetic
is done. The entry of $2.5 billion ought to be, I think, in the receipts
from the public side and the entry of an increase of $1.5 billion in
payments to the public. But the two do produce a minus $1 billion.
This is an important distinction to make, because the Commodity
Credit Corporation is, in effect, somewhat in the nature of capital
assets.
Secretary F r e e m a n . Yes, sir.
Representative C u r t is . But we turn over to the real budget which
Congress has no control over. We have already voted the authoriza
tion to spend. The President has complete control over this sector of
payments to the public and receipts from the public. The only thing
the Congress has to say is on page 40 of the budget, under new
ECONOMIC REPORT OF THE PRESIDENT
153
obligational authority by agency. There we see an entirely different
picture for agriculture.
The estimates for new obligational authority in 1963 were $6.7
billion. In the request for fiscal 1964, they are $8.1 billion—an in
crease of $1.4 billion. I assume this is going to be a recurring ex
penditure, not the nonrecurring type.
So actually, agriculture expenditures are not being held at any 1963
level as far as the Congress is concerned, because once we turn this
authority over to the Executive, he can spend it at any rate he chooses.
Now, I wonder if you would comment on why the statements of the
President and other governmental officials to the public and Congress
have been creating the impression that we are cutting back in Agri
culture in light of these hard figures, when you are actually asking
an increase of $1.4 billion to spend in fiscal 1964 ?
Secretary F reeman . Well, I do not have before me the budget
figures and had not reviewed them for several weeks.
Eepresentative C urtis. Let me show them to you, because I am
very interested in what you might say about them.
Secretary F reem an . The budget message that the President sent
to the Congress was based upon the cash budgets and on cash ex
penditures. What he would have said in relation to the NOA budget,
I don’t know.
Eepresentative C urtis. But look. The budget you present to the
Congress is for the Congress to act upon and the only thing we have to
act upon is new obligational authority. The expenditures are com
pletely within the control of the President and that is only a report
to us, not a request.
The budget request is in new obligational authority and the Depart
ment of Agriculture is requesting a $1.4 billion increase for 1964.
Do not the figures reveal that ?
Secretary F reeman . The comments that the President sent up were
commenting upon the cash budget, as I have said earlier, and I have
not seen any comments of the President on the NOA budget.
Eepresentative C urtis. Well, what are your comments? I see my
time has run out, but please answer my question.
Secretary F reeman . The items—I would need to go down here.
We in Agriculture are in the process of making a series of very basic
adjustments as we are moving from the holding of a very significant
surplus, items in a number of commodities to what we consider neces
sary security and stabilization reserves. I refer now to the Com
modity Credit Corporation.
Let me finish now.
Eepresentative C urtis. But I want to ask would that not show a
less amount than the other ?
Secretary F reeman . No. What is involved here again is equally
the kind of accounting which you pointed to a moment ago in dep
recating the cut in the cash budget.
Eepresentative Curtis. That is right.
Secretary F reeman . This is to restore to the Commodity Credit
Corporation losses, a substantial amount of which was for the food for
peace program, which had been incurred in previous years. In other
words, money that was expended in 1962 is included in these NOA esti
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ECONOMIC REPORT OF THE PRESIDENT
mates for 1964 to replenish the capital of the Commodity Credit
Corporation.
So as such, the NOA estimate does not involve new expenditures,
it involves expenditures or actually losses, already incurred, and is to
replenish the capital of the corporation.
Representative C urtis. I f you are replenishing, though, you are not
cutting back.
Secretary F reeman . But we are certainly not spending more, Con
gressman. I think you would have to agree with me on that if you are
not going to be dealing in dialectics.
Representative C urtis. You have raised it $1.4 billion, Mr. Free
man.
Secretary F reeman . This is money that has already been spent, in
1962, Congressman.
Representative C urtis. N o.
Chairman D ouglas. Mrs. Griffith?
Representative G riffiths . No questions, Mr. Chairman.
Chairman D ouglas. Mr. Kilburn ?
Representative K ilburn . I am from New York State, and I am sorry
to keep the questioning on a local level for a minute, but our economy,
of course, is part of the national economy.
We are interested in the whole economy. I have had a great many
letters from New York State and I just want to read one short one
and ask you about it.
It says:
New York farmers have been discriminated against by the artificial corn
pricing schedule recently announced by the Secretary of Agriculture. This
schedule permits corn users in 12 Mid-Atlantic and Southern States to purchase
CCC-owned corn at lower than market prices, thus adding to the competition
already created by unrealistic Government programs which New York farmers
are facing.
The announced purpose of the plan is to keep the market price of corn from
advancing in those States. This is the rankest kind of discrimination. We
prefer less tinkering by the Government.
Now, Mr. Secretary, it has seemed to me that the Agricultural De
partment for years has discriminated against the dairy farmers of New
York State, who comprise a large economic force in our State. Why
do you do it?
Secretary F reeman . Well, may I say, Congressman, that I served
as Governor of the State of Minnesota for 6 years and one of the
things I repeated from one end of the country to the other is that in
all our policies, why, Minnesota’s dairy farmers were discriminated
against in favor of the dairy farmers from New York State.
Representative K ilburn . That does not answer my question.
Secretary F reeman . Let me try to answer your question.
The letter, I am sure, is a very honest and sincere letter, but it is
based on misinformation. The feed grain program of 1962 now in
effect, and we will not have this problem with the program that is in
effect in this 1963 crop year, involved the Government selling substan
tial amounts of corn at various times and places in both 1961 and
1962. I think I can say honestly and with some pride, we did a very
skillful job, because there was a more stable price for corn, by and
large, around the country and feed grains, than there had been in the
history of the country. However, in certain places, there have been
ECONOMIC REPORT OF THE PRESIDENT
155
dislocations. For example, there would be a very heavy signup in a
deficit area, and therefore not much production in that area. Then,
if the relationship between prices got way out of line, let us say, and
instead of corn selling at about, let’s say, $1.20, it went up to $1.65,
disturbing its historic relationship with, let us say, prices in the Mid
west, why, then, we moved in and sold limited amounts in order to
prevent hoarding and speculation and to maintain the same historical
relationship based on a Midwest base pricing point.
Now, this has happened three times. It happened early in the
program in the West, in Oregon, and we sent some corn out to Oregon
to prevent that getting arbitrarily high there.
Otherwise, it happened last year and again is happening this year
again in the Southeast. It has not happened in the Northwest.
I f you check the historic relationship between the prices in the
Northeast as compared to the base points in the Midwest and in the
Southeast and the Far West, you will find that that relationship is a
constant one, and that the reason that very small sales are now being
made or were shorted in the Southeast is because there the prices
soared way up in the air.
This was not true in the Northeast and I would want you to know
that if you can make the case, which we have carefully reviewed, that
prices have become arbitrarily high in the Northeast, the Department
is prepared to act in the Northeast as we have recently in the South
east.
Eepresentative K ilburn . I am glad to know that. I am not a farmer
myself, but we have some awfully good farmers up there-----Secretary F reeman . I would certainly agree with you on that.
Representative K ilburn (continuing). Who feel that you and other
Secretaries of Agriculture discriminate against the farmers of New
York State because you all want to keep farm prices up for the people
in the Midwest.
Secretary F reeman . I can only comment that when I was Governor
of Minnesota, I would feel the same thing in connection with practices
in the Northeast where milk was concerned. My perspective on it
has been broadened as Secretary of Agriculture.
Representative E jlburn. That is all, Mr. Chairman.
Chairman D ouglas. Mr. Widnall?
Representative W idnall . In your statement, you say that:
This is a significant average increase of over 11 percent, raising the average
income of $3,075 per farm in 1960 to an average of $3,525 in 1962.
What about the difference in the number of farms between 1960 and
1962?
Secretary F reeman . I am just estimating now. I do not have that
number at my fingertips, but we have had about 200,000 fewer farms
a year over the last 10 years.
Representative W idnall . So that means 400,000 farms fewer, when
you consider income per farm ?
Secretary F reeman . That is correct.
Representative W idnall . So actually, the income per farm is going
up, because it is more concentrated income-----Secretary F reem an . Well, it is both, the total net income of agri
culture as compared to 1960-61 and 1960-62 is up about a little over
a billion.
93762— 63—pt. 1------ 11
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ECONOMIC REPORT OF THE PRESIDENT
That is a total net. There are fewer farms, so when you go on a
per capita farm basis, you have a greater increase, because there are
fewer to average it into.
Representative W idnall . I have in front of me a USD A issue of
Current Business, December 1962.
Under an article entitled “Agricultural Production and Adjust
ment,” by L. J. Atkinson, it says:
In contrast to the rise in nonfarm economy, farm production, and income
in 1962 are about even with 1961, but the average incomes on a per capita or
per farm basis have shown a considerable rise in the past few years due to
declining trends in the number of farms and farm population.
Would you like to comment on that ?
Secretary F reeman . Yes. I would say—this is what I thought I
would say earlier—two things.
Between 1961 and 1962, as Senator Proxmire brought out, the total
net farm income remained about constant. Per capita farm income
increased because there were fewer farmers.
In 1961, total net farm income went up in excess of $1 billion.
Representative W idnall. Does this not indicate that the practices
of the Department of Agriculture are forcing small farmers out of
business and forcing into production large corporate farms who get
all the tax benefits, who get all the large subsidies that we are passing
out in the agricultural sector of our economy ?
Secretary F reeman . No; it does not. The truth of the matter is
that the number of family farms has increased proportionately. The
number of large farms, sometimes described as corporate farms, and
the number of small farms have decreased. The number of family
commercial farms proportionately have increased. In other words,
the size of the family farm is increasing significantly, but it remains
a family operation and the percentage of our farms in that category
has significantly increased over the last 10 years. So over the last
10 years, the policies of the U.S. Department of Agriculture have had,
in the overall, the desirable effect of increasing the family farm com
mercial structure.
There are—some of the changes that have taken place have resulted
in fewer small farms and fewer larger farms.
Representative W idnall . Well, now, we are going back 10 years.
While, in your statement, you are taking 1960 as against 1962, in
some other areas—what would the relationship be between 1960 and
1962 in connection with the statement you just made, if you did not
just go back the last 10 years?
Secretary F reeman . Well, the general trend has been pretty con
stant in terms of these adjustments going forward. The real ques
tion is, as we look into the future, is that if agriculture does not have
an increased income, whether this rather healthy trend of increasing
the percentage of commercial family farms will continue, because this
is the economic mainstay of agriculture and that there are great ad
justments taking place in rural America that one need only ride in
the countryside to observe.
Representative W idnall . May I ask as a nonfarmer, How do you
describe a commercial family farm today ?
Is it one of 50 acres, 100 acres, 1,000 acres, 2,000 acres.
ECONOMIC REPORT OF THE PRESIDENT
157
How does it become a commercial family farm—is it an individual
name or a corporate name ?
Secretary F reem an . That would make no difference as to whether
or not it was incorporated. There are a number of descriptions that
are slippery if one is not precise in how he uses those descriptions.
First of all, you have to relate it to the area and the nature of the
farm. A 250-acre family farm in Minnesota today would probably
have been 160 5 years ago. A wheat farm in western Minnesota, the
Dakotas, or Montana would today be 1,200 or 1,500 acres.
It depends on what you are talking about.
Generally speaking, I suppose the most constant national definition
would be an operation that grosses more than $10,000 a year and
where the labor of the family itself provides most of the human
manpower.
In other words, outside labor does not exceed that provided by
the family. This is generally considered the definition of a family
farm.
Eepresentative W idnall. A s I understand what you have just said
there has been an increase in family farms.
Secretary F reem an . There has been an increase in the percentage
of family farms as related to, let us say, the so-called big corporate
farm.
Representative W idnall. I am interested in your statement where
you say:
We estimate that the 3-year reduction in tax rates will reduce the tax liability
of farm people by $250 to $300 million, or about 20 percent, with a correspond
ing increase in the amount of income after taxes that the farmers have at
their disposal.
As I understand that new tax bill—and I am not on the Ways and
Means Committee, so I haven’t gotten the first look at the proposals,
nor do I have the staff to research it—the Government is going to take
away some of the deductions that farmers have had in connection
with interests on their mortgages, interest on their debt, and taxes
which they are paying, which in my own area the small fanners find
the most burdensome.
How are they going to benefit if on one hand you give them a
so-called reduction in rate and at the same time take away the
deductions they have had ?
They are paying more and more taxes in my State primarily for
support of schools. How is it going to benefit the small farmer?
The corporate farm is going to benefit.
Secretary F reeman . I will only say that the drop in rates for the
family that pays an income tax on the farm will be commensurate,
if they have an income, and the point was made here earlier that
there are maybe 2 million farmers that do not have an income— why,
if they are not paying any tax now, obviously they are not going
to be benefited by the tax bill.
The figures you have before you are our estimate under the tax
bill of the tax savings to agriculture and to farmers in this country.
Eepresentative W idnall . But then some of the small farmers who
aren’t paying taxes now will be paying taxes after you get through
with the new tax bill.
Secretary F reeman . I do not think so.
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ECONOMIC REPORT OF THE PRESIDENT
Eepresentative W i d n a l l . Y o u are going to be bringing into income
certain things that today are not included in income.
Secretary F r e e m a n . On balance, I think if you analyze the tax
bill carefully, you will find that is not the case.
Eepresentative W i d n a l l . I am sure I am going to do that, and I
am sure everyone else will also.
There are some things that puzzle me about our whole agricul
tural economy. W e are constantly forcing out of production some
of the finest soil in the United States.
W e are taking it up sometimes for recreational purposes, and at the
same time we are spending millions and millions of dollars in areas
of the United States to bring into production what would be called
foul land or less than average land by pouring in every kind of an
agricultural incentive, chemical and other things, to grow products.
I am trying to personalize it as far as New Jersey is concerned.
W e are watching the farms vanish from New Jersey.
I realize in all fairness that part of this is due to the local tax
problem, local taxes. But at the same time, I just do not understand
why we do not get an overall picture in order to keep in production
throughout the United States— not only in selected areas— farmland
that is suited already by nature for production, that produces well
without spending millions and millions.
Secretary F r e e m a n . W e are doing that, Congressman. First of
all, I know you would agree that we have a kind of society where
property is privately owned and that is the way we want it, and a
farmer or landowner is free to develop that land for the most economic
purposes to his own use.
The result is, we do not always have a completely economic maxi
mum usage of land everywhere around the United States of America.
W e are not putting land, generally speaking, into production which
is foul land, as you express it. Quite the contrary. W e are develop
ing over the long run what we believe to be in a free property system
a systematic effort to utilize the best land located in a place where
it can produce the most efficiently, rather than to bring into production
land which you describe as foul land.
Lots of land in many places today, certainly in New Jersey, which
is a highly industrialized and growing State, is put into much more
economic use, related even to a recreation or a public purpose, or an
industrial expansion or a highway or whatever you might name, and
some place else, in the Midwest or the Far West, with our modern
transportation, can more efficiently and cheaply service the consumer
needs for food and fiber of that State.
This is one of the great things of our country, that we can inter
change in this fashion.
There is no policy to bring into production more land, except as
individual people in their own land see fit to want to develop for
a purpose, which I do not have the power, nor do I seek that, to tell
them what they can do with their land.
Eepresentative W i d n a l l . Mr. Chairman, I understand my time is
up. I would like to follow up this line of questioning a little bit
further.
Chairman D o u g l a s . Certainly.
ECONOMIC REPORT OF THE PRESIDENT
159
Representative W i d n a l l . I just cannot follow your answer on that,
when I know that under the present program, even under the program
that occurred during the Eisenhower administration, wonderful soil
is being taken out of production in our area, with payments from the
Government, while we are still spending money to bring into produc
tion areas that cannot produce.
Also, I do not follow your argument that with improved trans
portation between States you can cover at less cost the transportation
of fruits and vegetables and other things between the States. As
cost of transportation goes up, I think we are going to be very unhappy
to find that we become dependent on two or three major sources in
the United States for our fruits and vegetables rather than some more
localized sources.
I think we are making a great mistake when we go into just green
acres for recreation purposes rather than keeping a lot of those green
acres for production of fruits and vegetables and things that can
be transported immediately fresh to the neighboring areas, and then
become dependent on two or three major areas.
Secretary F r e e m a n . I do not know of any land, Congressman, in
New Jersey that is being paid to be taken out of production that is as
productive as you indicate. I f there were and it could be producing
fruits and vegetables as efficiently as you say, it would be producing
them.
I f it is not, it is because the landholder has not seen fit to grow the
commodity in question, and make a profit that is adequate in relation
to the outlay in the return he can get on his capital. The Government
has nothing to do with that.
Representative W i d n a l l . I think the Government subsidy in our
area has a lot to do with that, with alternative crops and everything
that goes with it in the agricultural economy.
In the current report, there are around $360 million for reclama
tion. This is going to be tied in with bringing new land into pro
duction. At the same time, we are taking good land out of production
and paying people for taking it out.
I think I am right.
Chairman D o u g l a s . I f my good friend would yield-----Representative W i d n a l l . It is $100 million over 1962.
Chairman D o u g l a s . I f my friend will yield, this is due to the
political power of the 17 irrigation States and the 34 Senators that
they have.
This is a result of the action of Congress and cuts across both parties,
particularly in the Mountain States. They insist on these reclamation
projects at a high cost per acre. But I don’t think you should charge
this up against the Secretary. That comes out of the American
political system.
Representative W i d n a l l . Mr. Chairman, I can only charge against
the Secretary a continuance of a policy which existed before.
I am not charging it as against one political party. But I think
it is dead wrong, it is using our natural resources the wrong way.
We can better use that money in other directions.
Secretary F r e e m a n . Might I add in all fairness to some of the West
ern States and to the so-called reclamation projects, water on those
projects is generally not used for any commodities that we have in
surplus supply anywhere and it is so stated in the law.
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Therefore, if the land to which you refer, Congressman, in New
Jersey, is as effective, and could make a profit in the marketplace, it
would continue to do so. There is no surplus in fruits and vegetables.
These are perishables. There is no support program. There is no
Government program, except as we seek to serve the economy by
extensive research and marketing.
This has been a great contribution to the agriculture business com
munity and to the people of this country.
But there is no kind of support program for these commodities at
aU.
Chairman D o u g l a s . I may extend an invitation to my good friend,
Congressman Widnall. The Western States have a conference, with
a secretariat, both Eepublican and Democratic Senators, and some
Representatives, and they work for irrigation appropriations.
I would be very glad to join the Congressman in an invitation for
the nonirrigation States to have a conference.
Senator P r o x m i r e . I would be happy to apply for membership in
that group.
Secretary F r e e m a n . I am glad I do not qualify.
Chairman D o u g l a s . Because it is perfectly true that as a result of
the policy of the Congress and both administrations and both political
parties high cost land at high altitudes have been brought into culti
vation at great expense to the taxpayer, and even though not directly
competing with land in the Middle West and the vegetable belts, it is
indirectly competing with such land.
So, Congressman, will you sign a joint appeal ?
Representati ve W i d n a l l . I will join you.
Chairman D o u g l a s . Then we have the nucleus of a bloc.
Representative W i d n a l l . Mr. Chairman, one more question. Mr.
Curtis received an answer to a question of his that the $1.4 billion that
was going back in this new budget was for money that had been spent
prior to this administration. Then I think it was qualified at the
last by the fact that some of it was spent in 1960.
How much of that was in 1960 and how much was in 1961 and 1962 ?
Secretary F r e e m a n . I would have to check and I would submit
that for the record. I am obviously calling on my memory, but the
system of financing of the Commodity Credit Corporation is to re
plenish the capital stock of the Corporation and it lags 2 or 3 years
behind in doing that.
This system is adjusted from Congress to Congress and on occasion,
there was the desire expressed by the Appropriation Committees to
go on a current basis and to make an appropriation, which I welcome.
Then, in the last Congress—I am calling on my memory now—why,
this was not done, so we are kind of caught in a squeeze here, where
you get a double-up of replenishment for previous years that makes
the NOA budget look, as Congressman Curtis pointed out, like it is a
walloping increase, when actually, it is a replenishment to try to get
back for expenditures long since authorized.
(See p. 169.)
Chairman D o u g l a s . Mr. Secretary, doesn’t a large part o f th e
trouble which we have in agriculture "come from a fact that you have
already alluded to; namely, that the demand for farm products is
highly inelastic?
ECONOMIC REPORT OF THE PRESIDENT
161
Secretary F reeman . Yes, sir.
Chairman D ouglas. S o that an increase of 5 percent in the total
quantity of products produced will cause a reduction in the unit
price, whether in bushels or pounds, not of 5 percent, but of 10 per
cent, 15 percent, or 20 percent, and you have the situation in which,
if the farmers produce a larger total output, they receive a smaller
total gross income and a still smaller total net income.
And this very fact of inelastic demand means that advancing tech
nology may be a fine thing for the consumer or the middleman, but
it works havoc upon the farmer. Furthermore, is it not true that
if you were to allow the impersonal forces of the market to operate
fully, the result would be a disastrous fall in farm prices, farm in
comes, and instead of 200,000 farm families leaving the farm each
year, the number would run up to half a million or a million. Isn’t
that true ?
Secretary F reeman . The Senator has stated it very well indeed.
Chairman D ouglas. And this is what has been behind the farm
policies of the last 30 years, really.
Secretary F reeman . Yes, sir.
Chairman D ouglas. N ow , let me ask you another question.
In the feed grain proposals which you advanced last year, for
which I voted, you were charged with trying to regiment American
agriculture in determining how much they should produce. As I read
your bill, you were not trying to do this, you were going to give the
farmers the choice as to whether they wanted a completely free mar
ket or whether they wanted a market in which acreage, at least, would
be controlled.
You took the position that you could not go along in the future
half free and half nonfree, so to speak, that the farmers themselves
should choose whichever program they wanted. Is that correct ?
Secretary F reeman . That is correct.
Chairman D ouglas. H ow do you account for the misrepresenta
tion which was given to your program ?
Secretary F reeman . Well, the misrepresentation sometimes accom
panies the effort to present a position and a program. It would ap
pear to me obvious on the face of it that if two-thirds of the farmers
see fit to vote for a program, this is a pretty democratic procedure
and that they should have that opportunity. Certainly to me it could
not be described as an effort to regiment or to dictate to them.
Chairman D ouglas. I f more than one-third voted against the
program, you would have had a so-called completely free market with
no control over production and no support for prices; is that not
correct ?
Secretary F reem an . That is correct, and that is the situation no^\
in wheat.
Chairman D ouglas. My good friend, Thomas Curtis, says yes, that
is true but that you had the threat to dump. Is it not true "that the
bill had a provision that any surpluses would be disposed of in an
orderly fashion ?
Secretary F reem an . That is correct; and furthermore, the question
would remain what we should do in connection with what were very
substantial surpluses. As a very practical matter, you are either
going to destroy them or you are going to try very carefully to work
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ECONOMIC REPORT OF TH E PRESIDENT
them into the marketplaces or continue to pay to hold them and store
them. So we are stuck: with this.
I would merely point out to this committee the situation, if I may,
with a little pride, that today there are several hundred million fewer
bushels of surplus grain in Government hands, and in this budget there
are $250 to $300 million less than we would be spending if it had not
been for the cutback in surpluses of both wheat and feed grains.
Further, there would have been an additional hundreds of millions
of dollars if we had continued under legislation that was on the books
when I became Secretary in 1961, because, under the laws then the
surplus would have continued to climb very rapidly.
Now, it has been an expensive program to attempt to bring these
surpluses into balance; but, I believe, at the end of this crop year, we
shall have eliminated a surplus in feed grains. I f the signup is what
we expect it to be, we shall have dropped from about 87 million tons
to 45 or 50 million tons of feed grains on hand, which we, in the De
partment, believe to be essential security and stabilization reserves. I f
the wheat program goes into effect following the referendum, within
3 years we shall have the wheat reserves from 1,200 million bushels
down to about 6 million bushels, which we consider necessary reserves.
So although this program has been expensive, actually it has been
more successful than we expected it to be, and we are pleased with the
response of the American farmers to it.
Chairman D ouglas. That raises a question. In your statement, I
did not find any outline of the new farm legislation which presumably
Congress will be asked to pass. Does this mean that you have not yet
made up your mind what type of a bill you are going to suggest to
Congress ?
Secretary F reeman . Yes, it does, Senator; in the sense that I have
been trying very carefully to consult with Members of Congress in
connection with, as a very practical matter, what this Congress is
willing to entertain. I do not contemplate submitting an omnibus
bill as we have before, but seeking, now that we have made some sig
nificant progress, to submit specific commodity programs at the proper
time. I think there is a strong likelihood that, in the near future, the
President will submit a general farm message, setting out the broad
outlines he thinks we ought to follow in connection with particular
programs, and I still have some more consulting to do in connection
with specific commodity programs.
Chairman D ouglas. Mr. Secretary, since you have made this very
fine statement, may I say that if you consult with congressional leaders
and follow their advice, you are likely to come out with a program
which will protect cotton and wheat, but which will leave the feed
grains in the lurch, because there is a close alliance in Congress, as
you well know, between cotton and wheat, which operates over a wide
spectrum, in which the representatives of wheat customarily vote on
civil rights with the defenders of cotton, and when the kissing takes
place under the mistletoe, com is never there.
Mr. Widnall has made a very eloquent plea for fruits and vegetables
of New Jersey. I simply ask you not to forget the corn of the
Mississippi Valley. We have been sold down the river a great many
times. I know you do not want to do that yourself, but you some
times get caught in a political bind.
ECONOMIC REPORT OF THE PRESIDENT
163
Paraphrasing Winston Churchill, “I did not become a U.S. Senator
to witness the liquidation of the corn democracy of the Middle West.”
Senator Proxmire ?
Senator P roxmire. I was not going to get into the specifics until the
chairman pushed us into them, but since we are talking about feed
grains, I would like to ask you a couple of things about it for the
record.
No. 1, you talked about the improvement in the feed grain picture
that was effected without the proposal which was turned down by the
Congress last year, which I opposed and you proposed.
Secretary F reeman . That is right. We hope it will be. We do not
know how this program will work yet.
Senator P roxmire. The program which was actually in operation
was the Kennedy-Freeman program for 1961, which was an excellent
proposal and which did, for the first time in a long time, reduce the
feed grain surplus.
Secretary F reeman . Yes, sir.
Senator P roxmire. In the third place, there is considerable question
on the part of certainly many polling experts, Sam Lubell being one
example, and there being others I have seen, that the feed grain refer
endum could not have succeeded in view of the fact that 80 percent or
so of the farmers growing feed grains feed them on the farm and do
not sell them off the farm. Therefore the farmer would be faced with
a referendum in which he would vote for reducing his production of
what he would feed to his own animals, without being able to see any
direct or immediate benefit that he would get.
This would be especially true with the dairy farmer, inasmuch as
dairy farmers grow feed grain, as you know as well as I do, as a Min
nesota Governor; they grow these feed grains and feed them on the
farm, and the reduced feed grain production could not and would
not increase the price of dairy products, firmly anchored at 75 percent
of parity. So he would be voting against his interest if he voted for
this bill, inasmuch as he would reduce his own production of feed
grain and he would not get any greater income.
I can see the great benefits of your proposal if it worked out. It has
a lot of merit. But the danger of submitting this to the farmers and
not getting a two-thirds vote, and having no program at all if they
voted no, it seems to me, was a terrible risk and would have resulted
in disaster in our feed grains. That is why I voted against it.
Secretary F reeman . I can only comment that the Senator won the
contest. The bill did not pass.
Senator P roxmire. Here in your statement you talk about the 3-year
reduction in tax rates, saying that it will “ reduce the tax liability of
farm people by $250-$300 million or about 20 percent, with a corre
sponding increase in the amount of income, after taxes, that farmers
have at their disposal.”
Since it is an $11.1 billion tax cut, this would give the 8 percent
of our population which are now on farms only 2.5 percent, roughly, of
the tax cut. So in other words, they would get far less than a pro rata
per capita share.
Secretary F reem an . I think that is right, because the income of
agriculture is substantially less than the income of nonfarming seg
ments.
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ECONOMIC REPORT OF THE PRESIDENT
Senator P roxmire. However, you would agree with me that they
pay heavy taxes in other areas, and these would not be cut ?
Secretary F reeman . They pay property taxes and local taxes, which
would not be cut, and these are the heavy taxes which the farmer pays.
Senator P roxmire. And the farmer is a debtor. We learned that
farm income has remained the same and interest charges have almost
tripled.
Secretary F reeman . Yes, sir.
Senator P roxmire. I f we follow a policy, which seems to be ad
vocated by many, of a loose fiscal policy—in other words, spending
more than we take in—and tight money, high interest rates, to restrain
inflation, in your judgment would not this adversely affect the farmer,
inasmuch as he would not get much benefit from the tax cut and
would be really on the paying end of higher interest rates ?
Secretary F reeman . I am not an economist, nor am I testifying as
one. But I think a tight money policy, so-called tends to run con
trary to the farmers’ interest. Because as you pointed out, he normal
ly uses credit heavily and pays very heavy interest charges.
Senator P roxmire. I am going to ask you a question which I would
not ask if you were not so capable, and today I think you are doing
even better than I have ever seen you do before. I think you are do
ing a superb job.
Chairman D ouglas. Be careful, now.
Senator P roxmire. I have the budget for 1964, page 48.
Page 48 shows that the Defense Department decreased the number
of employees, will decrease them in the coming year. Other depart
ments increased them, and the Agriculture Department increases its
number of employees more than any other department of the govern
ment, with the exception of HEW, which increases about 5,900, and
the Post Office, 9,600. The Post Office, of course, is far bigger.
Now, I can understand the difficulties in arriving at an agreement on
increased spending in agriculture on the basis of the administrative
budget, the cash budget, the obligational budget.
But here it seems is irrefutable evidence of an increase in the Agri
cultural Department bureaucracy, with 1963 having 116,268 employees
and in 1964, 121,583 employees. What is the answer?
Secretary F reeman . I am glad you asked that question, Senator, be
cause we shall show in our on-going programs, for example in our
stabilization programs, by and large, a reduction in personnel and
the application, I think, of as many and as effective administrative im
provements and the use of modern data processing equipment and
various modern administrative methods as any department in the
Government, and I think as any private corporation in the country.
Our increases come simply in a program expansion in, particularly,
our forests and our soil conservation programs.
Senator P roxmire. Why do you have an expansion here, in view of
the fact that we have just argued and you seemed to concur, that we
have had income disaster on the part of our farmer from the programs
of the Department of Agriculture which have promoted research in
soil conservation, and many of these other very instructive things.
I can see why we have to have them, but why expand them ?
Secretary F reeman . First of all, the Nation’s forests, we have 186
million acres of national forests.
ECONOMIC REPORT OF THE PRESIDENT
165
Senator P r o x m ir e . H o w much of this increase is in forests?
Secretary F r e e m a n . O f 10,000,1 would guess 6,000 is in forests. I
would guess another 3,000 is in soil conservation, and I would guess
that the remaining 1,000 is in agricultural research for staffing of
laboratories which have been in the course of construction for some
time, and go into the utilization research that Congressman Curtis
referred to a moment ago.
Senator P r o x m ir e . The 10,000 increase between fiscal 1962 and fiscal
1964?
Secretary F r e e m a n . Yes. We have had, since I have been Secre
tary of Agriculture, a number o f visits by people, for recreational
purposes, to the Nation’s forests; it has jumped from about 70 million
to 110 million. It has been going up by leaps and bounds.
Senator P r o x m ir e . H o w about conservation ? Why is that ?
Secretary F r e e m a n . Because there have been going through this
Congress many local watershed programs—in Illinois, all around the
country—to prevent erosion. These take a long time.
First there is planning, and these are coordinated into upstream
water control, prevention of erosion, and flood control on the stream
beginnings. Now, a number of these programs that have been planned
over the years now are reaching the culmination where Congress is
acting on them and authorizing their construction.
We have a 10-year forestry program which involves an increase in
expenditure to try to update "these forests, to build roads into them, to
make them available for both recreation and industrial purposes, to
protect them in fire and all the rest of this, which involves a sub
stantial capital investment.
This is the kind of thing, when you move dirt and when you need
technicians and when you need people.
In terms of our on-going programs, I would want to repeat, I
would be happy to submit an analysis, the number of personnel in
volved has been substantially decreased.
Senator P r o x m ir e . Is any of this paid for by a trust fund? In
other words, do you charge farmers for improvement in their land?
Secretary F r e e m a n . This is not farmers; this would be a local
conservation, a local soil conservation district, and they enter into
cost-sharing as a part of it. But in the forests, we have the situation
where—and I am just recalling now—a net of $175 million a year from
receipts in timber goes into the general revenue account, and the
budget will show an item of $350 million worth of expenditures for
forests.
By the same token, in Agricultural Marketing Service, you will
have an item—again I have forgotten precisely—of $50 to $100 million
for research, where half of it or more is paid for in fees, which goes
into the general revenue account, but for which the Agriculture De
partment is charged as if it were a total outlay.
Senator P r o x m ir e . What percentage of this cost for personnel
will be paid for in charges to the public or beneficiaries?
Secretary F r e e m a n . Virtually none, in terms of additional
personnel.
This pattern repeats itself. In this budget, you will find REA
loans, maybe $400 million authorized; we shall have paid back this
year $350 million in REA loans. That will not even show in our
166
ECONOMIC REPORT OF THE PRESIDENT
budget. That will go into the general account and we will be charged
with those loans.
We do now have a revolving account in EEA which we can draw
on so the budget item no longer shows up. But the average increase
in employees is within the Soil Conservation Service, the Forestry
Service, for staffing, laboratories, research, long since authorized and
just now coming into use.
Senator P roxmire. A couple of other quick things I would like to
ask about.
On page 28 o f the Economic Indicators, it shows that indexes of
prices received by the farmers have dropped catastrophically since
1952, but have remained about the same steadily since 1957-59. But
the prices paid by farmers—interest, wages, tax rates, all items—
have gone up regularly and in a very consistent way from 1952 to
date. This seems to me to imply that any inflationary bias of the
economic policies of this administration—that is, if the tax cut re
sults in higher prices, whereas the farmer would not benefit very
much from the tax cut because his income is low—he would be hit
hard by the increase in prices, because he has to buy so much just to
operate his farm, he has to spend so much.
Inflation hits him harder, perhaps than any other group in our
economy.
Secretary F reeman . Y ou are absolutely right, and, of course, the
economic fact of life is that we live in a highly-organized society,
whether it be the business community, whether it be those who process
and distribute, or whether it be labor; there are organized groups
that have some muscle in connection with their percentage of the
take.
Farmers have been not only an unorganized group, but as such,
they have been low men on the totem pole because they cannot stand
up and exercise the kind of muscle needed to get what they are en
titled to.
So increased costs are passed off on them, and their increased pro
duction tends to have a depressive effect on prices, so their situation
tends to become progressively worse.
Unless some kind of machinery is developed, and I emphasize, not
necessarily government machinery—preferably self-help machinery
that farmers can operate themselves so they can have comparable
economic muscle in the marketplace, that will happen.
Senator P roxmire. I heard that the Department of Agriculture
might have plans for distribution of our surplus, including the dairy
surplus, widely in case of atomic attack; special packaging and so
forth, so it would be available to our people if we had an atomic
attack. This would take it out of commercial channels and, to some
extent, prevent the price depressing surplus overhang, in a very
constructive way, in view of the terrible situation we would be in
just for food, in an atomic attack.
Can anything be said about this now ?
Secretary F reeman . Yes, there will be proposals made to the Con
gress, and I think there is a good deal of discussion of this in
the Congress, for the strategic location of both processed and semiprocessed foods which would be relatively inexpensive in terms of
increasing the pipelines that now go to the school lunch programs and
other appropriations.
ECONOMIC REPORT OF THE PRESIDENT
167
Also, to try to place at strategic places around the country wheat
and feed grains in deficit areas. This we are beginning in a modest
way, and we are trying to administer and handle the Commodity
Credit stocks in such a way that they will be located, so far as we can,
consistent with sound business management, in places where they
would be needed in the event of an emergency.
I would want the Senator to know that I think, as I was encouraged
to discover in some depth at the time of the Cuban episode, we have
quite a civil defense organization in agriculture. I have always
believed in its importance, and we are prepared, I think, to meet any
emergency.
Senator P roxmire. That is very encouraging. It will be a help,
too, from the economic standpoint.
The only other question I have is why can’t we have more dairy in
our f ood-for-peace programs % It is my understanding that 32 per
cent of our wheat marketings goes into food for peace, and over 1
percent of our dairy marketings, although dairy is something that can
be packaged as dried milk, and so forth, and can be used so con
structively overseas.
Secretary F reeman . A good deal more is and should be used. The
problem is a mechanical one, it is a very practical one, because the use
of dry milk is something that many people are not familiar with and
do not actually know how to use. We have to have the means to
distribute and to get it where it is needed. When people sometimes,
I think—what they do not stop to realize is that every country in the
world has a commercial system of distribution. Almost no country
has a concessional system of distribution. The net result is that it is
a real challenge to get the food to the people who really need it without
disrupting the economy of the country in question and without
extensive amounts being diverted to misuse and black market and
other places.
But the program has been substantially stepped up. The paymentin-kind program for work projects, the school lunch program for
children, has been increased by 10 million children that are being
reached. Today, over 90 countries around the world are receiving in
one form or another American food. I think that there is going
to be a substantial expansion where dairy is concerned, but it is a
problem of teaching people how to use it.
Senator P roxmire. Thank you very much.
Chairman D ouglas. I f our Republican friends would agree, I
would suggest that they confine their questioning of Secretary Free
man to 10 additional minutes.
Representative C urtis. Each?
Chairman D ouglas. Well, now-----Representative W idnall . I do not want that much.
Representative C urtis. I have some questions here, Mr. Secretary.
Secretary F reeman . I am worried about you, the way you have been
studying this budget.
Representative C urtis. The only way I know to go at these things
is to get to the details, Mr. Secretary.
While you were talking about forestry service, I am aware of the
need for expansion here. Forestry service is an item that has a net
cut from 1963 to 1964. Not much, but it goes from------
168
ECONOMIC REPORT OF THE PRESIDENT
Secretary F reeman . Well, Congressman, if you would take a look
at the emergency public works program in there, you would find that
there have been about $20 million that have gone to the forests, and
we have put unemployed people to work around the country building
forest roads and trails and putting into practice some forestry man
agement principles, and that gets to Senator Proxmire’s question.
It is true that the 10-year forestry program that would have called
for about a $20 million a year increase has been cut back and that
we are not maintaining that level of expansion. The only increase
that has been allowed has been the increase for forest roads and trails
which was related to the economic condition of parts of the lumbering
industry in the West, and the need to be able to get into these places
to reach the timber.
Eepresentative C urtis. That goes up $5 million and access roads
goes down $2 million.
Secretary F reeman . I do not want to dispute those figures in that
budget.
Representative C urtis. It is your own budget. One is on page 170,
and page 171 is where Forestry Service starts.
Secretary F reeman . These must show someplace else then, because
I am quite-----Representative C urtis. It shows a $5 million increase of forest
roads and trails from $80 to $85 million. Then just right below it,
it shows access roads cut by $2 million. And the total for the Forestry
Service is not very much less, but it is a minus figure, —$244,000 less
than your previous budget.
Now, going on over, we can find out somewhere-----Secretary F reeman . I am sure the Congressman does not object
to cutting the budget .
Representative C urtis. No; I am simply trying to follow your
figures, because you have told us where the increases were. I know
where the increases were. I am going to come to them.
One of them, of course, is the Farm Home Administration, where
increased salaries and expenses go up 20 percent—that is page 168—
to a figure of almost $40 million.
Secretary F reeman . With an increased volume of loans of over 200
percent.
Representative C urtis. No. As a matter of fact, it is not. You
have a $50 million authorization to expend from debt receipts and
that is eliminated. In place of that, you have your program of $100
million, so it goes up 100 percent.
Secretary F reeman . Supplemented by $300 million of repayments
which you will find someplace else in this document.
Representative Curtis. It does not show here. I know the expense
is there.
But now I want to get to the real items that bring your new obliga
tional authority up by $1.4 billion. That shows on page 166 in the
total Commodity Credit Corporation fund for $428 million. Actually,
the breakdown of that is on page 164, and it does relate to price sup
ports and related programs in special bills. The big item is $520 mil
lion. Here is your notation: “ Request is to cover 1962 realized losses.
Decrease in expenditures caused largely by reduction of unusually
large volume of cotton placed under price supports in 1963.”
ECONOMIC REPORT OF THE PRESIDENT
169
But there is your item of $428 million. It is really $520 million
and it is from 1962.
Now, then, let us go over to the biggest item, which is really Public
Law 480 funds. This is on page 163, at the bottom—“Foreign assist
ance programs, Public Law 480,” an increase of $879 million. Let
me read the note on this: “ Appropriations made to cover estimated
CCC losses.”
It does not say anything about 1960. It says “ estimated.”
Expenditures for these purposes included a part which will be reim
bursed to cover CCC later and are summarized in explanation under
COO below. But those are your two big items which, together, total
about $1.3 billion.
We shall leave the record open, though, Mr. Secretary, so that any
further explanation of this you would like to make I would be glad
to receive.
(The following was later received for the record:)
The programs of the Commodity Credit Corporation are financed currently
through use of the Corporation’s borrowing authorization of $14.5 billion. Cur
rent expenditures are made from funds borrowed under this authorization and
not from appropriations to the Corporation. Appropriations to restore the im
pairment of the Corporation’s capital, resulting from losses incurred, are made
(and, with minor exceptions, have been made for many years) 2 years after
the year in which the losses were incurred. The 1964 budget includes a request
for an appropriation of $2,799 million for the fiscal year 1964 to reimburse
the Corporation for losses incurred under the price support and related pro
grams in the fiscal year 1962. Because of the 2-year lag in these appropria
tions, the appropriation requested for 1964 does not in any sense represent a
measure of the estimated expenditures or losses of the Corporation in the fiscal
year 1964.
A similar situation is also involved in connection with the items shown in the
budget under the heading “Foreign Assistance Programs.” These include
the Public Law 480 activities, the International Wheat Agreement, and the
barter program. The basic laws which authorize these programs also author
ize the use of CCC funds to finance them. In the beginning these programs
were financed entirely from CCC funds and appropriations to restore the cost
to CCC were made 2 years after the cost was incurred. For the past several
years, in view of the need to relieve the Corporation’s financial resources as
much as possible of the burden of carrying the cost of the foreign assistance
programs, appropriations have been provided on the basis of including (a) an
amount to be applied to the current cost of the programs and (&) an amount to
reimburse CCC for unrecovered costs of the prior year’s programs. The 1964
NOA estimate for the foreign assistance programs includes $563 million rep
resenting estimated unrecovered prior year costs.
Of the total increase of $1.4 billion in NOA for 1964 for the Department of
Agriculture, $1.3 billion relates to appropriations to restore losses on prior year
CCC activities and appropriations for the foreign assistance programs.
Secretary F r e e m a n . Thank you very much.
You will note the item of $1 billion which is called sale of com
modities for foreign currencies. You will notice the item of $1,560
million. This is a restoration for sales that were contracted for a year
ago.
Representative C u r t is . Your note says made to cover estimated
CCC losses.
Secretary F r e e m a n . This is-----Representative C u r t is . I f they were incurred, they would not be
estimated. They would be real. You see, I do not think we can
escape the fact that------
170
ECONOMIC REPORT OF THE PRESIDENT
Secretary F reeman . Estimated losses. I think this use in this docu
ment of “ estimated losses” refers, you see, to sales under title I, which
are estimated losses. Theoretically, we have acquired soft currencies
for these sales at 1 day, and their value we can only conjecture
about. But the replenishment of the capital stock of the Commodity
Credit Corporation, it is my best recollection, reaches back to I960.
I would be glad to give the committee a breakdown on this.
Eepresentative C urtis. That is all I want, Mr. Secretary, so that
w.e can understand this.
Secretary F reeman . Very well. It will be a good review for me.
Every time Congress jiggles with it, we end up with something a little
different.
Eepresentative C urtis. I never quite understood what accounting
procedures you followed. In fact, I have been critical, as you know,
of the procedure followed here in entering a minus $1 billion item
instead of a $2.5 billion receipts from the public for the sale, and then
a $1.5 billion increased expenditures to give you that minus $1 billion
net. Would you explain the accounting procedures that you actually
do follow?
Secretary F reeman . I shall try to do that, and if I might be pre
sumptuous enough to make a suggestion, and I make it in all serious
ness, this is a complicated business and Congress has had their reasons
for doing it, and if you have had occasion to bump into the chairman
of the Subcommittee on Agricultural Appropriations, I think he will
give you a pretty good picture of what really happened.
Eepresentative C urtis. I know they are frustrated, Mr. Secretary,
because I have talked to them. That is why I take this opportunity
to go directly to you to ask this. I can assure you that Congress does
not know what is going on here, or does not feel satisfied, because I
have talked to the people who were supposed to try to follow these
dollars.
Secretary F reeman . Let me get a narrative in connection with what
has happened over the past 4 years in the Commodity Credit Corpora
tion Act and submit it for your perusal.
Eepresentative C urtis. I f you would, Mr. Secretary; thank you
very much.
I have no more questions, Mr. Chairman.
Chariman D ouglas. Mr. Widnall?
Eepresentative W idnall . I have one more thing to say. I remem
ber last session, when the agriculture bill came up and was finally
passed in whatever form it was finally passed, some questions were
asked about the city consumer, whether support prices were going to
hit the city consumer, and there was a denial of this.
I would like for the record to say that in the metropolitan area
where I live, around New York, they have just increased the price
of bread 2 cents a loaf. I hope tne administration will crack down in
this case the way it did in steel. This affects the consumer.
Secretary F reeman . May I comment on that, that this is a very odd
situation, because the price support for wheat in 1961, or the 1962 crop
year, was $2 a bushel. The current support price for wheat is $1.82 a
bushel. In other words, as it now stands, the price of wheat, as far as
Government support is concerned, is less. That being the case, there
ECONOMIC REPORT OF THE PRESIDENT
171
could not conceivably be attributable to the administration program
that there is an increase in the cost of bread in your area.
Representative W idnall . I hope this is right.
Secretary F reeman . There is absolutely, in terms of any change in
price, no justification whatsoever for the increase in bread price.
Eepresentative W idnall. Have you seen the announcement of the
price increase?
Secretary F reeman . N o.
Eepresentative W idnall . I think it would be a very interesting
thing for the Department.
Senator P roxmire. Will you yield on that?
Eepresentative W idnall. Yes. I have no more questions.
Senator P roxmire. Could I ask how much of the 2-cent increase in
a loaf of bread, how much in the total cost of a loaf of bread does the
farmer get?
Secretary F reeman . I f that loaf of bread were selling for 23 or 25
cents, he would get 2.5 cents.
Senator P roxmire. So you would have to double what the farmer
receives in order to justify this on the basis of a support price ?
Secretary F reeman . Yes.
Chairman D ouglas. I f there are no further questions, we want to
thank you, Mr. Secretary.
Secretary F reeman . Thank you, Mr. Chairman and members of the
committee.
(Whereupon, at 4:06 p.m., the committee recessed, to reconvene
at 10 a.m. on Wednesday, January 30,1963.)
93762— 63— pt. 1------ 12
JANUARY 1963 ECONOMIC REPORT OF THE PRESIDENT
W E D N E S D A Y , J A N U A R Y 30, 1963
C ongress of the U nited S tates,
J oint E conomic C ommittee ,
W a sh in gton , D .C .
The committee met at 10' a.m., pursuant to recess, in room A E -1 ,
the Capitol, Senator Paul H . Douglas (chairman of the joint com
mittee) presiding.
Present: Senators Douglas, Proxmire, Pell, and M iller; Representa
tives Reuss, Griffiths, and Curtis.
Also present: W illiam Summers Johnson, executive director; John
R. Stark, clerk; James W . Knowles, senior economist; and Roy E.
Moor and Donald A . Webster, economists.
Chairman D ouglas. The nour of 10 o’clock having arrived, the
committee will come to order.
W e are very glad to welcome Mr. W illard Wirtz, the Secretary
of Labor. W e are very proud of Mr. W irtz in the State of Illinois.
W e are proud indeed that we have furnished two successive Secretaries
of Labor to the Cabinet.
STATEMENT OF HON. W. WILLARD WIRTZ, SECRETARY OF LABOR;
ACCOMPANIED BY SEYMOUR L. WOLFBETN, DIRECTOR, OFFICE
OF MANPOWER, AUTOMATION, AND TRAINING, AND STANLEY
RUTTENRERG, SPECIAL ASSISTANT FOR ECONOMIC AFFAIRS, U.S.
DEPARTMENT OF LABOR
Secretary W irtz. Mr. Chairman, you know how very real and
personal a pleasure it is to participate in the affairs of this committee
under your chairmanship, sir. I am very grateful for this opportunity
to meet with this committee.
I have submitted a statement and I should propose to follow that
statement to a considerable extent, and yet I think perhaps in the
interest of time it will be possible to shorten it a little bit.
I shall take that liberty, if it is all right with you, Mr. Chairman.
Chairman D ouglas. The statement as a whole will be printed and
then any off-the-cuff remarks which you make will be added at the
appropriate time.
(The statement referred to follows:)
T
e s t i m o n y o f W . W il l a r d W ir t z , S e c r e t a r y o f L a b o r , B e f o r e t h e J o in t
E c o n o m i c C o m m i t t e e o n t h e P r e s i d e n t ’ s E c o n o m i c R e p o r t , J a n u a r y 30,1963
I
I am very grateful for the opportunity to meet with this committee to discuss
the country’s economic future. I am especially gratified because the Economic
173
174
ECONOMIC REPORT OF THE PRESIDENT
Report of the President which you are currently considering is, in my opinion,
a notably frank, courageous, and able public document.
The report records the significant economic progress we made in 1962. This
was reflected, so far as the manpower figures are concerned, by an increase in
nonfarm employment of 1% million, reaching by yearend a level 1.7 million
above the best totals prior to 1961. The fraction of labor time lost through
unemployment and part-time work has dropped from 8 percent in 1961 to about
6.7 percent in 1962. The number of major labor market areas with heavy un
employment fell from 76 in January 1961 to 41 in December 1962. These gains
have been especially notable because they have been achieved without inflation
and with a substantial improvement in our balance of payments position.
Yet, instead of complacently describing the underlying economic strengths,
the report refuses to gloss over our economic shortcomings, and expresses dis
satisfaction with the differences between where our economy is and where it
can and should be. Instead of boasting about the role of the Government, it
recognizes that the Government’s tax system has been in effect a major factor
in our inability to achieve a greater degree of economic well-being for a large
number of our citizens.
This frankness comes not from despair but from strength and from the
knowledge that a vigorous, well-though-out program of tax reduction and reform
can give us the dynamic prosperity which no amount of exhortation could
provide.
We have large numbers of workers without jobs, mainly because producers
do not have markets; and producers do not have markets because purchasing
power is too small, incentives for investment are inadequate, and the rate of
operation is too low to permit the full benefits of our newest techniques and
machinery to be reflected in competitive pricing. We have struck an equilibrium
well below where it could be. A carefully conceived change in the tax struc
ture will result in a higher level of business and personal purchasing power,
adding incentives for risk taking and personal effort which will in turn enlarge
the circle by providing new jobs and generating still larger markets and further
investment.
My testimony here today will be set in the context of my own responsibilities.
These relate principally, so far as the subject of the committee’s central inter
est is concerned, to the subject of manpower. It is appropriate to point out in
this connection that, as prescribed in the Manpower Development and Train
ing Act which Congress passed last year, the President will shortly present to
Congress the First Annual Manpower Report. That report will bring together
for the first time the great variety of statistics and analytical information
available on our manpower requirements, resources, and utilization. Some of
what is touched on in my present statement, relating especially to the basic
relationship between our economic growth and our manpower problems, will in
all likelihood be the subject of more definitive development in the manpower
report.
II
I note, as meriting the committee’s attention and consideration, the relationship
between tie general economic condition, particularly as it affects the job situation
and outlook, and the currently much publicized subject of labor-management
disputes. This relationship involves more than the fairly obvious fact that
wage raises are given most readily when business is good and when the job
market is tight. I refer rather to the fact that today the lack of that adequate
long-term growth which has characterized our economy in recent years is intensi
fying labor-management problems and is creating a new issue, job security,
which is potentially as troublesome as the “rising cost Of living” once was.
This issue is sometimes misconceived as a difference in attitudes toward the
developments we describe, too roughly, as automation. It is not this. All
Americans—businessmen and workers, economists, and the man in the street—
have accepted new methods, new machines, new products as major factors con
tributing to our rapidly improving levels of living. They have recognized the
historical fact that rising productivity brings with it more and better jobs
than it takes away.
The difficulty is rather that improved technology accomplishes its whole pur
pose only when the economy is expanding strongly. The American workingman
feels safe only when jobs are available and when incomes reflect his increasing
value to the economy. When business is unable to expand, however, it cannot
furnish new job opportunities for those affected by improved technology, much
ECONOMIC REPORT OF THE PRESIDENT
175
less for new jobseekers. Furthermore, when business is unable to expand, it
cannot provide the increased incomes which are both the real fruit of rising
productivity and the source of further demand. In an economy which is not
sufficiently dynamic, business operates too near the break-even point and work
ers—particularly those who have become permanently attached to a particular
occupation, industry, area, and even firm—fail to receive the security and to
enjoy the rising standards of living which are the measure of a healthy economy.
Another result is that the major emphasis of business investment is placed on
labor-saving rather than expansion of capacity.
I ll
We face the fact today that a slowing up of the rate of growth in the economy
in recent years has meant reduced opportunity for people to find and keep jobs.
I have just received from the Department of Labor’s Office of Manpower,
Automation, and Training, and am releasing today, a report on industrial em
ployment since World War II. It make® the recent retardation of growth acutely
clear.
This report confirms the general realization that job opportunities are declin
ing significantly in certain major industries. Agriculture, for instance, is employ
ing 3 million fewer workers now than in 1947; an average annual decline of
200,000. Mining employment is also declining steadily, and is now 300,000 below
the 1947 levels. But what is not so well known; employment in contract con
struction, which advanced sharply until 1956-57, has since then fallen by
300,000; and the same trend, including the same numerical decline, has appeared
in the transportation and public utilities group.
In manufacturing there has been a net loss of 425,000 jobs in the past 5 years,
as contrasted with a gain of 1.6 million jobs in the previous decade. This job
loss was entirely among production workers, whose number declined by 775,000.
Employment in the trade sector, which had also risen rapidly until about
1957, has advanced recently at a relatively slow pace. The rate of growth in
the finance, insurance, and real estate industry has also slackened since 1957.
Only in the service sector, of all the private nonfarm groups, has the rate of
expansion in the past 5 years matched the earlier postwar rate.
Another exception to this disturbing picture of slackening growth is the public
sector. While the rate of growth has slowed down in the Federal sector, there
has been a sharp increase at the State and local level, largely in school systems,
at an annual rate of 312,000 jobs a year since 1957, or about 100,000 more per
year than in the previous decade.
Summarizing these figures, the stern fact emerges that the number of persons
on nonfarm payrolls has been expanding in the past 5 years at barely half the
rate of the first postwar decade even while the number of workers potentially
available has been increasing more rapidly. The annual rate of increase in the
last 5 years was only 0.9 percent, as contrasted with an annual rate of 1.9 per
cent between 1947 and 1957. In actual numbers, there were less than half a
million new nonfarm jobs added to payrolls each year of the past 5, compared
with 900,000 per year earlier. The contrast would be even sharper if we were
to remove the Government employment figures and consider only the private
nonfarm sector.
As a result of the reduction in the number of jobs available in our major
industrial activities, the proportion of all workers in goods-producing industries
has fallen from 51 percent in 1947 to 46 percent in 1957, and to 42 percent in
1962. In fact, there were actually 1.5 million fewer workers in the goods-produc
ing industries—agriculture, manufacuring, construction, and mining—in 1962
than in 1947.
Along with this shift has come a change in the number of blue-collar or manual
jobs available. In 1956, for the first time, there were more white-collar workers
than blue-collar workers. In 1962, the number of manual workers was only 3
percent greater than in 1947. Within this group, skilled craftsmen were the
only occupational group to experience an increase, although even this category
has been growing at a rate slower than that for the economy as a whole.
Looking at job totals by industry, or by occupation, does not tell the whole
story. Growth in service-type employment has been accompanied by a slow
down in the expansion of full-time scheduled jobs. In the private, nonfarm
group as a whole, virtually the entire increase in employment since 1957 is
accounted for by a rise in part-time employment, chiefly in the trade and service
industries.
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Small wonder, then, that we cannot be satisfied with our present rate of
economic expansion. Small wonder, then, that increased productivity—the essen
tial ingredient in our dynamic, competitive economy—has become a major com
plicating factor at our bargaining tables.
One of the byproducts of the slow growth in job opportunities and in incomes
is the tendency to seek a shorter standard workweek as a solution. The common
aim of current proposals is to spread existing employment opportunities among
a larger number of persons, without reducing regular weekly earnings.
It is not hard to understand, with 4 million men and women unemployed, the
reasons for proposing shorter hours of work. But merely distributing currently
available man-hours of work among all members of the labor force is no solu
tion. The additional costs resulting from reducing hours without reducing weekly
wages would lead to higher prices, reducing real wages, and making more diffi
cult the attainment of other economic objectives, including the improvement of
the Nation’s balance of payments. The infinitely preferable policy is to en
courage the greater effective demand which will create jobs for unemployed
workers. Many of those advocating the principle of a shorter workweek
apparently prefer, in fact, expansionary fiscal and monetary policies to reduce
unemployment, but they apparently believe that adequate policies to expand
output either cannot or will not be applied.
I note, too, that any legislative advancement of the shorter workweek prin
ciple would have the defect that it would represent a program for the economy
as a whole and would not take account of the diversity of economic conditions
among firms and industries as well as the differing preferences for work sched
ules among employees. There has, of course, been a long-term trend resulting in
a steady decline in the total time individuals spend at work. Gradual changes
in working time reached through collective bargaining, whether in the form of a
shorter scheduled workweek or more time off through longer vacations and more
holidays, have been occurring for many years and have had an important beneficial
effect both for workers and for the general economy. However, major abrupt
changes which would have a serious impact on unit labor costs would be neither
in the best interests of the parties nor helpful to the economy. The implementa
tion of the President’s tax program will greatly reduce pressures for working
hours to spread employment. It will place the issue of shorter working time in
proper perspective.
IV
I need not repeat here the details on the other side of the manpower ledger—
unemployment. The President’s Economic Report has made clear the heavy
social costs, the damage to the individual and the family, and the irretrievable
waste of manpower, all of which would be reduced immensely if the economy
were to move upward at a faster pace.
I note, however, the implications of the fact that the unemployment rate of
5.6 percent in 1962—a nonrecession year—was exactly the same as in 1954—a
recession year. There is no warrant for complacency in the face of the fact that
the economy now leaves as much joblessness in a good year as it did not very long
ago in a recession year.
Equally disquieting is the fact of a rise in the degree of joblessness which
must be considered long-term unemployment. In 1957, out of every 100 jobless
workers, 19 had been out of work 15 weeks or longer. In 1962, the ratio of
long-term jobseekers had risen to 28 per 100.
The increase in long-term unemployment raises a serious question as to the
adequacy of resources to tide jobless workers over their emergency. Studies
by the Department of Labor of beneficiaries of the Temporary Extended Unem
ployment Compensation Act of 1961 (who were the long-term unemployed)
showed that two-thirds were the sole or primary support of a household, twothirds were between 25 and 54 years of age, and three-fourths had been in the
labor force during every month of the 3 years preceding their first claim.
The President, in his Economic Report, has recognized that the Nation has
a special responsibility to these people, most of whom are paying the price,
not for their own inadequacy, but for the general failure to provide a sufficiently
dynamic economy. We need an updated unemployment insurance system which
will extend coverage to more workers, which will encourage the States to provide
more adequate and equitable benefits, and which will extend the duration of
unemployment benefits in recognition of the fact that the economy is not
providing the opportunities for finding jobs which it is capable of providing.
It will, at best, take time for a major push in employment to gain sufficient
momentum to reduce long-term unemployment significantly.
ECONOMIC REPORT OF THE PRESIDENT
177
Among the most serious, persistent, and intractable unemployment problems
are those facing young people. In the past, the high rate of unemployment
among young people has too often been accepted as inevitable. Joblessness is
always higher among them than among adults, because they include a high
proportion of new labor market entrants and job changers and because young
people starting on their working careers tend to be more vulnerable to layoffs.
But more recently the unemployment problems of young persons have become
increasingly urgent. The number of unskilled and semiskilled jobs—those which
frequently provide the first opportunities for new young workers—has been
declining at an accelerating rate. The forthcoming manpower report will carry
projections of future occupational needs which will demonstrate the growing
demand for skilled, well-educated workers.
The rate of unemployment is especially high for youngsters who drop out
of high school. Some 27 percent of the dropouts who left school in 1961 were
unemployed in October of that year, as compared with 18 percent of the high
school graduates.
There is urgent need for specific legislation intended to provide employment
opportunities for the youths who are now or are in danger of being left out
of the mainstream of employment. Last October there were 600,000 youths age
16 to 21 out of school and out of work. Out-of-school youth were 7 percent
of our labor force—but 18 percent of our unemployed. They are a major
problem today—and the problem can become steadily worse from year to year
unless we lend them a hand. Constructive work opportunities are essential
to give them a sense of belonging, a sense of responsibility, and the incentive to
seek further education and training.
The Youth Employment Act can help provide opportunities to do neces
sary and meaningful work, both outdoors and in community facilities, such as
hospitals and recreation centers. Serious needs exist, and these youngsters
can be used constructively.
Passage of a Youth Employment Act in this session could well be an important
companion piece to a tax bill. The latter would open new job vistas and the
former would show discouraged and disillusioned youngsters that they, too,
have a share in the burgeoning prosperity.
V
If a review of the past 5 years offers only incomplete reason for satisfaction,
it is plain that the next 5 years will test our mettle more sternly. Let me put
the problem in the plainest terms—not in GNP, not in unemployment rates, and
not in goals—but simply in terms of the jobs needed and our efficiency in fur
nishing them.
Between 1957 and 1962, our total labor force increased by 3.8 million. Over
the same 5 years, output per man-hour in the total economy rose a total of 12.5
percent. In order to avoid any net displacement resulting from the rise in
productivity, 7.5 million job opportunities had to develop either in the same
shops—in the form of increased output—or elsewhere in the economy. Thus,
it was necessary for the economy to produce 11.3 million new jobs or job equiv
alents. It fell short of that task by 1.1 million jobs—the increase in unemploy
ment—or 10 percent. In other words, the economy furnished 90 percent of the
new jobs or the new job equivalents which were necessary simply to keep unem
ployment from rising above the 4.3 percent rate of 1957.
The 90-percent rate of achievement is probably too high a figure. Had the
demand been adequate, the labor force would have risen by a larger amount than
it actually did because more housewives would have taken jobs to supplement
the family income and fewer older workers would have left the labor force
because of inability to get jobs. In addition, a faster rate of growth would have
brought with it economies of scale and incentives to modernize, which would
have increased output per man-hour.
What does even the inadequate 90 percent mean for the future?
Between 1962 and 1967, the labor force will increase by an estimated 6.5 mil
lion. If productivity in the total economy rises at the postwar average of 2.7
percent a year—a very conservative rate—some 9.6 million new jobs or job equiv
alents will have to be provided to meet the effects of this increased productivity.
This means a total need for 16.1 million new jobs—just to stay even.
A 90-percent rate of efficiency in meeting this need (the 1957-62 experience)
would result in an increase of 1.6 million in unemployment. Total unemploy
ment would, therefore, rise from the present 4 to 5.6 million—or to more than
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ECONOMIC REPORT OF TH E PRESIDENT
7 percent of the 1967 labor force. This would toe the intolerable price of just
moving along as we have been.
One other aspect of this prospect for the future: Between 1950 and 1960 the
labor force aged 14 to 24 increased toy less than 400,000. Between 1960 and 1970,
this group will increase by more than 6 million. The big push will occur around
1965. We have only 2 years to find the answer, and to get it working. Never
before has this country had to train and provide jobs for so many youngsters
in so short a time.
I cannot urge too strongly upon this committee the view, developed from what
I recognize as an intensive, perhaps almost obsessive, preoccupation with the
manpower supply and demand factors in the economy, that this situation makes
it imperative that this economy be reinvigorated and strengthened by the adop
tion of the tax program which the President has placed before the Congress. I
have presented this point of view in terms of statistics. I think of the need in
terms of the human values of which these figures are only a cold reflection.
VI
I would not leave, with this committee, however, the impression that I find
the total answer to our needs for new growth and full employment in an im
proved tax system, a better unemployment insurance system, and a Youth Em
ployment Opportunities Act. The remaining factor, recognized by the President
in his Economic Report, is the need, in this increasingly complex and rapidly
changing economy for fuller assistance to workers in making the transition from
declining to new industries, from contracting to expanding occupations, and from
labor market areas in which job openings are being reduced to those of rising
job opportunities.
In 1961, with the passage of the Area Redevelopment Act, the concept of
Federal retraining for the unemployed came into being. This was followed, in
1962, by the Manpower Development and Training Act, which substantially
broadened Federal activity in the field of occupational training and retraining.
In addition, this 1962 statute laid the basis for a unified comprehensive man
power research program, designed to investigate the factors associated with
unemployment and to develop methods for eliminating its causes and ameliorat
ing its effects.
The Manpower Development and Training Act program has been in effect only
a short time, but certain implications concerning its direction can be drawn from
the record of the more than 500 projects which were approved between Septem
ber 1962, when training operations under the act were begun, and January 24
1963, the latest week for which information is available.
Projects have now been approved in 50 States covering more than 20,000
workers. Training courses have been approved for weU over 100 occupations,
falling into all major occupational categories, predominantly white-collar and
skilled occupations. This concentration reflects the prevailing shifts in our econ
omy from goods producing to service industries, from blue-collar to white-collar
occupations, and from less skilled to more skilled jobs which I have already
described. Over a third of the trainees were enrolled in courses leading to pro
fessional, managerial, clerical, and sales jobs; over 16 percent were in training
for such skilled service occupations as motor vehicle mechanics and repairmen.
Workers are trained only in occupations for which vacancies are available;
even in areas of relatively substantial unemployment, 7 out of 10 of the persons
in training are enrolled in courses leading to skilled occupations. Retraining
programs can be fully effective only when a sufficient number of job opportunities
are created.
VII
If I have dealt disproportionately here with what may seem the data of diffi
culty, the statistics of shortcomings, it is because the only possibility I see of
default in the American economy is that we will underestimate the full pro
portions of the task and the opportunities at hand.
If most of the figures which I have used here seem large, it is an appropriate
reminder that they have to do with only the 5- to 10-percent fringe of potential
failure. The worst risk is that when so many are doing so well, grevious burdens
on a comparative few will be overlooked.
I see every unemployed person in this country today not so much as a prob
lem but rather as a wasted asset, a potential contributor to the productive force
which would be pressed to its limit to meet presently unmet needs in this country
and in the world.
ECONOMIC REPORT OF THE PRESIDENT
179
My report to this committee is that we have the full capacity and competence
to meet every problem which exists in the manpower field, and are dependent
only upon the decisions to do it.
Secretary W irtz. I am especially glad to have this opportunity to
comment on the Economic Report of the President because I count it
very frankly a courageous, and I think, a very able public document,
and I would hope very much to keep my remarks in the pattern of the
approach which is taken by the President in his report.
My comments will be put very largely in the context of my par
ticular responsibilities which are in the manpower area. I shall not
attempt to cover those matters which have been covered in previous
testimony before the committee.
I point, therefore, in the beginning at the remarkable progress, the
economic progress, which has been made recently in terms of the
manpower figures as we have them. This progress is reflected in the
fact that there was an increase in nonfarm employment last year of
1y 3 million.
It is reflected in the fact that the fraction of the labor-force time
lost through unemployment and part-time work has dropped from 8
percent in 1961 to about 6.7 percent in 1962.
Just as one other index of the same progress, I note that the num
ber of major labor market areas with heavy unemployment fell from
76 in January 1961 to 41 in December of 1962.
Chairman D ouglas. I want to start off by congratulating you in
your willingness to use the figure which includes time lost within em
ployment ; that is, part-time work, as well as time lost through com
plete unemployment. I never expected to find a government which
would be willing to do this because it makes the figures worse. It is
always advanced by the outs as a criticism of the ins. I have done
that myself. I am very happy to see that you come out very frankly
on this issue.
Secretary W irtz. Y ou well know, sir, that is in large measure a
result of your own stimulus in this direction. We appreciate the
emphasis which has been placed on that.
This testimony will again, in the pattern of the Economic Report,
be related to the very large emphasis which we place on the importance
of a change in the tax system and in the tax structure. We have a
very large number of workers in this country without jobs today.
We think that this is mainly because the producers do not have the
markets which are required and the producers do not have those mar
kets because the purchasing power is too small.
We feel that we have struck an equilibrium which is well below
where it ought to be. We feel a very carefully conceived change in
the tax structure will result in a higher level of business and personal
purchasing power. It will add incentives for risk taking and personal
effort which will in turn enlarge the circle by providing new jobs and
still enlarging the markets and further investment. It is to that
possibility that I address particularly this testimony about the man
power aspects of this problem.
I call the committee’s attention to the fact that the President will in
accordance with the terms of the Manpower Development and Train
ing Act be filing the First Annual Manpower Report in about 5 weeks
and some of what I suggest here will be the subject of more definitive
development; in the manpower report.
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ECONOMIC REPORT OF THE PRESIDENT
I start in terms of particulars by noting the relationship between
the general economic condition today, particularly as it affects the job
situation and outlook, and the currently, much publicized subject of
labor-management disputes. Too many of my hours recently, frankly,
have been devoted to the working with some of these major labor dis
putes and controversies, a common characteristic of which is the
emphasis today upon the manpower utilization and the job security
problems. We would not have had a dock strike in this country this
winter if it had not been for the problem of manpower utilization and
job security which proved so difficult for those parties.
That same problem underlies a number of the other major disputes
which have been the subject of so much attention in this country.
The issue which is involved here is sometimes misconceived as a dif
ference in attitudes toward the development which we describe all
too roughly as automation. There is developing something of a feel
ing that tnere is a position o f labor of opposition to automation as
distinguished from a different position on the part of industry.
This is not the case at all. We find in these major labor disputes
a common attitude on the part of the working man and the manager, a
common attitude which recognizes the essentiality of technological
improvement.
The real problem is that under a situation where the economy is not
expanding at a sufficiently fast rate, the whole fruits, the whole value
of technological development cannot be realized, and there is created
instead a pressure on the situation. When a business is unable to ex
pand it cannot furnish new job opportunities for those affected by im
proved technology and much less for new jobseekers.
Then, of course, another result of this situation is that the major
emphasis of business investment is placed on labor saving rather than
on the expansion o f capacity. We face the fact today that a slowing
up of the rate of growth in the economy in recent years has meant
substantially reduced opportunity for people to find and to keep jobs.
I have just received, Mr. Chairman, and Mr. Reuss, from the De
partment of Labor’s Office of Manpower, Automation, and Training,
and I am releasing today, a report on industrial employment since
World War II. It makes the recent retardation of growth acutely
and ominously clear. This report confirms the general realization that
job opportunities are declining significantly in certain major
industries.
Agriculture, for instance, is employing today 3 million fewer work
ers now than in 1947. That is an average annual decline of 200,000.
Mining employment is also declining steadily and is now 360,000
below the 1947 level.
But there are some other things appearing in this report which are
not so well known. Employment in contract construction which ad
vanced very sharply until 1956 and 1957 has since that time fallen by
about 300,000, and this same trend including the same numerical de
cline has appeared in the transportation and the public utilities group.
Chairman D ouglas. Mr. Secretary, I wonder if you or one of your
assistants could give the figures for transportation and for public
utilities.
Secretary W irtz. Yes. There has been distributed to the commit
tee, Mr. Chairman, I think the copies of this Manpower Report No. 5.
Chairman D ouglas. I am going to ask that this be made a part of
ECONOMIC REPORT OF THE PRESIDENT
181
the record at the conclusion of your remarks. I wondered if we could
get these facts in the record at this point.
Secretary W irtz. The specific answer to your question, Mr. Chair
man, appears on page 9 of this report in table No. 4, the item of con
tract construction appearing about two-thirds of the way down that
sheet, and the change between 1947 and 1957 and the change between
1957 and 1962 is shown both in absolute figures and in percentage
figures.
For contract construction this table would show that between 1947
and 1957 the annual employment change for contract construction
was an increase o f 4 percent a year. That is reflected in an absolute
figure of 94,000. That since 1957 and for the last 5 years the annual
rate of change has been —1.6 percent, with a resultant reflection in
absolute figures of 45,000 workers.
Chairman D ouglas. On transportation, I notice a decrease of only
about 240,000.
Secretary W irtz. That would be about right.
Chairman D ouglas. That is during this time. I assume that the
decrease on the railways was much greater than this. Does this in
clude taxi drivers ?
Secretary W irtz. Mr. Chairman, may I introduce Dr. Seymour
Wolfbein, the Director of our Office of Manpower, Automation, and
Training; and accompanying me, too, Mr. Stanley Ruttenberg, Special
Assistant to the Secretary for Economic Affairs. Dr. Wolfbein has
been largely responsible for the preparation of Manpower Report
No. 5 and would address himself to that question specifically.
Chairman D ouglas. I asked if it included taxi drivers. Did you
say it included airline operatives ?
Mr. W olfbein. Yes, sir; it includes all forms of transportation,
buslines.
Chairman D ouglas. Would it include taxi drivers ?
Mr. W olfbein. Yes, sir. Also this is a broad group which includes
all the public utilities, Senator Douglas, as you know.
Chairman D ouglas. The decrease on the railways and electric lines
has not been compensated for in this major branch by an increase in
airlines, buses, or taxi drivers.
Mr. W olfbein. N o, sir.
Secretary W irtz. The same results, Mr. Chairman, are shown
graphically in the chart which follows table No. 4, and you will notice
with respect to transportation and public utilities with the bars ap
pearing in about the middle of the chart there is reflected 0.2 percent
annual increase from 1947 to 1957 as far as transportation and public
utilities are concerned, and following that in the shaded area the drop
of 1.5 percent per year since 1957.
Looking at manufacturing in terms of this same comparison there
has been a net loss of 425,000 jobs in the past 5 years. That contrasts
with a gain of 1.6 million jobs in the previous decade. This job loss
was entirely among production workers. Their number declined by
775,000.
Employment in the trade sector which had also risen rapidly until
about 1957 has advanced recently at a relatively slow pace.
The rate of growth in the finance, insurance, and real estate industry
has also slackened since 1957. Only in the service sector of all the
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ECONOMIC REPORT OF THE PRESIDENT
private nonfarm groups has the rate of expansion in the past 5 years
matched the earlier postwar rate.
There is another exception to this picture and that is in the public
sector. While the rate of growth has slowed down in the Federal
sector, there has been a sharp increase at the State and local level,
largely in the school systems at an annual rate of 312,000 jobs a year
since 1957, and that is about 100,000 more per year than in the previous
decade.
Chairman D ouglas. Your figure shows a percentage increase for
Federal employment from 1947 to 1957 of 1.6 percent; State and local,
4.2 percent; 1957-62, an annual rate of increase of 1.1 percent Federal
employment; State and local, 4.8 percent.
Secretary W irtz. That is correct.
Summarizing these figures, this very stem fact emerges. The
number of persons on nonfarm payrolls has been expanding in the
past 5 years at barely half the rate of the first postwar decade, and
that is even while the number of workers potentially available has
been increasing more rapidly.
The annual rate of increase in the last 5 years was only 0.9 percent,
as contrasted with an annual rate of 1.9 percent between 1947 and
1957. In actual numbers, there were less than half a million new
nonfarm jobs added to payrolls each year of the past 5, compared with
900,000 per year earlier.
I point out that that contrast would be even sharper if we were to
remove the Government employment figures and consider only the
private nonfarm sector. As a result of the reduction in the number
of jobs available in our major industrial activities, the proportion
of all workers in goods-producing industries has fallen from 51 per
cent in 1947 to 46 percent in 1957 and now down to 42 percent in 1962.
In fact, there were actually a million and a half fewer workers in the
goods-producing industries—agriculture, manufacturing, construc
tion, and mining—in 1962 than in 1947.
Along with this shift there has come a change in the number of
blue-collar or manual jobs available. In 1956, for the first time, there
were more white-collar workers than blue-collar workers. In 1962,
the number of manual workers was only 3 percent greater than in
1947. Within this group, skilled craftsmen were the only occupational
group to experience an increase, although even this category has been
growing at a rate slower than that for the economy as a whole.
Looking at the job totals by industry or by occupation does not
tell the whole story. Growth in service-type employment has been
accompanied by a slowdown in the expansion of full-time scheduled
jobs.
I come here most pointedly to the fact to which you referred earlier,
Mr. Chairman—in the private nonfarm group as a whole, virtually
the entire increase in employment since 1957 is accounted for by a
rise in part-time employment, chiefly in the trade and service indus
tries. You will find in the Manpower Report No. 5 a fuller develop
ment of that particular fact.
So we suggest that it is small wonder that we can’t be satisfied with
our present rate of economic expansion. It is small wonder that
increased productivity, the essential ingredient in our dynamic com
petitive economy, has become a major complicating fact at our
bargaining tables.
ECONOMIC REPORT OF THE PRESIDENT
183
I say although this point is developed here in terms of cold statistics,
this is the point which has been causing us the most trouble in connec
tion with these major industrywide critical emergency disputes which
we have been facing.
A byproduct of the slow growth in job opportunities and in incomes
is this tendency to seek a shorter standard workweek as a solution.
The common aim of current proposals is to spread existing employ
ment opportunities among a larger number of persons, without reduc
ing regular weekly earnings. It is not hard to understand, with 4
million men and women unemployed, the reasons for proposing
shorter hours of work. Yet merely distributing currently available
man-hours of work among all members of the labor force is in our
judgment no solution. The additional costs resulting from reducing
hours without reducing weekly wages would lead to higher prices,
reducing real wages, and making more difficult the attainment of
other economic objectives, including the improvement of the Nation’s
balance of payments.
The infinitely preferable policy is to encourage the greater effective
demand which will create jobs for unemployed workers. I think it
is true from my conversations that a great many of those advocating
the principle of a shorter workweek apparently prefer, in fact, ex
pansionary fiscal and monetary policies to reduce unemployment.
They apparently believe, though, that adequate policies to expand
output either cannot or will not be applied.
Chairman D o u g las . I wonder if we could go into the arithmetic of
the 35-hour week, Mr. Secretary.
Secretary W ir t z . Yes, sir.
Chairman D o uglas . Assume hourly rates of $2.50 an hour, and full
time weekly earnings at 40 hours of a hundred dollars a week ?
Secretary W i r t z . Your assumption was at what rate per hour ?
Chairman D ouglas . $2.50 an hour. And full-time weekly rates,
therefore, of a hundred dollars. In the 35-hour week, in order to get
a hundred dollars, the hourly rate according to my computations, which
I have not checked, would have to go up to approximately $2.86.
Would someone check that?
Secretary W ir t z . It should be in that area, $2.86.
Chairman D ouglas . That would be an increase of 36 cents an hour
or slightly over 14 percent?
Secretary W ir t z . Yes, sir.
Chairman D ouglas . Fourteen-plus percent ?
Secretary W ir t z . That is right, sir.
Chairman D ouglas . It would be the reciprocal of the reduction in
hours. Would you think American manufacturing industry could
stand this increase of 14 percent ?
Secretary W ir t z . The answer to that in general would be “ no,” Mr.
Chairman,, but I would respect the impossibility of a general answer.
In that connection I should say to you that within the past 10 days
we have asked the Bureau of Labor Statistics to make for us a com
plete, as far as the presently available information permits, study of
the effects of a shorter workweek if it were established in different
areas.
There would be some industries in which it could be absorbed a good
deal more easily than others. There would be involved the question of
the degree of international competition which is involved.
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ECONOMIC REPORT OF THE PRESIDENT
I don’t mean to fuzzy-up the answer to your question. It would
be my judgment that in the general form in which the question is put
the general answer would be “no,” given the present state of the
economy.
Chairman D ouglas. President Roosevelt faced this same demand
early in his administration when the high unemployment led to the
demand for a 30-hour week with no reduction in weekly earnings,
which would have meant an increase of 40 percent in hourly rates.
He tried to head this off by the 1STRA rather than to raise hourly costs.
I happen to think that the NRA was an incorrect answer. It was a
device or an attempt to expand employment which I think was largely
unsuccessful.
Secretary W irtz. This is a problem with which we are familiar in
general as a result of the changes in the Fair Labor Standards Act.
I am obligated by law to report to the Congress, I think tomorrow
or the next day, what evidence it has been possible to collect as to the
effect of the last change in the Fair Labor Standards Act. I feel no
restraint or constraint by saying to you that the results of that study
would indicate that that degree of change in this area has not had a
negative effect on the economy to any identifiable extent.
I would point out, too, just summarizing really the next point in
my testimony, that we recognize that there has been a long-term
definite trend toward a reduction in the workweek. We point out, too,
the fact that there is going on in private collective bargaining today in
connection with the paid holidays, the vacation, the workweek, the
overtime provisions, a further development of that trend. That would
seem to have in a good many cases an affirmative effect both in terms
of the economics and in terms of the human values of the situation.
So it would be in my judgment a mistake to take any position of
broad negative opposition to any further consideration or fluctuation
of the workweek. It is not that simple. But if we were talking, as
these proposals do, about reducing the workweek from 40 to 35 hours
by legislation at one point, the case against it seems to me almost
overpowering.
I have summarized the next part of the testimony and would there
fore turn now to the other side of the manpower ledger and suggest
to the committee those figures which seem most significant with re
spect to the unemployment problem.
The President’s Economic Report has already gone into this. To
the extent that any repetition of detail here would be unwarranted and
inappropriate, I point to only two or three additional factors.
One, I note the implications of the fact that the unemployment rate
of 5.6 percent in 1962, which was a nonrecession year, was exactly the
same as the unemployment rate in 1954 which we considered at that
point a recession year. I suggest that there is no warrant for com
placency in the face of the fact that the economy now leaves as much
joblessness in a good year as it did not very long ago in a recession
year.
Equally disquieting is the fact of a rise in the degree of joblessness
which must be considered long-term unemployment. In 1957, out of
every 100 jobless workers, 19 had been out of work 15 weeks or longer.
In 1962, the ratio of long-term jobseekers had risen to 28 per 100.
This increase in long-term unemployment raises a serious question
ECONOMIC REPORT OF THE PRESIDENT
185
as to the adequacy of resources—present resources—to tide jobless
workers over their emergency.
I want to make it perfectly clear that in general these long-term
unemployed are responsible people with the closest attachment to
the work force. Two-thirds, as nearly as our studies suggest, of these
people are the sole or primary support of a household. Two-thirds
are between 25 and 54 years of age. Three-fourths have been in the
labor force during every month of the 3 years preceding their first
claim.
Those figures are based on our analysis of the results of the admin
istration of the Temporary Extended Unemployment Compensation
Act. We feel very strongly that we need an updated employment
insurance system. The President has covered this matter in his
Economic Report in general terms, and there will be submitted to the
Congress, for its consideration, the proposals of the administration
in this area.
I point next to the exceedingly serious persistent and intractable
unemployment problem that today faces young people. In the past,
the high rate ox unemployment in young people has too often been
accepted as inevitable. I don’t think it is. The number of unskilled
and semiskilled jobs, however, those which frequently provide the
first opportunities for new workers, have been declining at an ac
celerating rate, and we recognize and emphasize the impact of that
development upon the problem of the untrained child, youngster,
leaving school.
The rate of unemployment is especially high today for youngsters
who drop out of high school. Some 27 percent of the dropouts,
although I should like to say, Mr. Chairman, that is a phrase which
bothers me terribly, the dropout phrase. We had reference yesterday
to the pushouts. I am inclined to think, sometimes, it is as much one
as it is the other. I say that against the background of 20 years or
more of teaching.
Representative Curtis. What do you mean by “ pushouts” ?
Secretary W irtz. I mean, Congressman Curtis, that we are a little
inclined to view this problem today in terms of shortcomings of the
individual students and it is high time that we look very seriously
at the question of whether the educational structure is such that there
is an element of pushout on that side as well as dropout on the side
of the individual.
Representative Curtis. Do you think it is motivation ?
Secretary W irtz. I think it is lack of motivation on the part of the
individual. I think it is lack of proper direction in some cases on
the part of the educational system. But I don’t like the dropout
phrase anyway.
Some 27 percent of these students who left school in 1961 were
unemployed in October of that same year, and that compares with
only 18 percent of those who are high school graduates. There is an
urgent need, in our judgment, for specific legislation intended to
provide employment opportunities for the youths who are now or are
in danger of being left out of the mainstream of employment.
Last October, there were 600,000 youths, ages 16 to 21, out of school
and out of work.
Chairman D ouglas. Mr. Wirtz, Dr. James Conant in the book
which he published last year, which was based upon several years of
186
ECONOMIC REPORT OF THE PRESIDENT
inquiry, estimated the number of youths in this age group who were
neither in school nor at work at approximately a million. Your figure
is somewhat lower than this.
Secretary W irtz. Yes, it is for a different period. There is not a
precise reconciliation of the figures. The figure that I have here is
for last October. Dr. Conant’s book covered a different period. We
could furnish you a reconciliation of that to the fullest extent possible,
Mr. Chairman, if that is appropriate.
Chairman D ouglas. I f it is not too much trouble, it may be ap
pended to your testimony.
Secretary W irtz. Surely.
(The information referred to follows:)
The number of unemployed youth, aged 16 to 21, who were not in school was
600,000 in October 1962, a month when unemployment is generally low. This
group of unemployed youth ranged from 600,000 to 800,000 (except during the
summer months), and averaged 700,000 in 1962.
It is my impression that Dr. Conant’s figure of 1 million out-of-school un
employed youth refers to the ages 16 to 24, the number the Bureau of Labor
Statistics reported for October 1961.
Senator P roxmire. It seems to me the age range was 14 to 19.
Secretary W irtz. We have tried to break this down in as many
different ways as possible. We understand that question was raised
here on Monday of this week. These figures would vary depending
' 1 ^ t the general impact remains starkly
.. .
„
jd this year in the advancement by
the administration of the Youth Employment Opportunities Act to
which we attach very real significance in terms of meeting this par
ticular part of the problems. We think the passage of the Youth
Employment Act at this session is a very important companion piece
to the tax bill.
Now talking about the past, if a review of the past 5 years offers
surely most incomplete reason for satisfaction, it is even plainer that
the next 5 years is going to test our national mettle even more sternly.
Let me put this problem in the plainest possible terms, not gross
national product, not unemployment rates, out simply in terms of
the jobs mat are going to be needed and our efficiency in furnishing
them. I apologize for the intricacy of these figures which follow,
but it is the best way we know to develop a picture of this situation.
Between 1957 and 1962, our total labor force increased in this
country by 8.8 million. Over that same 5 years, output per man-hour
in the total economy rose a total of 12.5 percent. In order to avoid
any net displacement resulting from the rise in productivity 7.5 mil
lion job opportunities had to develop either in the same shops in the
form of increased output, or elsewhere in the economy.
So it was necessary for the economy to produce during that period
11.3 million new jobs, or job equivalents, to cover both the additional
entries into the work force and the results of increased productivity.
We fell short of that task by 1.1 million jobs. That is between 1957
and 1962. That was the increase in unemployment. It amounted
to 10 percent. In other words, the economy furnished 90 percent
of the new jobs or job equivalents which were necessary simply to
keep unemployment from rising above the 4.3-percent rate of 1957.
Now that 90-percent rate of achievement is probably too high a
figure, for had the demand been adequate the labor force would un
ECONOMIC REPORT OF THE PRESIDENT
187
doubtedly have risen by a larger amount than it actually did because
more housewives would have taken jobs to supplement the family
income^ fewer older workers would have left the labor force because
of inability to get jobs.
In addition, a faster rate of growth would have brought with it
economies of skill and incentives to modernize which would have
increased output per man-hour.
What does this inadequate 90 percent mean for the future?
Be
tween 1962 and 1967 the labor force would increase by an estimated
6.5 million. I f productivity in the total economy rises at the postwar
average of 2.7 percent a year, and that is a very conservative rate,
some 9.6 million new jobs or job equivalents will have to be provided
to meet the effects of this increased productivity. This means a total
need in the next 5 years of 16.1 million new jobs just to stay even. ^
Now a 90-percent rate of efficiency in meeting this need, that is
the 1957-62 experience, would result in an increase of 1.6 million
in unemployment. Total unemployment would therefore rise from
the present 4 million to 5.6 million, or to more than 7 percent of the
1967 labor force. This would be the intolerable price of just moving
along as we have been.
There is one other aspect to this prospect for the future. Between
1950 and 1960 the labor force, aged 14 to 24 group, increased by less
than 400,000. Between 1960 and 1970 this group will increase by
more than 6 million.
Chairman D ouglas. Mr. Wirtz, this is due to the low birth rates
of the thirties and the high birth rates of the forties?
Secretary W irtz. That is right; immediately following the war.
Chairman D ouglas. Even before the war ?
Secretary W irtz. That is correct. The big push will come about
1965.
Eepresentative C urtis. In order to get that in context, the rate is
now declining from this high peak.
Secretary W ir t z . Has there been a decline ?
Representative C urtts. The birth rate has been going down for the
past 3 or 4 years. So maybe we are dealing with a hump.
Secretary W irtz. I will check that, Congressman. It would not
square with my general impression.
Representative C urtis. I am sure I am correct.
Secretary W irtz. I don’t believe it has gone down, Congressman
Curtis. It has fluctuated a good deal.
Representative C urtts. I think you will see in the past 3 or 4 years
it has. There has been comment on this. I will get the statistics,
so go ahead.
Representative R euss. I have a question on this. By the labor
force in the 1950-60 period, you mean those who were in the age
group?
Secretary W irtz. That is correct.
Representative R euss. You don’t mean those who were actually
working or anything o f the sort ?
Secretary W irtz. I mean those who were in that age group either
working or looking for work.
Representative Curtis. I f I may interrupt, this is Health, Educa
tion, and Welfare Indicators, January 1963. Our rates, beginning
.93762— 63— pt. 1------ 13
188
ECONOMIC REPORT OF THE PRESIDENT
in the fifties—they don’t show the forties—were 24 percent, and they
have now gone down to 23 percent. It was 24.1 percent in 1959, 23.7
percent in 1960, 23.3 percent in 1961. In other words, it looks as if
there is a curve. We don’t know for sure.
Chairman D ouglas. We all hope the problems will be less in the
1990’s.
Secretary W irtz. That covers most of the specific figures. I am
sorry there are so many of them. Yet I simply cannot urge too strong
ly on this committee the view which develops, I know, from what is an
intensive, almost obsessive, preoccupation with this manpower supply
and demand situation in the economy. I cannot urge too strongly the
view that this situation makes it imperative that the economy needs to
be reinvigorated and strengthened by the adoption of the tax pro
gram which the President has placed before the Congress.
I always feel apologetic for presenting a view of this sort in terms
of statistics. I know that you will realize that my thinking about the
views as yours is much more in terms of the human values of which
these figures are readily only a very cold reflection.
There is one other point. I won’t leave this committee with the
impression that I find the total answer to our needs for new growth
and full employment in an improved tax system or better unemploy
ment insurance system or Youth Employment Opportunities Act.
There is a very, very important remaining factor. It was recognized
by the President in his Economic Eeport. It has been the subject of
special attention by some of the members of this committee. It is a
matter of very great concern in the administration of the affairs of
the Department of Labor: It is this need in this increasingly complex
and rapidly changing economy for fuller assistance to workers in
making the transition from declining to new industries, from contract
ing to expanding occupations, and from labor market areas in which
job openings are being reduced to those of rising job opportunities.
We are developing an experience in this area which started with the
Area Redevelopment Act of 1961, followed by the enactment in 1962
of the Manpower Development and Training Act, and there are pro
visions now, too, in the same area in the Trade Expansion A ct of
1962.
I mention it just briefly because this will be the Subject of a much
fuller report in the manpower report in March including our starting
experience with the manpower development and training program.
We have approved now in conjunction with the Department of
Health, Education, and Welfare and working with the State agencies
some 500 projects. This is under the Manpower Development and
Training Act. That program started in September. The latest figures
are for January 24, 1963. We have approved new projects in all 50
States. They cover 20,000 workers.
Chairman D ouglas. Are those workers actually under training, or
are those workers who would be trained when thei programs went into
effect?
Secretary W irtz. It is the latter. The number of people actually in
training so far is about 8,000, Mr. Chairman. The approved programs
are about 20,000. Then there is another substantially even larger
group 6f projddts which are in the pipeline- and will be subject to ap
proval;
ECONOMIC REPORT OF THE PRESIDENT
189
The total figures are these: The projects approved are about 20,000.
The workers who are in training now or have been trained are about
8,000. We have so far about 1.800 alumni who have completed their
training program.
These training programs have been approved for over a hundred
occupations. They cover a wide gamut of work types.
I point to the fact that the workers are trained only in occupations
for which there is reason to believe that vacancies will be available.
This is a very truncated report on this act. As [ say, there will be a
much fuller development in the forthcoming manpower report.
Now, in conclusion, Mr. Chairman and members of the committee,
just a word of reorientation for myself, and perhaps for you, of what
I have said.
I have a strong feeling of having dealt here disproportionately
with what may seem to be the data of difficulty and statistics of short
coming. That is only because the one possibility I see of default in the
American economy is that we may underestimate the full proportions
of the task and of the opportunity which is at hand. Most of the
figures which 1 have used here sound large, and yet it is an appropriate
reminder that they have to do with only the f>- to 10-percent fringe of
potential failure in the economy. I point out that the worst risk is
that when so many in this country are doing so well, grievous burdens
on a comparatively few may be overlooked.
C h a ir m a n D o u g l a s . I am g la d 3’ ou used th e v e r b “ m a y ” r a th e r thayi
th e v erb “ w i ll,” w h ic h is in y o u r m a n u s c r ip t.
Secretary W irtz. May the record stand as “ may/'
I approach this matter in terms, of concern, Mr. Chairman, but
complete confidence. I see every unemployed, person in this country
today, not really as a problem, W t really as a wasted asset and a poten
tial contributor to the producti\Te force that would be pressed to its
very limit if we were to meet the presently unmet needs in this country
and the world.
So my report to this committee is that we have the full capacity and
the full competence to meet every single problem which exists m the
manpower field, and we are dependent only upoin our decision to do it*
Thank you.
(Manpower Report No. 5 follows:)
[Manpower Report No. 5, Jan. 30,1D63]
I n d u s t r y E m p l o y m e n t G r o w t h S i n c e W or ld W a r I I
A. high rate of employment growth is a fundamental requirement if the
American economy is to provide jobs for its increasing population and also
continue to raise the standard of living $f its workers. ■ The growth of American
industry in the past has been one of the sources of American strength, but .the
growth in the past 5 years, has raised questions regarding its adequacy. More*
over, (the growth which has taken pjace has led to changes in the structure of
employment which pose a challenge to workers seeking to adapt to industry’s
job needs.
Between 1947 and mid-1962, the number of nonfai^n workers in the United
States increased,by more than one-fourth, with the addition of 11.4 million jobs
to the economy. The gross national product rose by two-thirds in real dollars*
learnings of factory worker^ rose from about $50 per.week in 1947 to. close to
$100 in 19G2. Even uitb price increases discounted, the gains in factory,
workers’ earning^ were substantial, amounting to 45 percent between 1947 and
im .
190
ECONOMIC EEPOET OF THE PRESIDENT
These advances, however, were concentrated in the first decade of this 15-year
period. Industry employment growth during the past 5 years, in fact, has not
kept up with the performance of the previous 10 years, either in magnitude
or composition.
During the past 5 years, from 1957 to 1962:
The rate of job growth slowed down appreciably in the private sector of
the economy.
Between 1947 and 1957, private nonfarm industries increased their employ
ment by an average of 700,000 jobs, or 1.7 percent, each year; from 1957 to
mid-1962 the annual rate of gain fell to 175,000 jobs, or 0.4 percent.
Structural changes were also taking place which added to the problem
of reemployment of displaced workers.
As the rate of job growth slowed down, there was a speedup in the long-term
shift in the pattern of job growth, away from the output of goods and toward
more services. The proportion of all workers in the goods-producing indus
tries—agriculture, manufacturing, construction, and mining—fell from 51.3 per
cent in 1947 to 45.9 percent in 1957, and to 41.8 percent in 1962 (table 3). The
rate of decline in the latter period was two-thirds greater than in the earlier
period.
And the overall rate of economic growth and employment also moved
down.
From 1947 to 1957, the gross national product rose by 45 percent in constant
dollars, or at an annual rate of 3% percent. During the past 5 years, however,
the increase in gross national product has amounted to about 15 percent, or
an annual rate of 2.9 percent. The slowdown has occurred primarily in the
output of goods and in construction (see table 1).
An even greater slowdown in growth is reflected in employment. Between
1947 and mid-1962, the number of wage and salary workers on nonfarm payrolls
rose to 55.3 million, a gain of 11.4 million, or 26 percent. Of this rise, 21 per
centage points were gained in the 10-year period following 1947, and 5 percentage
points in the past 5 years. The annual rate of increase in the last 5 years (0.9
percent) was only about half the rate during the previous 10 years (1.9 percent).
During the early period, an average of 900,000 new jobs (including Government)
was being added to nonfarm employment each year; during the recent period,
the yearly increase was about 485,000. Moreover, the composition of this
growth has changed radically. Between 1947 and 1957, 76 percent of the job
growth was in the private sector of the nonfarm economy, the remainder in
Government; between 1957 and 1962, only 36 percent of the job growth has
been in the private sector (see tables 2 and 4).
EMPLOYMENT DISTRIBUTION
These different rates of growth have resulted in significant changes in the
distribution of employment. As noted before, in 1947 the goods-producing indus
tries (agriculture, manufacturing, mining, and construction) accounted for 51.3
percent of all industry employment; in 1957 they acounted for 45.9 percent;
and by 1962 the proportion had been reduced to 41.8 percent. These proportions
represent a significantly faster rate of decline from 1957 to 1962 than in the
previous period. By contrast, very rapid job growth—accounting for an increas
ing share of total employment—has been taking place in State and local govern
ments, in the service industry and in finance, insurance, and real estate. The
big increase in Government employment is mainly in the school systems, reflect
ing not only population growth, but the rising demand for a better educated
labor force.
The effect of recessions is one important explanation for the decline in growth
and the shift in industry pattern: We had two recessions during the first 10-year
period and two during the most recent 5-year period. Each recession affected
mainly the goods-producing industries. Large numbers of production workers
were laid off during each business downturn, and employment levels were never
fully restored during the subsequent recoveries as a result both of rapid changes
in technology and the lack of new gains in product demand.
However, in considering the periods as a whole, including both the recessions
and the recoveries, it seems apparent that the private sector of the economy
during the past 5 years has not continued to provide new jobs at the same rate
as during the decade following World War II. Most of the industries which
provided the lift to the job market in the first postwar decade have either
slowed down or declined during the past 5 years. For the entire period since
ECONOMIC REPORT OF THE PRESIDENT
191
the end of World War II, the industries of major job growth in the private
economy were construction, trade, services, and finance. But in both trade and
construction the principal advances took place before 1957; since then, employ
ment growth in trade has slackened substantially, and there has been an actual
decline in construction.
SERVICE
Only the service industry has continued to expand employment at close to
its former rate; this industry which includes personal, business, and professional
services, has shown a total rise of more than 50 percent between 1947 and mid1962. In the finance, insurance, and real estate industries, where total growth
has amounted to about 60 percent since 1947, recent gains (since 1957) have
been at a slower rate.
One of the accompanying features of the growth in service-type employment
is reflected in a slowdown in the expansion of full-time scheduled jobs. While
total nonagricultural employment (wage and salary and all other) increased by
4.3 percent, or 2.5 million, between 1957 and 1961, the number of workers on full
time schedules1 increased by only 800,000, or 1.7 percent. In other words, only
one-third of the employment increase since 1957 represents work on jobs having
full-time schedules. Much of this undoubtedly represents the needs of the
workers; many of the large numbers of women entering the labor market in
recent years have been attracted by the availability of part-time jobs. However,
it is not known to what extent full-time jobs would have been filled had more
of them been available. Moreover, the nature of the increases in employment in
recent years has a bearing on the extent of economic growth we have experienced.
GOVERNMENT
Only in the public sector of our economy has there been any increase in the
rate of job growth since 1957 as compared with the earlier period. The growth in
Government employment has been overwhelmingly at the State and local level
and primarily in the school systems. Other public services have also required
more workers as the population has expanded and our cities and urban areas
have grown.
Each year between 1947 and 1957 State and local government employment
grew by an average of 4.2 percent, accounting for 187,000 additional jobs yearly;
each year from 1957 the growth rate has averaged 4.8 percent or 287,000 addi
tional jobs yearly.
MANUFACTURING
Rates of employment growth in the largest sector of our economy, manufac
turing, are difficult to appraise since recessions and prosperity alike have af
fected employment in this sector more drastically than elsewhere. However,
between 1947 and 1957, both relatively good years, the manufacturing industries
added 1.6 million new jobs, an increase of 10 percent; since 1957, the number
of workers in manufacturing has declined by 425,000 or 2.5 percent.
The net result is, that over the entire 15-year period, the proportion of manu
facturing employment to total nonfarm payroll employment declined from
35.4 percent in 1947 to 30.3 percent in 1962. Moreover, the brunt of these lost
jobs was borne entirely by production workers; in the past 5 years alone, their
number decreased by a total of 600,000.
WHITE-COLLAR VERSUS BLUE-COLLAR WORKERS
During the postwar period, employment of blue-collar production workers in
manufacturing has fluctuated sharply, tending in general to decline, while the
number of white-collar jobs within this sector has continued to increase. Manu
facturing industries, which employed 13 million production workers in 1947,
employed only 12.6 million in 1962. During the same period factory output rose
by 80 percent. One reason for this dramatic increase in output with fewer
workers lies in the equally dramatic rise in the importance of workers supporting
the production workers. These nonproduction workers—executives, office per
sonnel, engineers, and scientists—who help develop the improved techniques mak
1 That is, those actually working 35 hours or more per week, and those who could if
they chose to work full time. The latter are usually full-time workers who are on part
time
foravailable
noneconomic
reasons. The 1961 data are used because seasonally adjusted data
are not
for 1962.
192
ECONOMIC REPORT OF THE PRESIDENT
ing greater production possible, have risen from 2.0 million in 1947, 16 percent
of total factory employment, to 4.3 million, or 26 i>ercent of the total, in 1062.
Nonproduction workers in manufacturing have increased even during the past
5 years while total manufacturing employment has declined. However, the
greatest rate of gain in nonproduction workers occurred during the 1947-57 i>eriod, at an annual rate of 4.5 i>ercent, while during the past r> years, annual
nonproduction worker growth has slackened to about 1.7 percent.
OTHER INDUSTUY SECTORS
The remaining major sectors of the private economy are primarily those which
sire contracting—agriculture, which now has .37 percent fewer workers than in
1947, transportation and other utilities, which is 6 percent lower (mainly be
cause of declines in the past 5 years), and mining, which is down by 32 percent.
T a b l e 1 ,—
Grqss national product, by major type of product, 19//7-57 and 1937-62
Output (billions of dollars,
1954 prices)
Gross national product
1047.
1957
1962
Annual rate of
increase (porccnt)
1947-57
1957-62
Total GNP.'........................................................
2*2.3
408. fi
471.5
3.*
2.9
Goods..........i - - .............-.... ................... ......................
Services..........................................................................
Construction.................................................................
163.3
04.7
21.3
223.4
111. 2
41.0
247.1
137.2
51.2
3.2
4.1
6.1
2.0
4.2
3.1
T a b le 2 .— Changes in employment "by. industry sector, 1947-57 and 19o7-fi2
Employment (Mi thousands)
Industry sector, l
1 947
Annual employment change
11
1
1957
i
1 962
1947-57
1 9 5 7 - 62
7?ate
Amount
Amount
Rate
(percent) (thou (percent) (thou-:
sands)
sands)
Total non farm employment___
Industries. of rooent job
growth
4 3 .8 8 1
5 2 .9 0 4
5 5 .3 2 5
1 .9
002
0 .9
404
2 1 ,2 3 3
2 7 .7 3 8
? l.30 G
2 .7
651
2 .5
7H
iMvate ...............................
Govf rmnoofc. ^
15.7595 .4 7 4
2 0 .1 1 2
7 ,fi2 6
2 2 .1 21
9 ,1 8 5
2 .3
a. 4.
435
215
1 .9
3 .8
402
3 12
Federal...................
State and local.......
1.8d2f.
3 .5 8 2
2 .2 1 7
6 ,4 0 9
2 ,3 4 1
6 ,8 4 4
i.6
4.2-
33
183
1 .1
4 .8
25
2 87
Industries of recent.joh decline K
U n m lu x m .................................
2 2 ,6 4 8
S. 2 50
2 5 .1 0 6 .
6 *2 2 2
2 1 .0 1 8
K. 190
1.1
—2 . 8
m
-203
- .9
- 3 . fr
-230
-206
1 Nonfarm employment totals arc based on establishment payroll data; agricultural employment oil
household survey data.
2 Industries of recent job prowth in the private sector comprise service and miscellaneous, trade and
finance, insurance and real estate.
3 Industries of recent job decline comprise manufacturing, mining, contract construction, transportation,
and public utilities.
ECONOMIC REPOBT OP TH E PRESIDENT
193
Taele 3.—Distribution of industry employment {including agriculture), 1947»
m 7, m d 1962.
Industry
Total, (including: agriculture) :
Nrimbpr ( t h o u s a n d s ) ,
__
_ _
Percent.___________________________ . _________*_____
19*7
1957
52.137
100.0
1962
59,126
100. (t
60,515
100.0
Good s-prod^cing industries.__ ____________________________
51.3
45.9
41.8
Manufacturing_______________________________________
29.8
29.0
27.7
Durable goods____________________________________
Nondurable goods........... ......................, ......................
16.1
13.7
16.7
12.4
15.6
12.1
Mining__________________ _ _________ ______________
Construction_____________________*________________ . . .
Agriculture.............................. ...............................„.............
1.8
3.8
15.8
1-4
4.9
10.5
is
8.6
Service-producing industries__ . __ ________________________ _
48.7
54,1
58.2
Transportation and other utilities.... . » ________________
Trade___ _ _ _______________________________________
Finance, insurance, and real estate...___________ _______
Services and miscellaneous.^ ______ — __________%_____
Government____*................................................. ...............
8.0
17.2
3.4
9.7
10.$
7.2
18.4
4.2
11.4
12.9
6.5
19.1
4.6
12.8
15.2
Federal........ ................ ................................... ..............
State and loc^l._______ _________— _____ . _______
3.6
6.9
3.7
9.1
3.9
11.3
* Represents payroll emDloyment in nonfarm industries and total employment In agriculture.
NoTE.-^Sum of individual items may not add to totals because of rounding.
194
ECONOMIC REPORT OF TH E PRESIDENT
T a b le 4 .— Employment changes in nonfarm industries and in agriculture,x
1947-57 and 1957-62
Employment (in thousands)
Annual employment change
1947-57
Industry sector2
1947
1957
1957-62
19621
Rate
Amount
Rate
Amount
(percent) (thou (percent)
(thou
sands)
sands)
Total nonfarm employ
ment_________________
M annfarrtnring,,. ^
Durable goods_________ ____
Ordnance and accessories__
Lumber and wood prod
ucts___________________
Furniture and fixtures____
Stone, clay, and glass prod
ucts___________________
Primary metal industries__
Fabricated metal products.
Machinery________ ______
Electrical equipment______
Transportation equipment.
Instruments and related
products_______________
Miscellaneous manufactur
ing____________________
Nondurable goods__________
Food and kindred prod
ucts___________________
Tobacco manufactures____
Textile-mill products_____
Apparel and related prod
ucts___________________
Paper and allied products—
Printing and publishing—
Chemicals and allied prod
ucts___________________
Petroleum and related
products_______________
Rubber and plastic prod
ucts___________________
Leather and leather prod
ucts___________________
Mining______________________
Contract construction...............
Transportation and public
utilities____________________
Trade_______________________
Finance, insurance, and real
estate_____________________
Services and miscellaneous____
Government. ________________
Federal________ __________
State and local.....................
Total agricultural employment.
43,881
52,904
55,325
1.9
902
0.9
484
16,645
17,174
16,750
1.0
163
— .5
-85
8,385
9,856
9,443
1.6
147
-.8
-83
27
140
215
17.9
11
9.0
15
845
336
655
374
607
381
— 2.4
1.1
— 19
4
— 1.5
.4
— 10
1
537
1,279
989
1,375
1,035
1,275
595
1,355
1,167
1,586
1,344
1,909
572
1,166
1,118
1,459
1,528
1,645
1.0
.6
1.7
1.4
2.7
4.1
6
8
18
21
31
63
— .8
-3.0
-.9
— 1.7
2.6
-2.9
—5
-38
-10
— 25
37
-63
267
342
358
2.5
8
.9
3
421
387
393
—.9
-3
.3
7,159
7,319
7,308
.2
16
1,799
118
1,299
1,805
97
981
1,772
89
881
(2)
-1.9
— 2.8
1
-2
-32
-.4
-1.5
— 2.1
—7
-2
-20
1,154
465
721
1,210
571
870
1,235
602
933
.5
2.1
1.9
6
11
15
.4
1.1
1.4
6
6
13
649
810
850
2.2
16
1.0
221
232
196
.5
1
-3.3
323
372
389
1.4
412
373
361
-1.0
-4
-.6
-2
955
1,982
828
2,923
647
2,696
-1.4
4.0
— 13
94
-4.8
-1.6
-36
-45
4,166
8,956
4,241
10,886
3,925
11,571
.2
2.0
8
193
-1.5
1.2
-63
137
1,754
5,060
5,474
1,892
3,682
8,266
2,477
6,749
7,626
2,217
5,409
6,222
2,793
7,757
9,185
2,341
6,844
5,190
3.5
2.9
3.4
1.6
4.2
- 2 .8
72
170
215
33
183
-203
2.4
2.8
3.8
1.1
4.8
-3.6
63
202
312
26
287
-206
5
1
—2
(*)
.9
8
-7
3
i Nonfarm employment based on establishment payroll data, agricultural employment on household
survey data.
* Less than 0.06 percent.
ECONOMIC REPORT OF THE PRESIDENT
195
ANNUAL RATES OF EMPLOYMENT GROWTH 8f INDUSTRY
1947-57 AND 1857-82
Eepresentative E ettss. This is a magnificent job, Mr. Wirtz, and I
am glad you did allow your emotions to invigorate your statistics.
I think this is a matter where both emotion and statistics are needed.
Secretary W irtz. Thank you.
Eepresentative E euss. Among the many arresting things in your
report is its observations about young people. I gather that unemploy
ment of 18-year-olds, looking xor jobs now, nationwide, is something
around 20 percent. You said 18 percent of high school graduates in
2961.
Secretary W irtz. That is about right.
196
ECONOMIC REPORT OF THE PRESIDENT
Representative R euss. I f it is true for high school graduates, the
actual figure must be something worse because that doesn’t include
the dropouts.
Secretary W i r t z . Let me set the specific answer in this broader
context. We have been fighting recently against the impact in the
public consciousness for which we are probably responsible in the
Department of Labor—the impact on the public consciousness of a
single unemployment figure of about r>i£ percent. That has been a
mistake which we must undo because the truth of the matter is that
we don't have a single overall unemployment problem. We have
principally two or three specific unemployment problems which we
have to start hitting with rifles instead of with a shotgun.
Approaching more directly the answer to your question, when we
think of unemployment in terms of 5 ^ percent, we ought to imme
diately think specifically of an unemployment problem of about 12
percent for three groups. One is children. Just in round terms,
if unemployment, which I think of as the infantile paralysis of the
economy, the unemployment figure for youngsters in round figures
comes to the refinements of age groups as 12 percent instead of 5
percent: the unemployment for racial minority groups is about 12
percent instead of 5 percent: the unemployment problem for unskilled
workers is about 12 percent, instead of the 5 percent.
Representative R euss. When you get a young, unskilled Negro,
then you get a little more arithmetic on those 12 percents, don’t you?
Secretary W i r t z . It is one out of five. We ought to face the fact
when you get into that area, one out of five in this country, in that
category, don’t have a chance.
Representative R euss. Let me ask you this: A lot of people are
going around saying, “ Five or six percent unemployment; this is
tolerable. Maybe we should just pay that 5 or 6 percent unemploy
ment compensation, and accept this as a normal condition.” Would
you acrree with me that kind of talk is hogwash for a variety of reasons,
including the fact that young people aren’t eligible for unemployment
compensation ? I f they are looking for a job for the first time, as I
understand it, in many States at least, they are not entitled even though
they are registered in an employment office.
Secretary W i r t z . You must liave work experience, I am advised, in
a good many of these situations.
Chairman D ouglas. The chairman says in all States. Is that true?
Secretary W i r t z . That is correct.
Representative R euss. Then the result of an acceptance, and God
forbid that we should accept it. of a 5.6 average unemployment figure
means that we are condemning young people to a very much higher
unemployment figure, with no provision made for unemployment
compensation for them. We are doing this in a social system where,
due to union seniority and a lot of other built-in rigidities, you don’t
have what you used to have years ago, when employers would hire
a lot of younger people because there"was no such thing as seniority,
and you could get younger people cheaper and put them on the
payroll.
Aren’t- we in effect, by tolerating an average level of unemployment
of 5 or 6 percent, contributing greatly to a demoralizing situation
for our young people which is an important part of the juvenile de
linquency in this country which everybody is talking about?
ECONOMIC REPORT OF THE PRESIDENT
197
Secretary W irtz. I don’t mean to let my agreement with your ques
tion, Congressman Reuss, stimulate my adrenalin too much, but I
frankly find it almost intolerable that the country takes with the de
gree of acquiescence it does an unemployment situation of the kind
we presently have.
I would like to make one other comparison. I think strikes are
a waste and most unfortunate. I never mind a bit the public reaction
against strikes. But I am appalled by the realization that we lost
more potential man-hours of production in 1 year last year from un
employment than we have in over 35 years from strikes. I can’t
help realize what we could do about unemployment if people got as
much worked up about it as they do about strikes.
With respect to the children question, I can only say that any fee]*ing anybody has about unemployment has to be increased just 300
percent if you start thinking about the child, because that is about the
relationship between the general unemployment and the younger
worker.
I point out only one other thing. You said, if I understood you,
we are condemning them to this situation. I would like to point out
that I think a very large part of this problem results from the fact
that we are in a period of rapidly increasing automation and tech
nological development with a resultant diminution in Hie number of
unskilled jobs in the economy. It is to those jobs that a good many of
these people used to go. I think there are ways of adjusting to this
situation. I feel perhaps less self-critical than some statements
might suggest, but I do point out that if we are to take advantage or
be able to take advantage of the technological development which is
available to us and on which we depend, we are going to have to make
these human adjustments to the problem.
Six hundred thousand unemployed youths can’t be part of the price
for technological advance in this country. I think we can meet it.
Representative R euss. Certainly one of the obvious components of
any program to deal with this situation must be, in my opinion
and I would like your view—a great expansion of the system of voca
tional education that some cities of this country have.
My own hometown of Milwaukee, as you know, has a particularly
fine system, and its record of preventing dropouts happens to be par
ticularly admirable. While simply having vocational schools m and
of itself is not going to solve the problem, you would agree, I trust,
with my observation that somehow or other there ought to be evolved
a system so that all the cities of the country have at least as good a
vocational school system as the city of Milwaukee.
Secretary W irtz. Of course. I agree completelv. I would simply
call attention for the record to the advice of the President’s panel of
consultants on Vocational Education which reported the shortcom
ings in that area, and would supplement that only by reference to my
conversation last evening with Dr. Wolfbein in which he tells me that
in connection with the administration of the Manpower Development
and Training Act we are encountering most immediately a shortage of
teachers as distinguished from facilities in this particular area, al
though both shortages are pressing in upon its. We are very much
concerned about, tliis shortage.
Representative Rjsttss. Thank you, Mr. Chairman.
Chairman D ouglas. Congressman Curtis.
198
ECONOMIC REPORT OF THE PRESIDENT
Eepresentative C urtis. That is a happy note to end on because
there are some jobs going begging in the teaching profession. I am
very sorry you didn’t comment on the new series of statistics I under
stand the Bureau of Labor Statistics is preparing on available jobs.
When will that be available ?
Secretary W irtz. That is correct.
When will be it available? I am advised that any definitive results
on the study are somewhat ahead. It proceeds from the Gordon Com
mittee last fall. It is not in a comprehensive form at the present.
Eepresentative C urtis. Here is where we need to concentrate, in my
opinion. Actually, and study will bear this out, technological ad
vance and automation create more jobs than they displace. But fre
quently these new jobs are in a different geographical area from the dis
placed jobs. Furthermore, they are usually outside the area of
previous union jurisdiction and endeavor.
Mr. Eeuss, you made the statement that certain unidentified people
were willing to accept 5 or 6 percent unemployment as a bearable
amount. I nave never heard that in the circles in which I travel and
I am wondering if the gentleman would identify who in our society
has been suggesting that a 5- or 6-percent rate is bearable.
Eepresentative E euss. I suggested that there is a school of thought
which says that a rather substantial level of unemployment is bear
able and that the remedy is to pay unemployment compensation to
them. Among the holders of that view are a lot of Eepublicans on
the one hand and Ken Galbraith on the other. It is quite bipartisan.
Eepresentative C urtis. That is what I want to find out. I am
aware of a school of thought, and this administration is part of it,
that says 4-percent unemployment is bearable. I happen to disagree
with that school of thought.
Eepresentative E euss. For the record, I think the testimony of Mr.
Heller is that 4 percent is an immediate goal to which it is sought
to reduce unemployment, but not the ultimate.
Eepresentative Curtis. I want the gentleman to identify the school
of thought that said 5 or 6 percent was acceptable, because I frankly
have never heard anyone make such a statement. I don’t think there
is any public statement to that effect. Maybe there is. I thought the
gentlemen, having stated that as a fact, would give us the benefit of
identifying whom he was talking about.
Eepresentative E euss. My point, without reference to 5 or 6 per
cent, was that there is a school of thought which says that a consider
able level of unemployment can be tolerated and that the humane
remedy is to pay the unemployed endless unemployment compensa
tion. I happen to differ from that.
Eepresentative Curtis. I will let it rest, but I wanted identification
because I am always a little queasy about statements not attached to
an actual person. The figure of 5 to 6 percent was used. I am aware
of the fact that this administration takes that philosophy at 4 percent
and I happen to disagree.
Eepresentative E euss. I will append a list of believers.
Eepresentative Curtis. Yes, I would be very interested in that.
Secretary W irtz. Would you tell me, Mr. Chairman, when it is
appropriate to clear the record on the point which has just been made,
because this administration in no respects accepts the 4 percent as
acceptable, tolerable, or anything else. I don’t mean to interrupt.
ECONOMIC REPORT OF THE PRESIDENT
199
Representative Crams. Y ou are perfectly right to interrupt to make
that statement. All I say is that the record has been made. It appears
in the Economic Report of the President’s Council of Economic Ad
visers time and time again. I will let others judge whether or not
that is their conclusion. I take exception to it and I am glad the
Secretary feels that we should not be satisfied.
Secretary W irtz. May I , Mr Chairman, note for the record, the
following statement which is taken from page 42 of the Council of
Economic Advisers’ Economic Report. The quotation is-----Representative C urtis. Just a minute, Mr. Secretary, please let
me go on.
Secretary W irtz. Surely.
Representative C urtis. The administration has ample time to pre
sent its case. I have 10 minutes each day to try to put in one little
voice to point out a few different ideas.
Secretary W irtz. I beg your pardon, sir.
Representative C urtis. The record is there and I think the gentle
man is perfectly proper in saying that, from his standpoint, the record
does not support my position.
Chairman D ouglas. This is not to be charged to the Congressman’s
time, but I will say that I made a point to allow the Congressman
generally 5 minutes more on his questioning than the rest of us have
taken and will continue to do so.
Representative C urtis. The chairman has been very generous, but
in this context I think everyone should be aware of the pitiful amount
of time that the loyal opposition has in this national debate. However,
we will gain time.
Chairman D ouglas. I f that is so, it is only because the Republican
members have not been as assiduous in their attendance as the Demo
cratic members.
Representative C urtis. That part is a fair criticism. But it still
doesn’t get at the basic problem, and I am not blaming anyone for this.
This is the nature of the situation. When my party had the executive
department, we had a similar imbalance. Today we are interested in
the facts involved here.
Mr. Secretary, allow me to comment. You ended your testimony
on a note with which I certainly agree. But I want to turn it around
the other way so that we get agreement there, too. I don’t want to
forget the 5 percent unemployed, because we have 95 percent doing
well. But in trying to meet the problems of these 5 percent, I don’t
want to damage the success of the system that has produced the highest
standard of living that any society has achieved.
I am happy to see that there has been a great deal of attention paid
to these 5 percent. It is far from forgotten. There are people in
political life today who are certainly going to continue picking up
the problems of these 5 percent. But I do urge that while paying
attention to the 5 percent we must not damage our basic system. From
the suggestions that have been made to help the 5 percent, I feel we
are actually damaging the basic system that has produced the good
life for the 95 percent.
I am going to conduct my interrogation in such a way as to leave
the record open for your further comments on areas needing addi
tional study.
200
ISOONOMIO REPORT? OF T S £
PRESIDENT
One is the impact of military draft on the young people entering
the labor'market. The impact of the draft hits :two ways. First, it
unsettles the employment situation of our younger people. Secondly,
and this is part o f the first, the employer feels uneasy when dealing
With a young man who is subj ect to the d rk i t.
The second, and equally important, factor is that a major part of the
funds for civilian vocational education is spent under military control.
The biggest operators of vocational education today are our military
establishments. The draft la^ is going to be extended. The last time
it was up for extension, n5 educator or labor leader, no one in the field
of this problem, testified on its impact upon our work force—our
young people.
T am very hopeful that this time there will be some intelligent r ev ie w
of the impact of this method of procuring manpower for our Military
Establishment, and how it affects these problems that we are dis
cussing. la m going to testify again myself and try to bring out the
same ideas I tried to emphasize uiider the previous administration.
I hope a few educators will take the trouble of giving us the benefit
of thei r views on this subject.
I think this area should be ment ioned in your original report. Cer
tainly, when you ask for a Youth Employment Opportunities Act
without discussing or referring to this draft act, it lacks basic context.
I would like to leave the record open or* that point, Mr. Secretary,
but you may make a preliminary comment.
Secretary W irtz. It would only be this: The Office of Manpower,
Automation, and Training is now making a study of the military
manpower aspects of this problem and it will be very easy for us to
bring this to the attention o f the committee in its present form, and
I would like to have appended to my testimony a summary of that
report.
I should also say, reflecting some of the views that you have ex
pressed, that we'are working very closely with the Deputy Assistant
Secretary of Defense for Manpower and we are meshing our train
ing program with theirs and are taking advantage of the large ex
perience which there is in that area. But we will add a supplemental
statement.
,
’
.
Representative C urtis. I hope HEW, which is also in this field of
vocational education, and you, in apprenticeship training, will do
a similar thing.
Secretary W irtz. They are working with us, Congressman, in pre
cisely this area.
Eepresentative C urtis. I personally am looking forward very much
to the manpower report which is due in.March. I am urging my
friends on the Labor and Education Committee to upgrade that report
and hold public hearings on the report. Of course, they will be doing
that in a narrow context.
Mr. Chairman, I think: it would be very advisable for the Joint
Economic Committee, or one of our subcommittees, to hold hearings
on this forthcoming report. I share the Secretary’s view that this
problem of manpower, employment and unemployment, is one of the
most vital affecting us today.
ECONOMIC ; REPORT OF THE PRESIDENT
201
Incidentally, I. also hope that if either of the committees, or both,
hold public hearings, in this area, .we invite State and local officials
in t his area. In fact, that ,is .where most of the work is being done.
Essentially, the Federal Government coordinates the activities o f the
private sector and at the local community and State levels. We fre
quently lose sight of these* components in our discussion here at the
Federal level.
Secretary W i r t z . Y o u know, how much we will welcome such
hearings and how glad we would be to cooperate in any way we can.
Representative C u r tisv I believe that, Mr. Secretary. I have just
itemized some of the data and material that I would have liked to
have seen in this year’s Economic Report. Maybe some of it is
here, but I have not had a chance to go through it carefully. For the
record, I would like to raise a few points.
First, I would like to have the figures 011 the average age at which
a person now enters the labor force. Our definition of the work force
begins at age bL That definition goes back into the early 1900?S;
I think the average figure is around 19 years and some months.
Mr. W o l f k e i n . The average American male makes his first full
time entry into the labor force at age 18.
Representative C u r t i s . That is a figure that I know has changed
and it is continuing to go upward. I am glad it is. It is natural
that it would, because our young people are staying in school longer.
This is the counterpart to your study and I have seen these figures.
I would like to get both studies into the record. What is the average
length of time a person stays in school ? I think our average is almost
the third year of high school. I would like those figures before 1962
because I think the importance of them is to watch the trend.
T know the trend has been to increase the amount of education in
our society. At the same time, that increases the age at which young
people enter the work force. The counterpart of this is the age of
retirement.
I would like to see those figures to see if there is a trend. As I recall
from what I have seen and read about this, I think we have a con
tinuing trend lowering the age. That is significant, because it bears
on the composition of the work force, and gives us a better insight
into what we might be facing in the future.
Secretary W i r t z . Both sets of figures are available, Congressman
Curtis, and I would have just one question. That would be the period
for which you would like that.
Representative C u r t i s . I am looking for trends.
Secretary W i r t z . Starting with what, sir?
Representative C u r t i s . Whatever period would show a meaningful
trend. I don’t know how accurate figures are in the past.
Secretary W i r t z . They go back to 1900.
Representative C u r t i s . It would be good to show 1 9 0 0 , because w h e n
we are dealing with estimating the labor force and talking about the
decades ahead, these figures become important.
My next point discusses that. Senator Douglas has already indi
cated the significance of the low birth rate of the thirties. I thought
that some of this so-called sluggishness, which I don’t agree exists,
results from this very fact. Today, we have a small 22 to 30 year
202
ECONOMIC REPORT OF THE PRESIDENT
age group. Shortly, this age group will increase as a result of the
higher birth rate of the forties and fifties. That is why I called
attention to the fact that it looked like the trend was going down.
I think these factors are important.
Secretary W irtz. You would like on this last point a projection
of net additional entries into the work force over a period as far ahead
as we can give it to you, is that correct ?
Representative C u r t i s . Yes. Also, I would like your projection of
what is going to happen as far as the age of entry into the labor force
is concerned. Considering levels of education. What is going to
happen with retirement ? Is this trend going to continue downward %
This, too, is another important ingredient.
Secretary W irtz. Our data will give you that figure, Congressman
Curtis, up to 1975.
Representative C u r t t s . The other ingredient that has been men
tioned is almost a post-World War I I phenomenon—namely, the entry
of women into our labor force. What are the projections there?
My time is over and I will come back on these later.
(The following was later received for the record:)
CHANGE IN THE AGE OF ENTRY INTO THE LABOR PORCE, 1 9 0 0 -1 9 6 0
In 1900 when about 40 percent of our work force was employed on farms,
the average young man entered the work force at about age 15. By 1940, the
age of entry had risen to age 17 partially as a result of longer schooling and
other legal restraints on the employment of young people. Even then, the age
of entry into the work force might have been less if the country had not been in
a severe depression which greatly limited employment opportunities. Between
1940 and 1960, the trend toward longer schooling further reduced the number
of young people not in school and who were working or looking for work; but
opportunities for part-time work for students has kept the age of labor force
entry from falling much below the 1940 level. Currently, the average age of
entry into the American labor force for a male occurs between his 17th and 18th
year.
The reduction in labor market participation by the young is shown by the
foUowing figures for boys 14 to 19 years of age:
Percent in
laborforce
1900
1940
1960
62.1
35.4
38.1
CHANGES IN THE AGE OF RETIREMENT, 1 9 0 0 -1 9 6 0
In 1900, most men worked almost as long as they lived and retirement as it
is known today was very unusual. Between 1900 and 1940, a drop in the age
of retirement for 60-year-old workers from age 72 to 69 resulted at least in part
from the decline in the proportion of the work force on farms where men could
work almost as long as they lived. Undoubtedly in 1940, the scarcity of employ
ment opportunities resulting from the depression brought about a somewhat
earlier retirement than would otherwise have occurred. Between 1940 and 1960,
the age of retirement declined again to age 68 as retirement benefits under the
social security system were liberaUzed and as private pension plans were
developed.
Because life expectancy has been increasing in the United States at the same
time that the age of retirement has been decreasing the average number of years
spent in retirement for 60-year-old men has increased from about 3 years in
1900 to over 7 years in 1960.
ECONOMIC REPORT OF THE PRESIDENT
203
INCREASE IN EDUCATION, 1 9 0 0 -1 9 6 0
In 1900, young persons just completing their education averaged about a grade
school education; now they average a little over high school graduation.
The following table shows the average years o f schooling for persons com
pleting their education about 1900, 1940, and 1960.
1900_____________________________________________________________________ 8.2
1940_____________________________________________________________________ 10.3
1960_____________________________________________________________________ 12.3
Source: Decennial census reports for 1950 and 1960. Data for 1900 estimated on basis
of educational attainment of persons 65 to 69 in 1940 who had been 25 to 29 at the time
of the 1900 census.
TH E CHANGING AGE AND SEX COMPOSITION OF TH E LABOR FORCE, 1 9 0 0 - 1 9 7 5
In 1900, the American labor force was much younger than it is today. Over
55 out of 100 workers were under 35 years o f age. By 1960, this figure had
dropped to 38 out o f 100 because the population was older and a smaller pro
portion of young people was at work. As a result o f the very large number o f
young people bom since World W ar II who can be expected to enter the labor
force in the years ahead, the proportion under 35 is expected to rise to about
45 out o f 100 by 1975 despite an expected continuation of the trend toward
earlier retirement.
Along with the growth o f urban centers and nonfarm industries, the proportion
of women in the labor force has risen more or less steadily from 18 percent in
1900 to 32 percent in 1960 and is expected to continue to rise to about 34 percent
by 1975.
Distribution of the total labor force, by age, 1900-1915
1900
1940
1960
1975
In thousands
Total, both sexes, 14 years and over.......................
27,640
53,297
69,078
93,031
14 to 19 years............................................................
20 to 24 years.............. .............................................
25 to 34 years............................................................
35 to 44 years..................................... .....................
45 to 54 years............................................................
55 to 64 years_________________ _______________
65 years and over....................................................
4,064
4,481
7,072
5,279
3,599
2,031
1,114
4,014
7,723
13,683
11,241
9,072
5,431
2,133
4,980
7,029
14,721
16,491
14,361
9,146
3,150
9,208
12,579
20,806
16,217
17,871
12,639
3,711
Percent distribution
Total, both sexes, 14 years and over.......................
100.0
100.0
100.0
100.0
14 to 19 years............................................................
20 to 24 years............................................................
25 to 34 years............................................................
35 to 44 years._______ ________________ ________
45 to 54 years__________ ___________________ _
55 to 64 years............................................................
65 years and over...................................................
14.7
16.2
25.6
19.1
13.0
7.4
4 .0
7.5
14.5
25.7
21.1
17.0
10.2
4.0
7.1
10.1
21.1
23.6
20.5
13.1
4.5
9 .9
13.5
22.3
17.5
19.2
13.6
4 .0
Source: 1900-1940 from “ The American Labor Force,” by Gertrude Bancroft, table D-l; 1960 Census of
Population, Supplementary Reports, PC(Sl)-35, table 194; 1975Special Labor Force Report, No. 21, table 2.
93762—63)—pt. 1---- 14
204
IpCONQMIC. REPORT, OP THE PRESIDENT
Percent distribution of total labor force , by sex and age, 1900-1915
1900
1940
1960
1975
Total, both sexes............................................ ♦.............*
100.0
10Q.0,
100.0
100.0
JMale, 14 years and over_____________________
81.9
75.6
67.9
65 5
14 to 19 years____________________________
20 to 24 years____________________________
25-34 vears______________________________
35 to 44 vears____________________________
45 to 54 y e a rs___________________________
55 to 64 years____________________________
65 j ears and over________________________
10.3
11.9
21.5
16.7
11.5
6.5
3 5
4 9
9 5
18 9
16.4
13.8
8.6
3 5
4 4
6.5
15 2
16.1
13 5
9.0
3 2
6.0
8 8
16.0
11.6
11.8
8.7
2.6
18 1
24 4
32.1
34.5
4.4
4 3
4.1
2.4
1.5
.9
.5
2.6
5.0
6.8
4 7
3 2
1.6
.5
2.7
3 6
5.9
7.5
7.0
4.1
1.3
3 9
4.7
6.3
5 9
7.4
4.9
1.4
Female, 14 years and 6 v e r _________________
14 to 19 years_______ *____________________
30 to 24 y ea rs-..*— __________ ___________
25 to 34 ysarsu-.
'35 to 44 years____________________________
45 to 54 years____________________________
55 to 64 yepj'S-^________________ *________
65 years and over__________________ _____
Source: 1900-1940 from “ The American I abor Force,” b y Gertrude Bancroft, table D - l ; 1960 Census of
Population, Supplementary Reports, P C (Sl)-35, table 194; 1975 Special Labor Force Report, N o. 24, table 2.
Chairman D ouglas. I know it is not good taste to call attention
to one’s generosity, but I would like to point out we have allowed
Congressman Curtis 18 minutes. I am going to ask Senator Proxmire
to coniine himself to 10 minutes.
Representative Curtis. A t this point let me make this remark. I
would rather not have the generosity if that is the manner in which
it is going to be handed out. I will again make this statement, Mr.
Chairman. The inequity of the administration is evident in conduct
ing a national debate. It has issued message after message, press re
lease after press release. The entire testimony this week is taken up
with Government witnesses who take most of the time. Those of us
who want to try to interject a contrary note for examination get 10
minutes and, when we get an additional 4, it is pointed out as gen
erosity. I do not regard it as generosity.
Chairman D ouglas. D o you think you should have more time than
the other members of the committee ?
Representative Curtis. Yes, in order to present a point of view.
I f you are trying to conduct a debate, yes. I f you are trying a snow
job on the public, no.
Chairman D ouglas. May I say any Republican who comes here will
be given 10 minutes, or more than 10 minutes. Congressman Curtis
has done extremely well in presenting his own point of view. I only
regret he has not had sufficient companions to balance this.
Representative Curtis. Let me say th is: I have not done well in
presenting my point of view. No one could possibly do well in these
complicated matters in 14 or 20 minutes.
Chairman D ouglas. Eighteen.
Representative Curtis. Or 18. A t least, without this kind of heck
ling, we could lay the groundwork.
Chairman D ouglas. I only mention this because the Congressman
both on the floor of the House and here has been complaining about
the restrictions which have been imposed on the Republican Party.
I would like to point out that if there have been restrictions they have
been self-imposed by the failure of Republican members to attend,
ECONOMIC REPORT OF. THE PRESIDENT
205
that we have certainly given Congressman Curtis .more time than iwe
have accorded to our Denlocratic colleagues. Perhaps it was bad form
of me to mention this, but I was somewhat pricked into this by his
charge that he wtis being muzzled. That is the last; thing that I.wish.
Representative C u r t is . Mr. Chairman, let vis get this in context*
M y criticism has not been directed against the chairman, of the com
mittee or the committee s rules, which I helped write and think are
good rules.
Chairman D ouglas. Which you don’t follow.
Representative C urtis. Which I try to follow. W hat I am trying
to point out is that what we are really engaged in is not a little con
test to see who can get a leg on the other as far as the. techniques-we
have. W e are really engaged in a very serious matter that affects
the welfare of this Nation.
There are two points of view. It is important, I think, if we are
going to have healthy debate, to get the other point of view dis
cussed. That is the basis of my remarks. I have no complaint against
you, but against the situation.
As I pointed out this imbalance was also true under the Eisen
hower administration, particularly in the 83d Congress when we con
trolled both the executive and the Congress. That is all I want to
point out, because I think the people must know this imbalance exists
in nat ional debate today. It is not healthy.
Chairman D ouglas. I don’t wish to take up precious time on this,
but I would like to point out that we invited two witnesses who are
former members of the Eisenhower Council of Economic Advisers,
Messrs. Burns and Jacoby. W e did this at the request of the minority.
Representative C urtis. Very generous.
Chairman D ouglas. Not generous; fair. W e wish -to be both gen
erous and fair.
Representative C urtis. Do you think that is a balance- with this
whole week of Government officials?
Next week we have two people, in a panel, I might say, who will
express a different point of view..
N o; I think, Mr. Chairman, you must recognize the basic inequity
of this national debate. As far as you personally are concerned,, you
have been very fair and I appreciate it.
Chairman D ouglas On this note of personal reconciliation, let us
continue.
Senator P roxmire. Let me add to the reconciliation that this Demo
cratic Party of ours is a democracy. It has much diversification o f
opinion. I happen to oppose the tax cut. You may not have been
able to tell by my questioning today.
Chairman D ouglas. I think that was evident yesterday.
Senator P roxmire, I am inclined to oppose it, but my mind is not
closed any more than Congressman Curtis’.
Mr. Secretary, I would like to read from an article that appeared in
the Post this morning and got mv adrenalin pumping. I would like
to indicate why I think it is unfair and I would like your comments:
Despite the grumbling, mutterings, and even screams of Capitol Hill about
fiscal irresponsibility, President Kennedy’s $13.5 billion tax cutting program faces
almost no organized opposition. But the opposition it does face is nonetheless
formidable even though scattered, inarticulate, and amorphous. This opposi
tion rarely makes itself felt in systematic ecoiiomic arguments. In general,
rather, it is sloganeering or throwback to old-fashioned Puritanism.
206
ECONOMIC REPORT OF THE PRESIDENT
This is a news article ; it is not an editorial. I would like to ask
if it is not perfectly logical and proper for Members of Congress to
challenge the tax cut which is in fact a drastic change in American
economic policy since it is being proposed in a period of relative
prosperity, a period in which we have a high deficit, a period in which
the President is going to ask for more spending and has told us so.
Should we not consider alternative methods of solving the unemploy
ment problems, alternatives which it seems to me have significant
and substantial promise 'i
I am talking about the possibility o f earlier retirement. I am talk
ing about the possibility of increasing the school-leaving age, which I
admit has to be done on a local basis. I am talking also about the
possibility that organized labor has proposed, which you discussed
very ably in your paper, of a shorter workweek.
It seems to me these alternative possibilities should be considered
along with the possibility of a tax cut. Also the alternative, to which
I am not inclined, of increased Government spending.
I think you would find substantial economic support, intelligent and
thoughtful economic support, not based on sloganeering. That since
so much of our unemployment is a special problem with the three
12-percent categories you can rifle-shot it. Not a scatter-gun approach
of a broad, general tax cut, increasing all demand, but perhaps more
emphasis on seeing what we can do about our minorities and opening
jobs to them, seeing what we can do about more opportunities for our
young people. Also, more training for the unskilled.
What is the matter with that kind of an approach ? Do you con
sider this to be irresponsible sloganeering, or isn’t it sensible for
Members of the Congress to demand justification?
Secretary W irtz. Senator, it would be presumptuous of me to
answer a question as to the reasonableness of the exercise o f any
congressional prerogative of that sort, and I decline to answer only
on the basis that I am sure I am not a proper judge of that.
Your question included also a point addressed to what we recognize
is a matter of very real concern and that has to do with the relationship
between what has been referred to as structural unemployment, which
would be susceptible to the approach of the Manpower Retraining
Development Act on the one hand and the broader problem of unem
ployment on the other.
I can only say respecting the time limitations which are involved
here, that it seems to us that the answer to that is very clearly that
we have to take both approaches to this problem. We see it every day
in connection with the administration of the programs which we
administer and in connection with the labor disputes which arise.
We think and feel very strongly that there are two things necessary.
One is the development o f an invigorated demand in the economy and
the other is the development of a manpower program of the kind in
which we are all here interested.
As between the two, priority is, in our judgment, attached to the
first. But it is equally our view that both are absolutely essential.
Senator P roxmire. First on the structural aspect, I would agree
that you have to work on both fronts although I am not convinced yet
that the tax cut is the best way.
Secretary W ir tz . I understand.
ECONOMIC REPORT OF THE PRESIDENT
207
Senator P roxmire. I t is certainly not the only way to increase de
mand. On the structural approach, are you satisfied that the area
redevelopment bill which we passed, the public works bills which we
haye passed, the provisions which we have for channeling some de
fense contracts into the area of unemployment, are sufficiently forceful
to provide the answer here ?
W hat I am getting at here is, should we step up these programs,
give them more emphasis, expand them, to a greater extent than we
have today ?
Secretary W irtz. Are you talking about those parts of these pro
grams which have to do with the stimulation of particular projects
or those parts of these programs which have to do with the training
or retraining ? I am not quite clear.
Senator P roxmire. I am talking about both. I am particularly
talking about the fact that we not only have the three categories you
talked aibout, of 12-percent unemployment. W e also have area
problems.
Secretary W irtz. That would be the fourth I would add.
Senator P roxmire. Pennsylvania, W est Virginia, southern Illinois,
northern Wisconsin, and so forth. Those are a few tough spots. I f
we could solve these specific problems, we would not have such serious
unemployment situations.
M y question is : Should we look to area redevelopment with more
reliance than we have in the past? It seems to me this is a terribly
small program. It started off with $395 million. W e may end up
with about a half billion dollar program this year.
In terms of the job it has to do, I am wondering if this is enough.
Secretary W irtz. I would like to answer in terms of the training
and retraining parts of these programs which are within our particu
lar competence and responsibility, and the answer is very clearly that
there is not enough of a program of this kind yet.
I should like to divide my answer into two parts. I think there has
been extraordinary, fantastic, unprecedented advance in the develop
ment of this program in the last 2 years. W e started with this, with
the area redevelopment program. This is a new program in America
today. But recognizing that advance, the situation is presently this:
The area redevelopment program has a training aspect to it which is
of limited numbers. The Manpower Development and Training Act
of 1962 provided for our training and retraining this year through
the State offices of 70,000 people. W e will do that before the fiscal
year is completed. That 1962 act provides for the increase in that
number to 100,000 next year, eventually to 400,000 in the 3-year period
o f the program.
We think that is probably an appropriate program and perhaps
all that can be done in this particular area at this point. However,
we feel it essential to add to this same program, and it really is the
same program, the Youth Employment Act which is o f a closely
related nature. I think it is probably true that with the Area Rede
velopment Act, the Trade Expansion Act, which has limited training
and retraining features, with the present Manpower Development ana
Training Act, assuming the appropriation for the next 2 years which
is provided in the original statute, and assuming the administration’s
Youth Employment Act, we will have taken gigantic strides in this
208
ECONOMIC REPORT OF THE PRESIDENT
direction and perhaps the largest steps that we can take in the period
at hand.
Senator P roxmire. N ow how about the placement o f the retrained
people? O f course, I subscribe to the whole thing. I think one of
the reasons this has worked so well in Milwaukee, as Congressman
Reuss said, is that it is run by people who understand the job situation,
top labor and industrial leaders* They have keyed the program to
the needs of the local industry. They know that local industry needs
a certain number of skilled people in categories, the Milwaukee voca
tional schools train for it and zero in on it. They don't train people
so they can acquire a skill and go someplace and find a job, maybe.
Secretary W irtz. I would be glad to answer that, but I have with
me the director of that office and perhaps you would prefer his
answer.
Dr. Wolfbein.
Mr. W olfbein. A s the Secretary indicated, we have a very small
number of alumni so far. So perhaps we should not generalize.
W ith that caveat, we have already, for these 1,800 alumni, placed
about 2 out of 3, which we think is an excellent record, since some
of these graduated just within the last few days.
Our placements have been best, as you might expect, in the situation
where you indicated, where you see a job right smack in a particular
company and you place the person. I would say, all in all, our experi
ence is very satisfactory on the placement side. But I underscore the
fact, Senator, that you mentioned. That in this particular program
what you do is first find out where the jobs are at the local level.
Senator P roxmire. I wonder if you gentlemen are in any position
to tell us the extent to which this problem could be solved by structural
measures of the kind you describe. Many of us feel that there are
jobs going begging, jobs that are never filled, simply because we don’t
have people trained to fill them. I think we may be able to solve a
part of our unemployment problem through training people to do the
kind of jobs for which people are not trained today.
To the extent that we can do this, it seems to me we would have
to have less of a deficit and less of a burden which many of us feel
we will have to otherwise carry in the future.
Secretary W irtz. May I emphasize a point in Dr. W olfbein’s state
ment? It is not only that two out of three of these trainees will be
placed. It is in this period we have already placed two out of three.
In some cases they are only a few days out of training. I don’t want
any misunderstanding. This is simply the first interim result.
I can answer that question better than I can the second one. I
don’t believe there is any good basis for identifying specifically, or
really very meaningfully or precisely, the number, or the amount of
this job which we can accomplish through purely structural changes.
There are various mathematical ways of approaching that problem,
and frankly, I have experimented with most of them. They don’t
satisfy me. The arithmetic beconies so complicated. I am not an
economist. ; I must without that •advantage or with that, advantage,
whichever it may be, fall blick—r^i .
Senator P roxmire.* I hope we can get statistics that will help us to
this,
«
Secretary W irtz. I wish we could.
'
ECONOMIC REPORT OS' THE PRESIDENT
209
Senator P roxmire; It would be a very useful and helpful investment.
Secretary W irtz. W e have replied affirmatively with every other
request for statistics. But I would be less than frank with yoti if I
were to suggest that I have yet seen a reliable breakdown in terms of
the projection of the answer to the question of how much of this cian
be done by an approach through a training program and how1much
o f it can be done by an approach through an invigoration o f the
economy and stimulation of demand.
I have not satisfied myself on that. But I am dead clear on one
thing, and that is that both are absolutely essential. So the only
difficulty is in answering the division between the two.
Senator P roxmire. I will come to the demand side in a minute but
my time is up. I yield to Congressman Curtis.
Representative Curtis. I think it is true that if demand is up, the
other job is easier. I f, on the other hand, the demand is really there
or could be there through purchasing power, you could increase pur
chasing power as you suggest and it would not be beneficial in one of
the biggest areas of technological growth, the agricultural sector.
That is where we are gaining the most. That is why I worry about
the administration’s undue concentration on the demand side of this
problem and why I have tried to emphasize the other side, the struc
tural or frictional one.
Although it is a difficult task to identify new skills I want to ask
how is this dictionary of skills coming along that you are updating?
Secretary W irtz. The Dictionary of Occupational Titles. Is your
question as to when it will be released ?
Representative Curtis. It is a continuing thing.
Secretary W irtz. That is correct.
Representative C urtis. Y ou have had it. There was an extra effort
made to try to bring it up to date.
Secretary W irtz. It is in a state of constant revision and updating.
Representative Curtis. H o w is it at this point? I think there has
been a neglect. I say that as one who might have to bear the politi
cal consequences because the previous 8 years were under my admin
istration.
Secretary W irtz. Congressman, you well know how very grateful
we are in the administration of the manpower development training
and the employment security programs for the emphasis that you
place on this aspect of the problem, and for your suggesting even
such things as the desirability of being sure it is up to date.
I am completely sincere in saying that, and with no qualification
at all.
Representative Curtis. You are very kind. I am only trying to
dig in here. This is just a specific case.
This gets into another area and I know it will embarrass you to
comment, but I want, it on the record. One of the? biggest problems
we have is in the division of jurisdiction between the Labor Depart
ment and the Department of Health, Education, and Welfare'in this
area. H E W has a Federal vocational education program and you
have the apprenticeship training one. I have been very much con
cerned about possible overlap here, especially since maiiy people have
been trained in skills already obsolete.
210
ECONOMIC REPORT OF THE PRESIDENT
In fact, I would like to see vocational education put under one roof
within the Labor Department. For example, one skill that is going
begging all over the country is tailoring. I f you talk to any tailor
ing company or go through the plants, and I have, you will find that
most o f the tailors are immigrants. Not old immigrants, but young
immigrants.
When I asked high schools in my own community why they didn’t
teach tailoring in high school they admitted they never considered it.
O f course, that goes back to the community, but this is an example of
the need to identify the skills that are going begging and relating
them to vocational education.
As I understand the report that is coming to Congress in March
about manpower training, it is to be a combined report o f H EW ’s
phase of it as well as yours. Am I not correct ?
Mr. W olfbein. The Secretary of Health, Education, and Welfare
will issue a report by March 1 and the Secretary of Labor will on the
operations of the act. This is in addition to the overall manpower
report.
Eepresentative Curtis. It is not one single report.
Secretary W irtz. It is a report by the President to the Congress re
quired by statute and then there are these additional reports by the
Secretaries.
Eepresentative Curtis. The President’s report will be a coordina
tion o f the two, I presume ?
Secretary W irtz. That is correct. But if your question implied,
as I thought it did at least at this point, any difficulty o f working
relationships in connection with this program between H EW and
ourselves, it has been notably free of any friction of that kind at all.
In fact, I can’t think of a single instance in which I felt there was
any diminution in efficiency or economy of operation or effectiveness
as a result of division between the two Departments.
Eepresentative Curtis. I am referring to the testimony before the
Labor and Education Committee in the House when we were con
sidering the Manpower Training Act. It seems to me that this has
been a basic problem although I do understand that your personal
relationships have been good. It is the same problem you would
run into in any division of jurisdiction.
I have several other areas for which I want statistics, if we have
them.
One way you measure a forward-moving economy is through in
creased leisure time. A possible criteria o f measurement would be
the establishment of benchmarks of hours per worker by year. Cer
tainly the 40-hour week and increased vacation time are indicative
of real economic growth. These do not show up in gross national
product, but mean a great deal. Use of our leisure time is another
question. (See p. 221.)
I f you could develop any meaningful trends in these areas, I would
like to see them. Let me list them rather than comment, because you
may already have the figures.
The amount of on-job training and retraining that is already going
on.
Secretary W irtz. The amount of off or on ?
ECONOMIC REPORT OF THE PRESIDENT
211
Eepresentative Curtis. On-job training and retraining, and then
the off, if there has been any trend. I am sure there have been some
real increases here, but I don’t know whether we have statistics.
Secretary W irtz. This would be hard to define. The amount of
on-the-job training figures are difficult for us to come by. But we
will do the best we can on that. That is because those are figures which
the private employer has.
Representative Curtis. That is right. It might be with one o f the
institutions, McGraw-Hill or some other research group.
Secretary W irtz. Our figures will be less complete on that.
Representative Curtis. The same thing is true of off-the-job adult
education. I separate that from vocational education of those enter
ing the labor force for the first time. I am interested in those already
in the labor market who take adult education. This number has
grown by leaps and bounds and I would like to get some estimate of
its increase.
Secretary W irtz. We will get that from HEW.
(The following was later secured for the record:)
In response to your questions (pp. 379-380) covering the extent o f the training
in the United States, I should first like to emphasize that our present informa
tion on this subject is inadequate. I am very happy that the Manpower Develop
ment and Training Act of 1962 specifically charges the Department of Labor to
“ appraise the adequacy o f the Nation’s manpower development efforts * *
In order to determine the extent o f the country’s manpower development efforts,
the Department is initiating studies which will enable us, for the first time, to
view the entire field of skills development in the United States.
On the basis o f the fragmentary information now available, we believe that
about 62 million Americans are receiving some kind of formal training each year.
Of this 62 million, over 55 million were enrolled in the Nation’s school systems.
In addition, a large number of employed workers are developing skills informally
on the job. It has been estimated that 6 young persons out of every 10 go from
secondary school directly to a job. Another two take some additional training
before entering the labor market. Two o f the ten complete college or university
before starting their careers.
EssentiaUy, six major institutions carry on training activities in the United
States.
The Nation’s schools are its primary training institutions. More than 55
million Americans, or 1 out o f every 3 above the age o f 5, are enrolled in a formal
program of instruction. The number o f students enrolled in schools has been
increasing steadily over the years. This has resulted in a sharp rise in the edu
cational achievement level o f the population. In the 1962-63 school year almost
47 million youngsters were enrolled in regular day schools, kindergarten through
grade 12. Another 4.6 million were attending schools of higher education which
give degrees.
Also in the Nation’s schools are more than 3 million adults taking evening
classes offered by local public school systems and more than one-half a minion
enrolled in part-time programs offered by schools o f higher education.
Federal-State programs of vocational education accounted for 1.7 million of
the daytime students, and over 2 million of the part-time students in 1961.
Private industry is probably the Nation’s second largest developer of skills.
Although the full extent o f the contribution o f private industry to training is
not known, a recent Department o f Labor study indicates that about 2.6 million
workers are receiving formal training in programs both on and off the job. This
training is sponsored by more than 100,000 industrial establishments. This sur
vey confirms earlier findings that the bulk o f training is conducted in larger
industrial firms. One o f the most important o f these formal programs is appren
ticeship, sponsored by management and unions to train workers for the craft
skills. More than 155,000 workers were being trained in apprenticeship pro
grams registered with the U.S. Department o f Labor in 1962. A considerable
number o f other workers were being trained in nonregistered programs.
212
ECONOMIC REPORT OF THE PRESIDENT
Formal training represents only a small part of the total training carried on in
industry. Informal on-the-job training is an extremely important training aspect
contributing to the skill level of the American labor force. Unfortunately, little
is known about the extent of informal training. The Department is now sponsor
ing a survey of how workers acquire skill. This study is expected to supply in
formation about informal on-the-job training.
The U.S. Department of Defense is clearly one of the largest, best equipped, and
one of the most important training institutions in the Nation. M a n y of the 12
million men and w o m e n who were in the Armed Forces during World W a r II re
ceived training which has contributed to the Nation’s growth and development
in the postwar period. This contribution has never been fully assessed. W e do
know that Armed Forces training has played an especially important role in pre
paring workers for jobs in air transportation, electronics, and in other newly
developing technologies.
Since 1948, almost 6 million Americans have been drafted for military training.
This training has become increasingly technical as a result of the demands of a
modern army, including new weapons systems. A considerable amount of the
training develops skills which can be used in civilian activities. In 1960, the
Armed Forces reported an enrollment of 632.500 enlisted men and officers in edu
cational programs while off duty. The total amount of Federal funds expended
for academic training of military personnel amounted to almost $50 million, of
which $7 million was spent in civilian institutions, including colleges, hospitals,
and industries. In fiscal 1962 the Department of Defense spent almost $13 million
for training in non-Government facilities.
Correspondence schools which offer home study courses also play an important
role in developing the Nation’s skills. According to the National H o m e Study
Council, almost 2.3 million individuals were enrolled in correspondence courses
in 1,960. Most of these persons were taking occupationally related courses. >
Almost all civilian Government agencies conduct or sponsor programs of
training.
Some of these programs are carried on for particular groups in the United
States. The Office of Vocational Rehabilitation helped return some 102.000 handi
capped persons to employment in 1962. Approximately one-third of these indi
viduals received some type of occupational training during the process of
rehabilitation.
Federal correctional institutions train approximately 12.000 prisoners yearly,
and State prison systems, it is estimated, train almost twice as many. The Vet
erans’ Administration provided on-job and on-farm training for some 36,000
eligible veterans in fiscal year 1960. The Bureau of Indian Affairs trained some
600 youths and 1,200 adults in vocational programs during 1960.
Other programs sponsored by Government agencies are directed toward up
grading skills of Government employees. A m o n g these are the management in
tern programs, refresher courses for secretaries, and the great variety of other
specialized programs. In addition, civilian agencies of the Federal Government
spent $5.7 million for training in nongovernmental facilities in fiscal year 1962.
National data are not available on the training activities of private social
service organizations. Nevertheless, the contribution of these organzations is,
in the ..aggregate, substantial as well as strategic. For example, Goodwill In
dustries, which has probably the largest network of sheltered workshops, pro
vided training and work for an estimated 35*000 disadvantaged persons during
I960.- Another organization, the American Federation for the Blind, reported
serving oyer 70,000 persons through 400 agencies, with approximately one-fourth
of them eamrying on vocational training programs.
A recent .directory lists 104 national, nonsectarian agencies which provide
either direct services or indirect support to the handicapped. About one-third
of them.have regional, State, or local affiliates.
There in no question that the Nation’s training activities are expanding. Where
w e ;have iinformation on enrollments and expenditures, all signs point to in
creased! training in all; of the six major training institutions. Enrollments in
the Nation’:* schools have increased sharply over the last decade. Industrial
training,, according to observers, is increasing rapidly with new: classrooms
opening *each year in the factories and in the stores. Defense expenditures for
all academic: training have more than doubled; since 1950: Correspondence school
enrollments have:grown by 300,000 yearly in recent years. Nondefense ;Federal
financial expenditures for education rose by. more than 50 percent between 1953
and 1959. Private social service organizations, according to scattered infonna-
ECONOMIC REPORT OF THE PRESIDENT
213
tion, also lire increasing their services to tlie special groups of citizens who are
in need of training.
The increased amount of training does not offset the need for Federal train
ing and retraining programs. These programs, such as those offered under the
Manpower Development and Training Act and the Area Itedcvelopment Act.
extend the opportunity for training to persons who otherwise might not be
trained in the programs referred to above. The Manpower Act specifically aims
at achieving a bettor matching between men and jobs. The labor market orien
tation of this program represents a new and necessary dimension to training.
Representative Curtis. I guess they would have it. but won't you
have some? I would regard union activities in the apprenticeship
training programs as adult education.
The last area on this is statistics relating to the impact of improved
health. That is what I call it. In other words, I am i n q u i r i n g about
the amount of rime 011 the job or, turning it around the other way,
the loss of hours through sickness and accident. Again, these would
be trends that I am interested in.
Secretary W irtz. Would the absenteeism figures cover that? It is
hard for us to know why a person is off the job. We do have the
figures for absenteeism.
Representative Curtis. I know. What I am Irving to do is relate
it to the tremendously improved health of our society which has cut
down the incidence of loss of work for health reasons. Maybe H E W
is the Department to ask. The accident rate I think you do have.
There are three reasons for absenteeism: one is health, the second
is accident, and the third is unknown. The two I am concerned about
would be the health and the accident factors. (See p. 221.)
I think my time is probably up and I will get to ask my final ques
tions later.
Chairman Douglas. Y o u have another minute.
Representative Curtis. D o I, really? Maybe I can complete it
here, then.
There are three areas of reform that I am very anxious to promote.
I am doing a little lobbying here now. I have introduced bills for
these reforms in the past. First, under our present tax laws a work
er’s home is where his job is. That has a very deleterious impact on
labor mobility in two ways. This came to my attention through the
McDonnell Aircraft case when highly skilled employees were sent to
Alamogordo, X . Mex., to follow the missile industry". They were on a
per diem wage because they were away from home. After they had
been there a while, the Internal Revenue Service said this wage was
added pay, not per diem on the basis that your residence is where your
job is. These people owned their own homes and had children in
school in their home communities. They had to commute back and
forth. This had a bad effect 011 labor mobility and ah impact 011 de
fense. This is really a serious problem.
A second example can be seen in the Chrysler move from Evansville,
Ind., to St. Louis. A lot of these workers could not sell their homes
right away. They had to commute back and forth. They could hot
deduct the maintenance of two residences as a cost because your resi
dence is where your job is. A s a Congressman I can claim this expense.
I maintain two residences and I am permitted to deduct the cost.
Secretary W irtz. The new tax bill has a new provision in it for in
creased recognition of moving expenses.
214
ECONOMIC REPORT OF THE PRESIDENT
Representative C urtis. I know they recognize moving expenses,
but look what the Internal Revenue Service did the other day. They
imputed part of the cost that the employer gave to a man for moving
expenses as his income. It is obvious that today most workers own
their own homes. Their residence is where their home is and not
where their job might me. This is a real impediment to labor mobility.
We have a similar impediment in the area of upgrading skills. This
process o f matching jobs is not an easy one. You cannot take the
unemployed, since they are usually unskilled, and match them with
these highly skilled jobs that are going begging. It is more a process
o f taking a fellow with a job who will study, and upgrading his skill
to a new level. Thus, his job is vacant for someone less skilled, often
someone currently unemployed. Yet our tax laws say that if a person
attends night school, and upgrades his skills, he cannot claim it as a
tax deduction. I was made aware of the problem when a teacher asked
me why she couldn’t deduct attendance at summer school as a busi
ness expense. I said she could, but I was proven wrong. The prin
cipal could tell her, “ You will be fired if you don’t go to summer
school,” and she could deduct it. But, if she was doing it willingly, she
couldn’t claim it. I was able to persuade the Internal Revenue Serv
ice to consider teachers and the deduction was provided.
This deduction should apply across the board in our dynamic econ
omy. I am lobbying to get that one now.
The third problem is to obtain help on unemployment insurance,
so that we could reorient it toward retraining. I am happy that 20
States have now turned it around and, in effect, say that if a fellow
doesn’t retrain he might lose his unemployment insurance. But surely
we shouldn’t make him lose his unemployment insurance if he does
retrain. I think we can do more to our unemployment insurance law
to further facilitate this retraining process.
I suggest use of the experience rating. This gives credit to the
companies who, knowing they are going to have to lay off certain
people in 6 months, engage in retraining for a skill that perhaps they
can’t use, but could be used elsewhere. That is my lobbying.
Secretary W irtz. On the last point, we are actively in support of
that same position and will continue to do everything we can to meet
that problem. I will take up with Mr. Caplin or the appropriate
authority the other point which you raise with respect to the expenses.
Representative C urtis. There are two: labor mobility and upgrad
ing o f skills.
Secretary W irtz. Yes.
Mr. Chairman, I hope there will be an appropriate time for entering
into the record, and I hope without offense to Congressman Curtis,
one paragraph from the report of the Council of Economic Advisers.
Representative C urtis. I f I can have it open for rebuttal.
Chairman D ouglas. I take it, it is on page 42?
Secretary W irtz. Page 42, the third complete paragraph?
Representative C urtis. May I have it open for rebuttal ? I will put
in the inserts.
Secretary W irtz. May I inquire o f the chairman whether it is con
sistent with his conduct o f this meeting in view o f his request that I
do this?
Representative C urtis. The only rebuttal I want is to insert other
quotations from the Economic Report.
ECONOMIC REPORT OF THE PRESIDENT
215
Secretary W irtz. Then, from my standpoint, I am inclined to let the
record stand as it is.
Chairman D ouglas. Thank you.
Secretary W irtz. I need not add it is only in the interest o f the
record.
Chairman D ouglas. I notice a natural tendency o f the loyal oppo
sition both outside and inside the Democratic Party to lay emphasis
on structural unemployment, and to imply that if various impediments
to transfer o f labor, such as lack of skill, moving difficulties, and the
rest, were removed, that unemployment itself would vanish. Now
I would like to ask if the jobs are not there, to what types of em
ployment will these people go ?
Secretary W irtz. The act requires that we not establish the train
ing program unless there is a reasonable possibility o f employment.
I have forgotten the precise form. We have not reached that problem
yet in connection with these first 500 projects. But we see ahead of
us as a very real limiting factor the almost certain prospect that we
will not be able to offer that degree of assurance which the act re
quires.
Chairman D ouglas. There are openings, o f course, for women in
the field of nursing and stenographic help, openings for men as auto
mechanics and certain other lines. But if there is a large percentage
o f unemployment caused by “ a shortage in total aggregate money de
mand,” the removal of these structural difficulties will not solve any
large portion of the problem; isn’t that true ?
Secretary W irtz. I think it is both. It is perfectly true in those
areas in which this is an acute problem—I am not speaking of the
economy as a whole—-it seems to be a problem of having both a flat
tire and being out of gas and we are trying to do both things. We
are trying to remedy both problems.
Chairman D ouglas. Let us go into this question of an alleged short
age in aggregate demand. I was remarking yesterday in questioning
the Director of the Budget that I think this is equivalent to saying that
the sum total o f price tags on goods produced or which could be pro
duced with substantially full employment is in excess of the sum total
of monetary purchasing power m the pockets o f consumers. I f this
is so, then there are two basic remedies. One is to reduce prices to the
level of monetary purchasing power. The other is to pump up mone
tary purchasing power to the level of prices. Theoretically, I would
favor the former policy.
But what do you think about the time which would be required and
the prospects of success of carrying out this policy of reducing prices
to the level of monetary purchasing power. You are an experienced
lawyer. You made a fine reputation and very comfortable living in
Chicago as a corporation lawyer. Do you think a vigorous enforce
ment of the antitrust laws would result m a speedy reduction in prices
and would result in harmony with the business community ?
Secretary W irtz. I think the largest interests o f this committee are
served when I say to you frankly that I feel I am over my depth, and
I don’t know the answer to the question you have asked. I don’t thor
oughly understand it. The last part of the question was with respect
to the results of a vigorous enforcement o f the antitrust laws.
Chairman D ouglas. With the aim of reducing prices to competitive
levels.
216
ECONOMIC REPORT OF THE PRESIDENT
Secretary W irtz. And the question specifically was whether I would
feel there is a prospect or sufficient prospect of that being effective to
meet the problem that we have before us ?
Chairman D ouglas. That is correct.
Secretary W irtz. I would hope it was appropriate to defer to other
departments of Government the answer to the question as to how
much prospect there is of effective relief in that direction. I don’t
mean for a moment to suggest an unfamiliarity with the field. The
whole administered price problem and so on and so forth. But I
really think it is in the interests of the committee if I profess incom
plete knowledge of how far that would be effective. I don’t think it
will do the whole job or we wouldn’t be urging these other things.
But I don’t want to pretend to you that I can translate into any kind
of specific figures the effectiveness of that program.
Chairman D ouglas. It so happens that a third of a century ago
I wrote an article proving that under a competitive economic system
you would not have what was termed technological unemployment,
namely, that improvements in productivity would translate themselves
into reductions in unit labor costs per hour if not accompanied with
increases in wages, and that under a competitive system this should
result in a lowering o f prices and an increase in quantities demanded.
In the industries where the elasticity of demand was greater than
unity, this would result, as my confrere said, in an increase in employ
ment. In industries with elasticity less than unity, it would result in
diminution. But the average elasticity for the economy as a whole is
equal to unity, and therefore for the economy as a whole there would
be reabsorption. I think I demonstrated that perfectly, if we had a
competitive economic system. But we know we don’t have a competi
tive economic system.
A former colleague of mine at Chicago has written a very able book
called “ Capitalism and Freedom.’’ I f we had a perfectly competi
tive system most of the conisequences which he describes would be true.
We know we don’t have it.
Do you want to turn to the question of pumping up purchasing
power to the level o f prices? We had some exercises on Monday in
working out the probable numerical magnitude of the so-called multi
plier. I wonder if your advisers down at the Department of Labor
have worked on that question ?
Secretary W irtz. We have gone over the fullest record we have of
Monday’s testimony and k$ow the colloquy to which you refer. So
far as I can tell, not on the basis of just general suggestion but on the
basis of reviewing that testimony, the position which Dr. Heller took
would, be in every respect the position which I would be inclined to
take.
Chairman D ouglas. As a matter of fact, he took a much more con
servative position than I took. I think he would only claim a multi
plier of 2-plus, with plus an unknown magnitude from the investment
accelerating factor. We made a rough estimate of the accelerator
factor and we came out with a multiplier of from 3 to 4.
I would like to point out that if you do have a multiplier of 4 anji
an $8 billion tax cut produces a $35$ billion increase in the gross na
tional product, that this will mean greater tas revenues at the reduced
rates in the second year o f not far from $6 billion. And the nei loss
ECONOMIC REPORT OF THE PRESIDENT
217
in revenue is therefore only $2 billion. It will probably create an
increase in employment of somewhere around 2 million.
I wish we could get some informed discussion on the magnitude
of this multiplier, because this is crucial. I f the multiplier is only
2, and you get an increase in gross national product o f only $16
billion, then the increase in net governmental revenue is only a little
over $3 billion, and you lose close to $5 billion in revenues from a
total of an $8 billion cut, and your reemployment is much nearer 1
million than 2 million. I wish we would grapple with this question
of the multiplier. Very frankly, one of our difficulties in this whole
matter which Congresswoman Griffiths referred to yesterday in her
most witty and penetrating examination is that while the theory of
the multiplier has permeated the ranks of the economists in the last
30 years, it has not permeated the mind of the general public. Even
among the economists, the multiplier has been used as an offset to
recessions, not as a stimulus to retarded growth.
You have a great deal of ability, Mr. Wirtz, yourself, and you
have surrounded yourself with able men both to your left and right
down in the Department. I wish they would work on the quanti
tative magnitude of the multiplier combined wTith the accelerator
principle.
People laugh at this and say these are extravagant terms, but I
would like to remind them that the atomic bomb was worked out with
mathematical values, and if the theoretical work which Einstein
started and which Fermi and the others carried out had not been
previously done we never would have had the atomic bomb.
Now we are engaged in a great experiment to help mankind. Many
people regard it as dangerous as the one which was carried out in
our home city. It is important that we know what we are talking
about. So I am going to urge you to get your experts to work on
the multiplier and accelerator and translate it into increased employ
ment.
I have taken up my 10 minutes, and I will yield to Senator
Proxmire.
Senator P roxmire. I want to get on this demand situation which
is much the most fascinating part of our discussion, but I do want
to ask about a couple of specific details on the Labor Department
itself.
To what extent do labor bottlenecks stem recovery, assuming that
the tax cut would stimulate the economy and would provide increased
employment? Would labor bottlenecks, lack of training, force pres
sure on prices and wages to such an extent that we would suffer infla
tion before we achieved the 4-percent or the 3-percent level of
unemployment ?
Secretary W irtz. It is not a quick or political answer. It is a
considered and responsible answer to the limits of our fullest con
sideration of that problem. The answer is “ No” ; there will not be,
assuming effective administration of the training and development
program, assuming the exercise of responsibility all the way along.
We think that aspect of the problem can be met so that there will be
neither a seriously limiting factor resulting from lack of sufficient
trained manpower, nor any inflationary pressures which will present
serious problems.
218
ECONOMIC REPORT OF THE PRESIDENT
Senator P roxmire. Is this true with regard to services?
Secretary W irtz. I was just going to say the answer is clearer in
some areas than with respect to others. Just by illustration, we face
the clear realization that there will be, in the construction industry,
serious shortages of skilled journeymen unless we increase, very
rapidly, the amount o f training which goes on fairly fast. There
will be other particular situations where we will feel an acute concern.
Senator P roxmire. H ow about the terrific expansion o f the space
program and the great need for technicians in this area as well as
professionals?
Secretary W irtz. My latest advice is that the most serious shortage
is the semitechnical level. May I inquire of Dr. Wolfbein as to
whether there is an identifiable shortage there ?
Mr. W olfbein. Yes. This will be detailed in the manpower report.
Senator P roxmire. The same thing would apply to health?
Mr. W olfbein. Health, teaching.
Senator P roxmire. Education?
Secretary W irtz. Those are the principal areas.
Senator P roxmire. Y ou think that these would not interfere with
the overall economic objectives? That is, you feel that you would
be able to reduce unemployment to the goal level and below it, which
we all want to do, to 3 or even less percent, before we get into serious
inflationary problems?
Secretary W irtz. Yes, sir.
Senator P roxmire. As far as labor is concerned ?
Secretary W irtz. Yes, sir.
Senator P roxmire. That answers the second question which was
to what extent are your training programs, with their present scope,
likely to solve this problem. You say the scope is adequate, and you
think you can do it.
Secretary W irtz. Yes.
Senator P roxmire. From the papers I read, I think we have been
subjected to a big brainwash on this tax-reduction theory. I think
that this is most unprecedented. I challenge you or anyone else to
give me an instance where the President o f the United States has ever
asked for a tax cut at a time when we have a big deficit. He is increas
ing spending when the country is moving ahead, and when the pro>osed deficit will be even bigger. We have had nine tax cuts in the
ast 40 years. A fter two of them, business remained about the same.
After four of them, I understand business improved over what it had
been. After three of them, business declined.
After the 1954 tax cut, for example, the business improved. After
the 1948 tax cut, it declined. On the basis o f this uncertain record, and
on the basis of the lack of precedent for a tax cut under these circum
stances, I am wondering why we shouldn’t give greater consideration
to such alternatives as interest rate stimulation.
The distinguished chairman of this committee, the only professional
economist in the Senate, has just told us that, in his judgment, it is
a matter of getting adequate monetary purchasing power in the hands
o f the public. Isn’t it perfectly possible that we could provide this
adequate monetary purchasing power by increasing the money supply
moderately, bringing down the interest rate? In the construction
industry tnis would help far more than a tax cut. A man ends up
{
ECONOMIC REPORT OF THE PRESIDENT
219
with a tax cut, as we pointed out the other day, as the President
proposed, with $3 or $4 more every 2 weeks, maybe $5 or $6 more
every 2 weeks, in his pocket. I f interest rates, the biggest single cost
in the construction of a home, are cut, wouldn’t it help more ? One
of the costs in purchasing an automobile is interest. With interest
rate reduction mere would be far more incentive to building homes
which really put people to work, to buy automobiles which put people
to work, rather than the kind of tax cut we are talking about which
may or may not have a direct stimulating effect.
I doubt if many people would buy a home if they found $4 or $5
a week more in their pocket.
My question is, Would you feel that monetary stimulation offers
a possible alternative ?
Secretary W irtz. Senator, it is hard for me to answer. I have
come here with a presentation of what seemed to me as the result of
the most serious, responsible consideration I can afford a picture of
this situation as far as its manpower aspects are concerned. There
was no thought o f brainwashing anybody.
Senator P roxmire. I am not saying the administration has brain
washed anyone. O f course, the administration in a free society could
not if it wanted to do so. I am simply saying that most of the
commentators I read, the newspapers I read, the editorials I read,
in the newspapers I get, are on one side and the argument they make
is that the only people who oppose the tax cut are idiots, who are
mouthing slogans and don’t understand what the score is.
That was the brainwashing I was talking about. The President
has every right and a duty to fight for his viewpoint as powerfully
as he can. He is doing a good job of it. I would not criticize him
or you for being a polemicist. It is your j ob.
Secretary W irtz. Perhaps I can lighten the moment by referring
to something I just saw last night: Anybody who tries to brainwash
me is involved in a iob of a light rinse.
On the point of whether there could be an approach by the ad
ministration o f different monetary policies which would be more ef
fective than the tax reduction approach, I again am not qualified
on that point. I don’t know. I respect any variety of judgment
in that field. I have tried to stay within the competence of my o f
ficial responsibility, and that includes not only the development o f the
details of the problem but also responsible consideration of what
to do about it.
I must say that in my most honest conviction the tax reduction is
the most direct, most immediate, most equitable, most effective ap
proach to the stimulation of the demand which seems to me imperative
if we are to put the full manpower resources of the country to work.
I think we sometimes make a mistake when we talk about the man
power problem in terms of unemployment, or when we talk about it
as a manpower problem at all. I thought we would perhaps do much
better if we started from the unmet needs of this country as a whole
and worked back from that.
There is not anything very constructive I guess in this particular
approach at the moment, yet it bears on your question and on the
relevance of increasing demand and so forth. I realize that if we
decide, not overnight but in a year or two, to do the things both in the
93762— 63— pt. 1------- 15
220
ECONOMIC REPORT OF THE PRESIDENT
private sector and in the public sector which we need so much to do
to meet the demands which we need to meet to pull up the 30 million
people, the purchasing power of the 30 million people who are today
living in this country at almost marginal levels, to build the schools
we need, the roads, the parks, the water supply system which only the
League of Women Voters seems to be very much concerned about, if
we started from that standpoint and decided to do those things which
we need so much to do, we would have a manpower shortage in this
country.
It is from that conviction and no more lightly that I answer your
question that the tax reduction approach does seem to me within the
limits of my understanding of those things right because it is directed
at the demand, the increasing of the demand, which seems to me iden
tifiable with what ought to be the right approach to this manpower
problem. But I cannot answer more expertly than that.
Senator P roxmire. I think that is a very impressive answer. My
reaction, however, is this: The matter of meeting that need is a matter
o f time and a matter of disposition on the part of consumers, espe
cially when you are relying on a tax cut. It is something we proceed
gradually on. We have solved this problem of utilizing manpower
over the years in a sensible way. We could still have the 60- or 70hour week. We could still have no social security and no retiring at
65. We could still have most children leaving school at 14. We don’t
have. We have reduced the potential work force in all these areas.
Therefore, it seems to me we might give some attention before
abandoning the fundamental Puritan ethic, which is pretty good ethic,
of relying on balanced budgets in prosperity and unbalanced budgets
in periods of recession. We ought to give some consideration to the
possibility of solving this problem, No. 1, by earlier retirement.
There is nothing sacred about 65. A whale of a lot of people would
like to retire at 60; of raising the school age limit. I introduced a
resolution 2 days ago in the Congress to increase it to 17 uniformly,
appealing to school boards all over the country to do it.
We can do far more to promote economic growth by relying as
much as we can on the traditional method of governmental stimula
tion in free societies, a method we have used repeatedly in this coun
try o f increasing our money supply.
The only other question I would like to leave, because my time is
up, is when you come in with these very persuasive estimates which
you as a Secretary of Labor and highly able and responsible man on
the effect of the tax cut in stimulating employment, I hope you will
specify very clearly so that it can be underlined that these are based
on assumptions that may not work out. The fact is that if we have
an increase in the propensity to save from 6 percent to 8 percent as a
result of this tax cut, we could wipe out the whole effect o f the tax
cut and this is well within the areas that have been given to us by the
Council of Economic Advisers.
So if the consumer spends 92 percent o f his income instead o f 94
and continues to do that because he has a little more and his spending
does not grow, then there is no stimulation at all. If, furthermore,
we get action on the part of the monetary authority to stem inflation
by selling bonds to the public, that combined with the attitude toward
ECONOMIC REPORT OF THE PRESIDENT
221
the tax cut might very well result in savings that would wipe out the
whole thing.
So I would stress that when you come in with these estimates, spell
out that these are based on assumptions, that there is no economic
experience of having this kind of a tax cut under these conditions.
Secretary W irtz. I am grateful for the suggestion. I mean that
sincerely. I think it is very important that we not pretend to know
more about the certain applications of these things than we actually
know and we will respect that.
Chairman D ouglas. Thank you very much, Mr. Wirtz. Your testi
mony has been very interesting.
We will recess until 2 :30 this afternoon when Secretary Hodges
will be the witness.
Secretary W irtz. Thank you very much, Hr. Chairman and gentle
men of the committee.
(The following was subsequently received for the record :)
U.S.
D epa r tm e n t op L abor,
O f f ic e o f t h e S e c r e t a r y ,
Washington, February 8, 1963.
M r. J o h n
Stark,
Clerk, Joint Economic Committee,
Washington, D.C.
D e a r M r . S t a r k : Following are further data in response to inquiries raised
by Congressman Curtis at the hearings on January 30.
s
Work injuries.— As the enclosed chart 1 shows, work-injury rates have been
reduced from the high wartime rates and now are well below prewar levels.
Employment in 1061 was up 42 percent above the 1040 average, but total disabling
injuries were up only 6 percent, as shown in chart 2.
Absenteeism due to illness.— Statistics do not seem to show a downtrend in
absenteeism to correspond with improvements in health. The rate o f absence
from work (o f 1 week or more) because o f illness was the same in 1960 as in
1948. (See enclosed table.) It is possible that the effects o f generally im
proved health have been offset to some extent by the rising average age of the
labor force, and by the increasing degree to which health insurance and medical
services are available.
Leisure time.—Enclosed is a report from the Monthly Labor Review, March
1962, entitled “Recent Growth o f Paid Leisure fo r U.S. Workers,” by Peter
Henle. The section headed “ How Much More Leisure?” beginning on page 255,
indicates that in two decades there has been an increase o f 155 hours o f leisure
time per full-time employed person per year.
Sincerely,
S t a n l e y H. R t j t t e n r e r g ,
Special Assistant
ECONOMIC REPORT OF THE PRESIDENT
222
Injury-F requency Rates
in
Manufacturing
1 9 3 8 -6 1 *
RATE
25
20
15
YEAR
10
1938
1939
1 94 0
1941
1942
194 3
1944
1946
1 946
1 94 7
1948
1949
1950
1951
1952
195 3
1954
1955
1 95 6
1957
1958
1959*
I9 6 0 *
1961 *
RATt
15.1
14.9
15.3
16.1
19.9
20.0
1 8 .4
18.6
19. 9
18. 8
17. 2
14.5
14.7
15.5
14.3
13.4
11.9
12.1
12.0
11.4
10.9
11.9
II. 3
MO
The Injury-Frequency Rate Is the Number of
Disabling Work Injuries Per Million Hours Worked
-1—1—-L
J—.L— L...1—J___L
1938 '3 9 '4 0 *41 *42 '4 3 '4 4 '4 5 '4 6 '4 7 '48 '4 9 ‘5 0 '51 '5 2 '5 3 '5 4 '5 5 '5 6 *57 '5 8 *59 '6 0 1961
U N IT E D S T A T E S
BU R C AU OF L A B O R
DEPARTM ENT
S T A T IS T IC S
OF L A B O R
♦preliminary
224
ECONOMIC REPORT OF THE PRESIDENT
Employed civilians absent from work on an average day, owing to illness
Duration of absence
Year
N um ber (thousands)
Less than 1 1 workweek
workweek
or more
Total
1948.— ........................................
1949............................. ...............
1950......... .....................................
1951________ _______ _________
1952......................... ....................
1953..............................................
1954......... .....................................
1955..............................................
1956......... ................................. .
1957...............................................
1958...............................................
1959...............................................
1960...............................................
1961...............................................
Percent
1,257
1,352
1,204
1,251
1,315
1,250
356
390
322
344
373
351
Total
843
719
717
782
775
783
752
835
901
962
882
907
942
898
Less than 1 1 workweek
workweek
or more
1.94
2.08
1.88
1.91
1.98
1.87
Source: Health, Education, and Welfare Indicators, December 1962.
Labor, Bureau of Labor Statistics, Em ploym ent and Earnings.
0.55
.60
.50
.52
.56
.53
1.42
1.22
1.20
1.29
1.27
1.26
1.23
1.32
1.39
1.48
1.38
1.39
1.42
1.34
Based on U.S. Department of
[Reprinted from the Monthly Labor Review, March 1962]
R
ecent
G row th
of
P a id L e is u r e
for
U.S.
W
orkers
(By Peter Henle1)
Traditionally, the American economy has been oriented more toward work
than leisure. American habits o f living and American cultural standards have
tended to emphasize the virtues of work and the vices of idleness. Of course, in
the Nation’s earlier years, there was litle choice; only through constant toil
could the early settlers provide for themselves and their families. Long working
hours were the accepted practice for the early industrial enterprises as well.
Gradually, a productive economy and a changing climate of public opinion
amde possible more leisure time. One o f the primary goals o f early union activity
was a shorter workday and workweek. The value o f rest away from work and
the adverse effects on health of long hours became recognized. The accepted
standard for hours of work declined slowly, through voluntary action by em
ployers, collective bargaining, and State and Federal legislation. The 12-hoiur
day gave way to the 10- and then the 8-hour standard, and eventually the 40-hour,
5-day week became the norm. A more recent development has been the emphasis
on other forms o f leisure—the paid vacation and the paid holiday. Before
World W ar n , these were quite limited for hourly paid workers, although many
salaried workers had been receiving this type of benefit.
Increased leisure has also 'been a byproduct of various shifts within the
economy. The decline in employment in agriculture and small retail stores, both
of which traditionally have involved long hours, has meant an automatic drop
in average working hours.
This growth o f leisure time has played a major role in shifting the patterns
of family living and in stimulating more widespread travel, sports, and recreation
activity throughout the country. Much of the output of the American economy
now consists of end products for leisure-time use or consumption. For example,
while the gross national product grew by 14 percent between 1957 and 1960, con
sumer expenditures for foreign travel were up 34 percent; books and maps, 28
percent; theater and opera, 26 percent; and commercial participant amusements
(such as bowling), 30 percent.
The purpose o f this article is to bring together statistics which the Bureau of
Labor Statistics has compiled from time to time on various aspects o f leisure
time, primarily hours of work, paid vacations, and paid holidays. It also
attempts, for the first time, to measure changes in the average worker’s avail
able leisure time in the 20 years 1940-60. In doing so, leisure time is not defined
1 Special Assistant to the Commissioner, Bureau of Labor Statistics.
ECONOMIC REPORT OF THE PRESIDENT
225
simply as time away from work because, in an economic sense, leisure has little
meaning unless it represents paid time taken voluntarily. The individual con
cerned has to be assured that he can spend time away from work without sacrific
ing living standards fo r himself and his family. It is in this sense that leisure
time is used in this article.
HOURS OF WORK
Hours of work have been declining for over a century.2 The most marked
reductions occurred between 1900 and 1980, when average weekly hours dropped
from about 67 to 55 in agriculture and from 56 to 43 for nonagricultural workers.
During the depression of the 1930’s, working hours were further reduced, but
by necessity rather than choice. Most of the industry codes promulgated under
the National Industrial Recovery Act between 1933 and 1935 included provisions
limiting the workweek to 40 hours (in some cases, 35) in an effort to stimulate
greater employment. The enactment o f the Fair Labor Standards Act in 1938
represented legislative decision that 40 hours a week constituted a desirable
standard, with certain exceptions, fo r workers in interstate commerce. Work
after 40 hours was not prohibited, but was made expensive to schedule by requir
ing that such hours be paid for at the penalty rate o f time and one-half. The
new standard was introduced gradually, beginning with 44 hours for the first
year o f the new law. The 40-hour standard became effective in October 1940,
and at that time, workweeks exceeding this standard were found almost
exclusively in industry groups either partially or wholly exempt from the Fair
Labor Standards Act—retail trade and class I railroads, for example.
The most significant change since 1940 has been the more widespread adoption
of the 40-hour week. Far more workers have seen their hours shortened to 40
than reduced below this level. While there have been some reductions of work
schedules below 40 hours, these have taken place only in a few industries, largely
those in which unions have made shorter hours a primary objective in collective
bargaining. In effect, the standard set in the Fair Labor Standards Act for
firms in interstate commerce had, by 1960, been extended to the vast majority
of nonfarm wage and salary workers.3
These are conclusions reached after an examination of available BLS data
on hours of work during the period 1940-60. Three types of data have been
involved in this examination:
1. Hours worked by individuals in the labor force as reported by a sample
of the Nation’s households and published in the Monthly Report on the Labor
Force. (Data for periods prior to July 1959 were published by the Bureau of
the Census.)
2. Scheduled hours o f work as reported by employers in response to surveys of
wage rates covering wage and salary workers in particular localities and
industries.
3. Straight-time hours as reported by labor unions in four industries in which
the Bureau conducts surveys o f union scale wage rates.
The basic figures for average hours worked are shown in table 1 for May of
1948, 1956, and 1960 for the various classes o f workers in the economy. (Com
parable data for earlier years are not available.) These months were chosen
because they represent months of generally high economic activity. By choosing
the same month of each year, problems o f seasonal adjustment were avoided.
These figures make it clear that hours are still longer in agricultural than in
nonagricultural pursuits. Moreover, those who set their own hours, the selfemployed, work longer hours than those whose hours are set by their employer
or through collective bargaining.
Between 1948 and 1960, average weekly hours worked by all employed persons
declined by 2.6 hours, or 6 percent. However, since part-time workers have been
forming a considerably higher portion of the labor force, the figures for all
workers exaggerate the trend toward a shorter workweek. In 1960, almost 6
million workers voluntarily were working at jobs o f less than 35 hours a week.4
2 “The Workweek in American Industry, 1850-1956,” Monthly Labor Review, January
1958, pp. 23-29.
PA 1961 amendment to the Fair Labor Standards Act extended coverage to about 3.6
million workers, most of whom are in retail, service, and construction industries. Be
ginning Sept. 3, 1963, most newly covered workers must be paid overtime after 44 hours,
1 year later, after 42 hours, and in 1965, after 40 hours.
4 “Labor Force and Employment in I960,” Monthly Labor Review, April 1961, pp.
344-354.
ECONOMIC REPORT OF THE PRESIDENT
226
The decline for full-time workers was only 1.3 hours, or 2.8 percent. The drop
in working hours for full-time workers was quite marked in agriculture; in fact,
several times the decline for nonagricultural workers. On the other hand, there
was no decline for full-time self-employed persons in nonagricultural industries.
Table 1.— Average weekly hours worked "by persons at work, 1948,1956, and 1960
A ll workers
Full-time w orkers1
Class of worker
M ay
1948
M ay
1956
M ay
1960
M ay
1948
M ay
1956
M ay
1960
Total at work______________________
43.4
41.6
40.8
46.8
46.0
45.5
Agriculture_____ ________________________
52.5
49.6
48.0
58.3
56.4
55.5
49.4
57.9
39.4
42.8
58.7
35.8
43.3
56.5
35.4
56.9
59.6
54.0
53.5
59.2
49.3
52.3
58.6
49.4
41.9
40.7
40.1
45.2
44.8
44.6
41.1
41.1
41.3
47.9
39.4
39.7
(2)
(2)
49.1
39.4
39.3
39.1
40.3
47.1
40.0
44.2
44.3
43.1
52.7
50.1
43.8
<*)
(2)
53.1
50.2
43.7
43.8
43.1
52.7
49.4
Wage and salary workers_____________
Self-employed workers_______________
Unpaid family workers_______________
Nonagricultural industries_________ _____
W age and salary workers_____________
Private employers__ ____________
Government............................. .........
Self-employed workers............................
Unpaid family workers________ _____
1 Persons who worked 35 hours or more during the survey week.
2 N ot available.
The distribution of full-time wage and salary workers by hours worked in
table 2 confirms the continuing slow decline in the average workweek. Yet for
most workers there has been little, if any, change in working hours. The
majority of nonfarm workers were on a 40-hour workweek in 1948 and have
remained so. By 1960, those working fewer than 40 hours had increased from
5 to 8 percent of all full-time nonagricultural wage and salary workers. Each
of the industry divisions also showed an increase in the proportion of those
with workweeks of less than 40 hours. However, only in nondurable manu
factures and the service, finance, insurance, and real estate division was this
proportion higher than 10 percent.
More significant perhaps was the drop in the proportion o f those working
more than 40 hours, from 43 percent in 1948 to 33 percent in 1960. The drop
was sharpest for agriculture, where the proportion working 48 or more hours
declined from 81 to 60 percent. In manufacturing, where the 40-hour week was
standard by 1940, the decline was slight; but in mining, transportation, trade,
and services, the continuing shift toward the 40-hour week was quite marked.
These figures, of course, represent hours actually worked, as reported by a
member o f the households included in the survey. An individual working
longer than 40 hours may be doing so because he has been assigned overtime
work, because those are his regular hours, or because he has more than one job.
(In December 1960, 3 million workers held more than 1 job.5) Similarly, a
person working 35 to 39 hours may have a work schedule calling fo r those hours,
may have begun or quit a job during the survey week, or may have missed cer
tain scheduled hours for such reasons as illness, bad weather, or cutbacks in
production. However, the years selected were years o f relatively high economic
activity, so that differences in the amount of both overtime and short time
would "be slight. In any case, the definition o f full-time workers as those work
ing 35 hours or more would exclude most short-time workers. Moreover, the
proportion of multiple jobholders has not changed significantly.6 Consequently,
there is little doubt that the 1948-60 decline in hours worked reflected, for
the most part, changes in scheduled hours.
5 “Multiple Jobholders in December 1960,” Monthly Labor Review, October 1961, pp.
1066-1073.
« I b id .
ECONOMIC REPORT OF THE PRESIDENT
227
Table 2.—Full-time wage and salary workers, fty hours of work during the
survey week and industry, May of 1948, 1952, 1956, and 1960
[Percent distribution]
M a y of—
AGRICULTURE
1948......................................................................................
1952.......................................-.............................................
1956...........................................................-............- ..........
1960......................................................................................
NONAGRICULTURAL INDUSTRIES, TOTAL
1948......................................................................................
1952......................................................................................
1956......................................................................................
1960......................................................................................
MINING
1948......................................................................................
1952........................................ - ...........................................
1956......................................................................................
1960......................................................................................
CONSTRUCTION
1948......................................................................................
1952......................................................................................
1956......................................................................................
1960.......................................................- ..........................
MANUFACTURING, TOTAL
1948.......................................................................................
1952.......................................................................................
1956................- .....................................................................
1960.......................................................................................
Durable goods
1948.......................................................................................
1952.......................................................................................
1956.......................................................................................
1960.......................................................................................
Nondurable goods
Total,
35 hours
or more
1948.......................................................................................
1952.......................................................................................
1956..................................................................................—
1960.......................................................- ............................
PUBLIC ADMINISTRATION
1948.............................. .........................................................
1952.......................................................................................
1956........................................................................................
1960.......................................................................................
1Includes insurance and real estate.
5.2
7.4
10.7
15.9
80.5
72.4
67.8
59.7
12.3
11.3
31.1
27.7
25.2
23.3
6.1
7.4
7.6
51.8
55.0
56.3
59.6
100.0
100.0
100.0
100.0
.7
1.4
3.5
7.4
41.8
48.9
56.3
59.1
100.0
100.0
100.0
100.0
4.9
4.8
8.5
100.0
100.0
100.0
100.0
4.1
5.7
6.4
6.7
100.0
100.0
100.0
100.0
2.2
100.0
100.0
100.0
100.0
SERVICES AND FINANCE *
10.7
14.0
13.6
18.2
100.0
100.0
100.0
100.0
TRANSPORTATION AND PUBLIC UTILITIES
WHOLESALE AND RETAIL TRADE
41 to 47
hours
6.2
7.9
6.2
100.0
100.0
100.0
100.0
1948.......................................................................................
1952.......................................................................................
1956.......................................................................................
1960.......................................................................................
40 hours
100.0
100.0
100.0
100.0
1948.......................................................................................
1952.......................................................................................
1956.......................................................................................
1960.......................................................................................
1948.......................................................................................
1952.......................................................................................
1956.......................................................................................
1960.......................................................................................
35 to 39
hours
4.8
6.4
9.9
10.7
11.0
2.1
2.8
4.3
4.3
9.4
5.4
8.7
5.4
52.1
43.7
31.5
28.1
54.4
54.9
58.9
64.8
12.3
9.6
28.5
30.7
66.7
65.5
18.4
11.2
10.1
9.1
8.2
18.0
18.7
18.2
16.7
68.3
73.4
12.4
10.5
9.0
7.8
16.7
20.5
19.2
15.4
9.2
19.5
16.2
16.7
18.4
2.7
3.4
11.1
48 hours
64.5
64.3
63.4
61.7
6.0
10.8
10.0
21.8
18.3
42.5
65.9
67.9
69.3
11.2
7.1
7.9
44.2
24.3
19.9
19.6
100.0
100.0
100.0
100.0
3.3
4.2
5.5
34.8
36.5
40.0
44.1
15.5
16.8
14.9
13.0
46.5
42.4
39.6
36.8
100.0
100.0
100.0
100.0
10.3
11.3
12.3
40.8
44.7
45.6
51.3
13.8
13.3
13.4
10.3
35.1
30.6
28.7
26.5
100.0
100.0
100.0
100.0
6.1
12.0
2.0
4.7
5.3
4.8
67.2
68.5
68.5
71.3
6.0
7.6
6.3
22.0
20.7
18.6
17.6
228
ECONOMIC REPORT OF THE PRESIDENT
These figures on hours actually worked can be compared with BLS studies
providing data on scheduled hours. Such figures fo r the year ending June 30,
1961, are available for 13.8 million workers in the country’s standard metropoli
tan areas (table 3) .7 Almost two-thirds o f all office workers and over four-fifths
o f all plant workers in metropolitan areas were employed in establishments in
which a 40-hour schedule predominated. Practically all the remaining office
workers had schedules of less than 40 hours (mostly 35 or 37% ), while most
o f the other plant workers had hours longer than 40. As a general rule, office
workers had shorter scheduled hours than plant workers.
The figures for scheduled hours generally fall below those for hours actually
worked by full-time workers but follow a similar pattern o f industry variations.
The incidence o f overtime work and dual jobholding would tend to make working
hours longer than scheduled hours. In addition, the scheduled hours data
cover only metropolitan areas, where hours are often shorter than in the smaller
cities and rural areas.
No comparable information on scheduled hours is available for years prior to
1960, but the Bureau’s union wage-scale studies provide hours’ information
dating back to earlier years for four industries (table 4 ).
In the printing trades, nearly all unions have succeeded in their attempts to
reduce scheduled hours below 40. In 1940, 64 percent o f the union workers
in the industry were scheduled to work a 40-hour week, while only 13 percent
had workweeks below 37%. By 1960, only 2 percent were on a 40-hour week,
while 54 percent had schedules o f less than 37% hours. The average workweek
had dropped to 36.6 hours.
T able 3.— Work schedules of lst-shift plant and office workers in metropolitan
areas,1 by industry division, year ending June SO, 1961
[Percent of workers]
Scheduled weekly hours
A ll in
dustries
M anu
Public
facturing utilities *
W hole
sale
trade
Retail
trade
Fi
nance *
Serv
ices 4
OFFICEWORKERS
A ll schedules......................
100
100
100
100
100
100
100
Under 40 h ou rs5..........................
35 hours___________ _______
Z6H hours...............................
37H hours...............................
38H hours...............................
40 hours..........................................
Over 40 hours................................
35
10
3
13
4
64
2
21
7
1
8
4
78
1
23
9
(«)
13
1
76
(«)
29
9
2
13
3
66
5
23
5
2
10
2
70
7
64
17
8
21
7
36
(«)
49
18
3
19
4
46
5
Average hours..... .........................
38.9
39.4
39.2
39.6
39.2
37.9
38.6
PLANTWORKERS
A ll schedules......................
100
100
100
100
100
100
Under 40 h o u rs 8______________
37H hours_________________
40 hours_______________________
Over 40 hours *............................42 hours___________________
44 hours...................................
45 hours...... ................„ ........
48 hours____________ ______
Over 48 hours........................
7
3
82
11
1
2
2
4
2
7
3
85
8
1
1
2
2
2
1
1
94
6
1
(6)
2
1
1
4
2
77
19
1
4
3
3
4
10
4
67
23
2
5
3
7
2
8
3
63
29
2
4
3
16
1
Average hours_________________
40.5
40.2
41.1
41.1
41.5
40.3
* See text footnote 7.
Railroads were excluded in a few of the areas studied.
3 Includes insurance and real estate.
* Includes, among others, hotels, personal services, business services, auto-repair shops, m otion pictures,
nonprofit membership organizations, and engineering and architectural services.
* Includes weekly schedules other than those shown separately,
s Less than 0.5 percent.
2 Includes transportation and communications.
7
Data were obtained for on© payroll period during the year (primarily in early 1961)
for all nonsupervisory employees (including working supervisors or foremen) in the
offices and plants of establishments in the six broad industry divisions shown in table 3.
The scope of the survey excluded Government institutions and' the construction and ex
tractive industries. The establishments within the scope of the survey were those employ
ing 50 or more workers except in the largest areas, where the minimum size was 100
employees in manufacturing, public utilities, and retail trade.
ECONOMIC REPORT OF THE PRESIDENT
229
In the local trucking and transit industries, unions have achieved wide
spread reductions in the workweek to the standard 40 hours. In trucking,
65 percent of union members in 1940 worked schedules of 48 hours or more.
By 1960, this figure had been reduced to 2 percent while the proportion working
40 hours or less had grown from 13 to 94 percent. While 1940 data for the
local transit industry are not available, the trend from 1946 to 1960 is similar.
In the earlier year, almost as many union members were working 48 or more
hours as were working the 40-hour week. By 1960, only 4 percent had schedules
as long as 48 hours, while 85 percent were on the 40-hour week.
In the fourth industry—construction—the average schedule has actually
lengthened somewhat since 1940, when 29 percent o f the workers were still on
schedules that had been shortened below 40 hours during the depression of the
1930’s. During World W ar II, standard hours in many areas were lengthened
to the 40-hour week, and this standard has been generally maintained in the
postwar years. As a result, in 1960, only 12 percent of the workers were on
schedules o f less than 40 hours.
In summary, recent years have witnessed a gradual increase in leisure time
through reductions in the standard workweek and in hours actually worked.
While such reductions have taken place throughout the economy, they have not
followed a uniform pattern. In a few industries, notably printing and publishing
and women’s apparel, general reductions in hours to a level below 40 have
taken place. In many predominantly white-collar industries, the workday has
also been reduced below 8 hours. In most manufacturing industries, the 40-hour
week has remained standard. In such nonmanufacturing industries as retail
trade and services, where many establishments were not subject to the Fair
Labor Standards Act, there has been a major movement toward the 40-hour
standard.
T
able
4.— Union scales of weekly hours1 in selected industries and trades,
selected dates, 1940-60
[Percent of workers]
Local trucking
Building trades
Printing trades
Local transit2
Hours scale1
June
July
July
June
July
July
June
July
July
July
July
July
1940
1950
1960
1940
1950
1960
1940
1950
1960
1946«
1950
1960
An scales__________ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Under 40 hours__________
Under 35 hours______
35 hours_____________
Over 35 and under
37H hours__________
3 7 ^ hours___________
Over 37H hours and
under 40 hours_____
40 hours__________________
Over 40 and under 48
hours__________________
Over 40 and under 44
hours______________
44 hours______________
Over 44 and under 48
hours______________
48 hours_________________
Over 48 hours____________
N ot specified_____________
Average hours___________
0.4
0.9
3.0
1.4
• 1.6
12.7
72.1
91.1
21.9
6.7
3.6
5.3
12.5
1.3
1.8
4.1
44.4
20.6
3.6
16.7
3.4
.2
2.5
2.0
.1
.2
47.2
42.0
40.1
29.2
9.6
19.6
13.5
.9
12.6
12.0
1.2
10.7
\f
1
66.9
86.5
88.0
2.9
(<)
(4)
35.5
4.1
5.0
85.9
2.2
6.4
97.8
2.3
19.1
3.4
21.7
33.0
42.6
32.8
43.1
1.3
63.8
1.7
13.9
.5
2.2
«.7
*.2
|
}- 1
.9
(4)
38.3
39.3
39.3
38.8
37.2
100.0
31.6
31.9
84.7
26.2
24.0
6.3
4.0
22.0
5.4
18.4
1.7
3.7
.2
27.0
3.7
11.5
.2
25.6
3.7
14.8
.9
3.2
.8
5.0
43.9
40.6
36.6
1 M axim um schedules of hours at straight-time rules agreed upon through collective bargaining between
trade unions and employers in cities of 100,000 or more.
2 Operating employees only.
3 Earliest date for which figures are available.
* Less than 0.05 percent.
» M a y include a very small number with longer hours.
N ote .—Blanks indicate either no data reported or data not tabulated for specified interval
230
ECONOMIC REPORT OF THE PRESIDENT
PAID VACATIONS
A more pervasive increase in leisure time since 1940 has occurred as paid
vacations have been adopted or lengthened for virtually all types o f workers.8
For example, in 1940, collective bargaining agreements applying to 2 million
organized wage earners, or about one-fourth o f all union members, provided an
nual vacations with pay.® For most of these workers, the maximum vacation pe
riod for which they might become eligible was 1 week. A few agreements provided
a 2-week vacation for all workers and about a fourth o f the workers who got
vacations were entitled to 2 weeks if they met specified service requirements,
but only rarely was provision made for more than 2 weeks. By contrast in 1957,
91 percent o f the workers covered by major collective bargaining agreements
(each covering 1,000 or more workers) Were eligible for paid vacations, and 84
percent o f the agreements made provision for a maximum vacation o f at least
3 weeks, usually for longer service employees.10
Practically all office and plant workers in the country’s metropolitan areas are
now entitled to paid vacations. In 1961 more extensive vacation benefits were
generally provided for office than for plant workers. After 25 years o f service,
38 percent of the office employees but only 25 percent o f plant employees were
eligible for 4 weeks or more o f vacation (table 5). Similarly, after 10 years o f
service, 41 percent of the office employees but only 29 percent o f the plant work
ers were eligible for 3 or more weeks o f vacation. The most prevalent service
requirements for the 2-week vacation were 1 year for office employees and 2 or
3 years for plant workers.
These figures, however, do not indicate the length o f vacation actually taken
by employees, and no such data are collected. But the Monthly Report on the
labor force provides an estimate of the number o f individuals absent from their
job “ on vacation” during the entire survey week. On the assumption that the
survey week is representative o f the months concerned, these data yield annual
estimates of full weeks of vacation. (See table 6.) For 1960, over 83 million
full weeks of vacation were recorded—150 percent o f the 1948 level and an aver
age of 1.3 weeks of vacation per employed person.
This figure understates total vacation time for two reasons: (1) The survey
week, being the week ending nearest the 15th o f the month, generally avoids all
m ajor holidays, whereas vacations tend to occur more frequently during holi
day weeks. (2) The figure does not include paid vacation time o f less than
a M l week. Including estimates for these two gaps in the calculations, a rough
figure for total vacation time fo r 1960 would amount to 96 to 100 million vacation
weeks.11
Almost 85 percent of nonagricultural wage and salary workers were paid while
on vacation in 1960. The percentage varied somewhat by industry, from a low
8 One exception is employees of the Federal Government. Vacation provisions for the
1 million Government workers covered by the Federal Classification Act were reduced by
the Annual and Sick Leave Act of 1951 from a uniform 26 days* annual leave to 13
days for employees with less than 3 years* service, 20 days for those with 3 but less than
15 years, and 26 days for those with 15 years or more.
• “ Vacations With Pay in Union Agreements, 1940,” Monthly Labor Review, November
1940, pp. 1070-1077.
“ Paid Vacation Provisions in Major Union Contracts, 1957” (BLS Bull. 1233, 1958) ;
for summary, see Monthly Labor Review, July 1958, pp. 744-751.
01 This figure is based on these computations:
1. To estimate the extent of the understatement because the survey week generally
avoids all major holidays: The most recent survey week containing Labor Day (Septem
ber 1959) showed 600,000 more persons on vacation than in the following September. The
last survey week containing July 4 (July 1954) showed 1.3 million more people on vacation
than in the following July. Assuming 7 holidays a year, 6 of which have the same effect
as Labor Day, and adding 1.5 million for the seventh (July 4), additional vacation weeks
due to the occurrence of holidays would be between 5 and 5% million. Variations in the
specific identity of the 6 paid holidays received by the average worker (footnote 16) due
to differences in local customs, worker desires, employer practice, etc., account for the
assumption that some workers observe holidays (and take vacations during the holiday
week) on at least 7 different days during the year.
2. To estimate the extent of the understatement because no allowance was made for
part-time vacations: According to household survey data, in the average week, about
one-half of 1 percent of all employed persons take about one-third week part-time vacation.
For 1960 this amounted to approximately 4 to 5 million vacation weeks. However, certain
part-week vacations may not be fully reported in the monthly survey (for example, in
weeks containing a holiday that are not survey weeks). Consequently, a judgment was
made that the total understatement for part-week vacations might be somewhat higher
than these statistics would indicate.
ECONOMIC REPORT OP THE PRESIDENT
231
o f 60 to 70 percent for construction and the service industries (including educa
tional services) to 93 percent for workers in transportation and public utilities
and 96 percent for employees in public administration.12
PAID HOLIDAYS
A similar development in recent years leading toward increased leisure has
been the growth in the provision of time off with full pay on holidays.
Before World W ar II, while major holidays were frequently observed through
out industry, the practice o f providing pay for hourly rated employees was quite
rare. During the war, the practice of paid holidays first began to spread, partly
as a result o f decisions by the National W ar Labor Board that the granting of
as many as six paid holidays would be allowed within wage stabilization regula
tions. But in 1943 a Bureau o f Labor Statistics analysis of collective-bargaining
contracts concluded:
Although an increasing number of union agreements make provision for paying
wage earners for some or all of the major holidays, the majority of agreements
in manufacturing, construction, and mining merely provide time off on holidays,
without pay.1®
After the war, the practice o f paid holidays spread generally throughout in
dustry. The most recent survey o f holiday provisions in major collectivebargaining agreements indicated that in 1958 only 12 percent o f the workers
covered were not entitled to paid holidays.14 Nearly three-fifths of the workers
under agreements calling for paid holidays were entitled to seven or more paid
holidays.
Currently, the average appears to be about 7 paid holidays in major American
industries. In the country’s metropolitan areas, data for 1961 show that all but
1 percent of the office workers and 5 percent of the plant workers received pay
for holidays not worked (table 7 ). The majority o f both office and plant workers
received 7 or more paid holidays. Some 24 percent of the office employees had
9 or more paid holidays, but only 7 percent o f the plant workers received this
number. The average among those receiving holiday pay was 7.8 paid holidays
for office workers and 7.0 for plant workers. Thus, the traditional advantage of
office workers over plant workers with regard to this benefit still applies.
The number of paid holidays varied by industry. Traditionally, banks have
had a liberal holiday policy, and over half of the office workers in the finance in
dustry received 9 or more paid holidays, and over one-third, 11 or more. Among
plant workers, the industry with the most extensive paid holiday provisions was
public utilities. Among both office and plant employees, retail trade provided
the fewest paid holidays.
Frequently, the additional paid holidays that have been recognized have
been, not the traditional holidays, but days that provide additional leisure time
at certain times o f the year or a longer weekend. For example, holidays im
mediately preceding Christmas and New Year’s Day have become increasingly
popular. The Friday following Thanksgiving has become a recognized holiday
in a small number o f bargaining agreements. Following are two agreement
clauses which illustrate how the selection of holidays has been geared to the
desires of employees for longer weekends.
Washington’s Birthday is designated as the holiday in February except when
the observance of Lincoln’s Birthday would provide a longer weekend, in which
event Lincoln’s Birthday shall be the observed holiday. * * *
*
*
*
*
*
*
*
w Special Labor Force Report 14, “ Labor Force and Employment in I960” (Bureau of
Labor Statistics, 1961), table E-3, p. A-36.
18 “ Vacations and Holiday Provisions in Union Agreements,” Monthly Labor Review,
May 1943, p. 929.
14 “ Paid Holidays in Major Contracts, 1958,” Monthly Labor Review, January 1959,
pp. 26-32.
232
T able 5.— Vacation pay provisions1for office and plant workers in metropolitan areas,2 by industry division, year ending June SO, 1961
[Percent o f workers]
A ll provisions........................................
A ll in M anufac Public
Whole
turing
dustries
utilities3 sale trade
100
100
100
Plant workers
Retail
trade
100
100
Finance< Services*
100
100
All in M anufac Public
W hole Retail
turing
trade
dustries
utilities* sale trade
100
Under 1 w eek___________________________ _
1 week.................................................................
Over 1 and under 2 weeks................. - .........
2 weeks...............................................................
Over 2 w eeks....................................................
(«)
23
1
75
2
(#)
(6)
16
1
80
2
53
(«)
46
(6)
26
(®)
(«)
72
1
(«)
3
(«)
(•)
96
(•)
5
82
5
6
5
83
7
4
(•)
25
1
70
3
(«)
64
2
31
2
1
69
2
27
59
(•)
36
1
(•)
(«)
70
2
18
2
AFTER 5 TEARS OF SERVICE
Under 2 weeks..................................................
2 weeks...............................................................
Over 2 and under 3 weeks.............................
3 weeks...............................................................
Over 3 w eeks....................................................
1
85
5
9
(•)
1
88
3
7
(«)
(•)
4
(«>
<*>
1
89
2
7
95
<•)
2
81
1
15
(«)
(•)
79
11
9
(•)
3
66
8
19
3
(♦)
(•)
6
74
2
17
14
74
2
2
1
4
54
4
34
1
6
39
1
51
3
14
61
3
14
1
4
29
1
62
2
6
28
14
44
2
32
3
6
84
2
7
94
1
4
(•)
(«)
(•)
AFTER 10 TEARS OF SERVICE
Under 2 weeks..................................................
2 weeks...............................................................
Over 2 and under 3 weeks.............................
3 weeks.............................................. ...............
Over 3 w eeks....................................................
1
50
8
40
1
1
47
13*
38
1
(«)
1
15
1
79
5
1
13
1
81
4
(«)
71
3
25
1
1
52
3
42
1
2
41
1
53
2
1
25
1
71
2
2
26
(«)
46
9
44
(*)
3
47
1
42
6
4
48
18
27
2
3
45
26
23
2
(•)
3
27
1
60
9
4
19
2
69
5
3
16
3
71
5
(«)
71
3
24
1
AFTER 15 TEARS OF SERVICE
U nder 2 weeks..................................................
2 weeks...............................................................
Over 2 and under 3 weeks________________
3 weeks............................................ —..............
Over 3 weeks....................................................
(6)
5
92
2
(#)
69
3
(«)
12
1
80
7
(«)
3
92
4
(#)
61
4
PRESIDENT
1
77
6
13
2
(6)
63
1
35
THE
1
73
4
18
2
100
100
100
OP
100
AFTER 1 YEAR OP SERVICE
REPORT
100
Services *
ECONOMIC
Office workers
A m ount o f vacation pay and length of
service1
AFTER25 YEARS OFSERVICE
Under 2 weeks........................................
2 weeks.....................................................
Over 2 and under 3 weeks...................
3 weeks.....................................................
Over 3 and under 4 weeks...................
4 weeks...................... ............................
Over 4 w eeks._____ _________________
1
13
1
12
1
49
6
31
(6) 46
3
37
1
(«)
(#)
(6)
(«)
56
38
1
(6)
43
1
30
(#)
(6)
24
50
(•)
(6)
(#)
42
1
47
2
4
17
2
43
7
25
3
25
1
50
1
19
9
(«)
2 See text footnote 7.
3 See footnote 2, table 3.
4 See footnote, 3, table 3.
8 See footnote 4, table 3.
• Less than 0.5 percent.
(•)
3
15
3
44
11
22
(«)
(#)
(•)
4
28
1
43
1
22
3
56
1
38
1
(«)
6
26
(6)
(6)
(#)
14
42
2
31
1
5
32
36
00
ECONOMIC
i Includes percentage or flat-sum type payments converted to equivalent weeks of pay.
Periods of service were arbitrarily chosen and do not necessarily reflect the individual
provisions for progression. For example, the changes in proportions indicated at 10
years’ service include changes in provisions occuring between 5 and 10 years.
The distribution does not indicate the number of workers actually receiving vacations
of the stipulated length, since this depends on the number meeting length-of-service and
other eligibility requirements.
REPORT
OF
THE
PRESIDENT
233
2
24
1
24
5
234
ECONOMIC REPORT OP THE PRESIDENT
I f Christmas Day is on—
SundayMonday.
Tuesday.
Wednesday.
Thursday.
Friday___
Saturday.
HO W
The eighth holiday will be—
Preceding Friday.
Preceding Friday.
Preceding Monday.
Day after Thanksgiving.
Following Friday.
Preceding Thursday.
Preceding Friday.15
MUCH
MORE L E ISU R E ?
Clearly there has been a marked increase in leisure time over the past 20 years.
Admittedly, estimates o f how much increase has taken place must be rough
approximations, particularly since few data are available for 1940. Neverthe
less, they give for the first time some indication of the magnitude of changes
in paid leisure time. Essentially, the increase in leisure time in 1960 over 194016
consists o f the follow in g:
Hour8 per year
per full-time
employed person
1 y2 hours less in the workweek.
6 days more paid vacation____
4 days more paid holidays____
75
48
32
Total.
155
For the economy as a whole, this additional leisure time amounts to over 10
billion hours (5 billion from the shorter workweek, 3.2 billion in additional vaca
tion, and 2.1 billion in added holidays).
Many of these hours represent additional time away from work. This is ob
viously true, for example, of the reduction in the workweek. However, the
additional paid holidays largely represent payment fo r time which in 1940 was
spent away from the plant without compensation. The additional vacation time
is a combination o f these two factors.
The 155 hours represent almost 4 average weeks of employment, but they
represent only a small fraction o f the gain in productivity that the national
economy has achieved since 1940. BLS estimates o f output per man-hour would
indicate that to produce the 1960 output with the 1940 productivity would have
required an additional 1,447 hours of working time— or 71 percent more—for each
employed member of the 1960 labor force.17 Thus, the 155 hours that have been
accounted for in terms of reduced hours o f work, increased vacations, and paid
holidays amount to only 11 percent of the hours that have been made available
by the Nation’s increased productivity since 1940.
« Ibid., p. 30.
10 Estimates in the tabulation presented here were derived as follows :
Average hours of work: The drop of 1% hours per week seems reasonable in view of
the 1.3 hour drop for full-time workers between 1948 and 1960 (table 1). Comparable
estimates for 1940 are not available.
Paid vacation: Figure assumes an average paid vacation per employee of 0.3 week in
1940 and 1.5 weeks in 1960. The 1940 figure would make allowance for the following paid
vacation: none for farmworkers; 1 week for one-fourth of all manual and service workers
(roughly the proportion of the 1940 survey for union members; see footnote 8) ; 2 weeks
for one-half of the white-collar workers; and 1 week for one-fourth of the white-collar
workers. The 1960 figure is based on 1.3 weeks of full vacation (table 6) plus an allow
ance for the understatements described in footnote 10.
Paid holidays: Figure represents the difference between 2 paid holidays in 1940 and 6
paid holidays in 1960. fThe 1940 figure allows no paid holidays for farmworkers, 1 for
manual workers, and 5 for white-collar workers. The 1960 figure is based on 7-7.8 paid
holidays for workers in metropolitan areas (table 7) and a smaller number for workers
outside these areas.
17An alternative method of determining the allocation of productivity gains to income
and leisure would be to compare the actual 1960 output with that resulting from applying
1960 man-hours at 1940 levels of productivity. This procedure also involves taking into
account the reduced annual hours worked during this period. fThe results from the two
methods are essentially the same.
ECONOMIC REPORT OF THE PRESIDENT
T
able
6 .—
235
Estimated number of full vacation weeks of employed persons, 1948,
1952, 1956, and 1960
Item
1948
1952
1956
1960
N um ber of full vacation weeks (millions).........................
During July and August................................................
During other 10 m onths.................................................
155.5
136.5
19.0
59.9
36.2
23.7
71.5
42.0
29.5
83.5
49.4
34.1
Average number of persons em ployed (m illions)............
59.1
61.0
64.7
66.7
Average number of vacation weeks per em ployed person.
.9
1.0
1.1
1.3
i Survey week in July included July 4.
T able
7.—Paid holiday provisions1 for office and plant workers in metropolitan
areas,2 by industry division, year ending June SO, 1961
[Percent of workers]
N um ber of paid holidays 1
A ll in
dustries
Public Wholesale
M anu
facturing utilities *
trade
Retail
trade
Finance* Services8
OFFICE WORKERS
A ll provisions___________
99
99
99
99
98
99
98
Less than 6____________________
6 and 63^______________________
7 and 7 H ........................................
8 and 8 ^ _ .____________________
9 or more______________________
4
19
33
19
24
2
14
49
22
12
1
9
47
21
22
7
26
24
23
20
10
42
32
7
7
5
18
10
15
51
8
20
20
19
21
Average number •_____________
7.8
7.4
7.8
7.5
6.7
8.9
7.4
PLANT WORKERS
All provisions___________
95
96
98
97
93
77
Less than 6____________________
6 and 6K ______________________
7 and 7lA ........................................
8 and 8 ^ ______________________
9 or more______________________
8
21
44
16
7
5
15
52
17
6
2
12
49
18
16
13
27
23
19
14
18
40
22
10
4
18
35
14
4
6
Average number 8_____________
7.0
7.1
7.6
7.1
6.1
6.1
1 A ll combinations of full and half days that add to the same amount are com bined; or example, the p ro
portion of workers receiving a total of 7 days includes those with 7 full days and no half days, 6 full days
and 2 half days, 5 full days and 4 half days, etc.
2 See text footnote 7.
« See footnote 2, table 3.
4 See footnote 3, table 3.
s See footnote 4, table 3.
« Based on workers in establishments providing paid holidays.
While this gain in leisure time represents only a relatively small proportion
of the increased productivity since 1940, this is not unexpected. Much of the
limited productivity gains of the previous decade, 1930-40, were reflected in
shorter hours of work, not because workers preferred greater leisure but be
cause o f the depressed conditions of the decade. The passage o f the Fair Labor
Standards Act to a large extent reflected changes in hours that had already
taken place. In the two decades following the 1930’s, the emphasis quite na
turally was on income rather than leisure.
A review of the changes in paid leisure between 1940 and 1960 shows that
there was no major shift in the standard workweek. Perhaps the most sig
nificant development was that more than half the total gain in paid leisure
resulted from increased vacation and holiday time, rather than from a reduction
in working hours. This is a definite shift from the pattern o f earlier years and
seems to indicate that leisure time preferences are running more to additional
whole days each year rather than additional minutes each day.
Of course, the leisure time gained since 1940 does not necessarily represent
time available for travel, recreation, etc. The nature o f the economy and the
Nation’s living habits have changed in important ways since 1940, and since
9 37 6 2 — 63— p t. 1-------- 16
236
ECONOMIC REPORT OF THE PRESIDENT
individuals now live farther from their place o f employment, some of this addi
tional “leisure” time may now be spent in commuting to and from work.
Although the average employee has more leisure time today than in 1940,
many individuals continue to prefer more work to more leisure in order to maxi
mize their income. The operation o f today’s economy makes it possible for those
who wish to work longer hours to do so, either by accepting overtime when it
is available or by obtaining a second job. The economy also makes it possible
for more people, especially women, to work at part-time jobs.
It is difficult to generalize about future trends in leisure time from this record.
There is no way to measure the intensity o f the demand for more leisure time
against the intensity o f the demand for greater income to be spent on leisure
time activities. Trade unions continue to present demands fo r a shorter work
week, although much union pressure in this direction is motivated not by the
desire for more leisure but by the possibility o f increasing the number o f jobs.
Of course, regardless o f the motivation, the attainment o f shorter hours o f work
would bring with it greater leisure time.
Changes in vacation and holiday practices continue to be negotiated in collec
tive bargaining. A number o f unions have also expressed interest in some type
of extended paid leave provided periodically fo r longer service employees.
One new factor is the form which the demands for leisure time are likely to
take. The relatively slight decline in average hours o f work in recent years has
been accompanied by a greater interest in more extended paid vacations and a
greater number of paid holidays, providing a greater number o f days off seems
likely to continue to receive greater emphasis than reducing the time spent each
day at work.
(Whereupon, at 12:10 p.m., the committee adjourned, to reconvene
at 2 :30 p.m. of the same day.)
A F T E R N O O N SESSION
Chairman Douglas. We are very happy to welcome Senator Miller
of Iowa, who has just been appointed to this committee. We hope
that your service on the committee will be a pleasant one and that
it will be of value to the country.
Mr. Secretary, we are delighted to have you this afternoon and ap
preciate your taking the time of what I am sure is a very busy lixe
to come here. You may proceed in your own way. We have your
statement.
STATEMENT OF HON. LUTHER H. HODGES, SECRETARY; ACCOM
PANIED BY DR. RICHARD H. HOLTON, SPECIAL ASSISTANT FOR
ECONOMIC AFFAIRS; AND DR. LOUIS J. PARADISO, ASSISTANT
DIRECTOR, OFFICE OF BUSINESS ECONOMICS, U.S. DEPARTMENT
OF COMMERCE
Secretary H od g e s. Thank you, Senator Douglas, Senator Prox
mire, Senator Miller.
I have with me Dr. Kichard Holton, who is my economic adviser
in the Department of Commerce, from the University of California,
who has been with us for some months. We have with us also Dr.
Louis J. Paradiso, an oldtimer, whom you have seen many times.
These are the two experts. I will just talk about how we see this
situation and try to answer your questions or get help from these
gentlemen. I think I can do best, Mr. Chairman, by just going ahead
and reading this, if it is all right with you, sir.
Chairman Douglas. Yes.
ECONOMIC REPORT OF THE PRESIDENT
237
Secretary H o d g e s. Mr. Chairman and members of the committee,
I greatly appreciate the opportunity to appear today to comment on
the state of the economy and on the proposals for improving our cur
rent situation. I need not dwell on the details of the performance of
the economy in 1962 since you are already familiar with these.
Instead, I will devote most o f my remarks to certain aspects of
the economy which are of particular concern to the business com
munity and to the Department of Commerce. The central theme
of my presentation is that the administration’s program for deal
ing with our current economic problems is not only designed to help
the U.S. economy as a whole; it is also designed to strengthen sub
stantially the position of the many business firms in the country.
I am happy to say that this program is basically a probusiness proram and one that businessmen from coast to coast should welcome,
ince our economy is a free enterprise economy, it is fitting that pub
lic policy for growth should provide an environment within which
the thousands of private firms in the country find it easier to ex
pand, to modernize their plant and equipment, and to provide con
sumers with a continually expanding array of goods and services.
From many points of view 1962 was a very good year indeed. The
gross national product, according to the preliminary estimates pre
pared by the Office of Business Economics in the Department of
Commerce, rose to $553.6 billion for the year, an increase of 6.7 per
cent over 1961.
Personal income rose by 5.8 percent to reach a new high of $440.5
billion for the year. The employed work force also stood at an alltime high of nearly 68 million persons.
This performance, however, is simply not good enough considering
our overall problems and our capability. Our goals should be not
merely to surpass the peaks o f previous experience, but rather to
exploit to the full our potential for economic expansion. We estimate
that the gross national product is currently $30 to $40 billion below our
full employment potential.
A ll during 1962 unemployment fluctuated around 5 percent of
the work force. This means 3.8 million persons out of work. It is un
becoming for the United States, the leader of the free world, so eager
to demonstrate to the emerging nations the advantages o f our way
of life, to operate for so many years with more than 5 percent of the
work xorce unemployed and with so much idle capacity.
But we need to achieve our full potential and a more rapid rate of
growth not only to minimize unemployment, but for a number of other
reasons as well. Better performance of the economy would permit us
to more nearly meet the unfilled needs of the country, both private
and public.
A more buoyant economy would make it easier for State and local
governments to fulfill their many demanding programs, which have
been expanding since the end of the war far more rapidly than for
the Federal Government. Furthermore, when the economy is growing
rapidly and employment is available there is less pressure for welfare
grants and other public assistance.
Firms can more readily adjust to import competition if domestic
markets are expanding more rapidly; and labor can adjust to automa
tion more easily if there are alternative jobs to be had.
§
238
ECONOMIC REPORT OF THE PRESIDENT
The United States and the 19 other members of the OECD have
agreed to attempt to achieve a 50-percent increase in the combined
gross national product of the member nations between 1960 and 1970.
Growth at this rate would not only strengthen the member nations
in our economic competition with the Soviet bloc; since the OECD
countries buy such a high proportion of the exports of the underde
veloped countries, a rapidly growing OECD means more trade for
tho underdeveloped countries, <ind, hopefully, less need for economic
aid from the United States and elsewhere.
Our rate of growth in 1962, though good, fell short of expectations
largely because investment expenditures were considerably less than
had been anticipated. Inventory investment was far less than is nor
mal for this stage in the business cycle.
Fixed investment, although 9 percent above 1961, did not increase
as much as had been anticipated in view of the availability of internal
cash, the new depreciation guidelines, and the investment credit. By
the iourth quarter of 1962 gross private domestic investment was at
an annual rate of about $75 billion, down from the second quarter
peak of $77.4 billion.
For 1962 as a whole, gross private domestic investment will be only
about 5 percent above 1959, the previous peak year. Investment ex
penditures were not lower than anticipated because savings were too
small. Personal savings were running at about 7 percent of disposable
personal income, the same as in 1961.
Corporate liquidity, measured by the ratio of current assets to
current liabilities, has been remarkably stable over the last several
years, and corporate gross saving exceeded gross investment by about
$3 billion in 1962.
It is difficult to avoid the conclusion that investment expenditures
were lower than expected not because of any shortage o f funds but
rather because o f limited profit opportunities.
In addition to the problems of underutilized productive resources
and inadequate economic growth, we are still concerned about the
balance of payments. As the annual report of the Council o f Eco
nomic Advisers indicates, we are making progress in correcting our
balance o f payments problem. The deficit in the overall balance has
shrunk from $3.9 billion in 1960 to $2.5 billion in 1961 and around
$2.0 billion in 1962.
^ Exports rose in 1962 by 4.5 percent to an all-time high of $20.8 bil
lion, but imports rose substantially so that merchandise exports ex
ceeded imports by only $4.7 billion in 1962 compared with $5.4 bil
lion in 1961.
I f we are to have an export balance great enough to help correct
our balance of payments problems and to perlnit us to play the role we
aspire to in international affairs, we must increase our exports sub
stantially. W e have set an immediate goal o f an increase of $2 billion,
or about 10 percent.
The President’s economic^ program, including mainly the tax re
vision and programs in civilian technology, education, and manpower
development, should go far toward solving the problems I have just
reviewed. This program is largely a probusiness program. This
is especially borne out by the tax proposals, which are designd to im
prove the profit position o f American business and provide healthy
incentives tor investment.
ECONOMIC REPORT OF THE PRESIDENT
239
One major reason for the unsatisfactory performance of the economy
is that taxes are too high. This is not just the simple idea that house
holds and business would like to see a reduction in their tax burden.
Taxes are too high in the sense that, on balance, they are depressing
individual expenditures and business investment so much that we can
not bring all our available labor and plant capacity into use.
The present tax system was designed for the postwar and Korean
conflict years when aggregate demand was high, business expectations
were buoyant, and our productive capacity was strained.
The tax structure was at that time a restraining influence, necessary
to minimize inflation. Such a tax structure is an excessive burden
under today’s conditions.
The President’s tax program is designed to raise aggregate demand,
to improve profit prospects, and to increase investment incentives.
The major deterrent to profits and investment is simply that total de
mand is too small. The reduction in personal income tax rates will
raise aggregate demand by increasing take-home pay, which will flow
into increased consumer spending.
The larger relative reduction in rates in the lower income ranges
is consistent with this need to expand total buying.
To improve investment incentives for corporations, it is proposed
that the corporate tax rate be reduced to the pre-Korean level. This
will round out the initiative begun last year with revision of Treasury
depreciation schedules and the enactment by the 87th Congress o f the
tax credit proposed by the President. The proposed reduction of the
top bracket of the individual rate from 91 to 65 percent is also aimed
at stimulating investment and private initiative.
Quite apart from these changes, the administration is proposing a
whole series of structural reforms in the tax code which will overcome
distortions in resource use and the flow of investment funds that have
crept into the existing tax structure and which often represent a
barrier to creative investment.
One example of this is the proposal that the tax rate on the first
$25,000 of corporate income be dropped from 30 to 22 percent. While
business as a whole has not been seriously restricted in their access to
funds during the recent period, this has not always been true for
many small and rapidly growing firms.
Still another example is the proposed reduction of the capital gains
tax to 30 percent of ordinary income rate for all classes of taxpayers.
This reduction in the capital gains tax should free up the capital
market and thereby facilitate growth particularly for small- and
medium-sized firms.
However, I would like to emphasize that the heart o f the President’s
program is the measures designed to increase aggregate demand—pri
marily through the reduction of the tax rate on personal income. It
is important to emphasize here that the business community should
benefit substantially from an improvement in the consumer demand
picture.
Businessmen for some time have been acutely aware o f the “ profit
squeeze.” The ratio o f corporate profits to total national income has
been declining for a decade and the rate is below that enjoyed in
the 1920’s.
The postwar profit squeeze is largely accounted for by a marked
increase in the relative importance of depreciation charges. In 1948
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the corporate before-tax profits amounted to 21.3 percent of the gross
product originating in the corporate sector o f the economy.
By the first half of 1962 this 21.3 percent had shrunk to 15.7 percent.
Meanwhile depreciation charges had increased from 5.5 to 9.5 percent
of the corporate gross product or from $8 billion in 1948 to $28.9
billion in 1962.
The increase in indirect business taxes, such as property taxes, was
also substantial, from 8.9 to 10.5 percent; this was an increase from
$12.7 billion in 1948 to $32 billion in 1962. The share of gross product
in the corporate sector accounted for by compensation of employees
was stable at about 64 percent.
Even after correcting for accelerated depreciation, it is clear that
the profit share of the corporate gross product has declined markedly
since the end of the war, largely as a result of increased depreciation
charges.
Depreciation charges have been increasing in part because these
charges were abnormally low in the immediate postwar period since
the plant and equipment being depreciated had mostly been purchased
at much lower price levels. The modernization of capital plant during
the last decade required acquisition of new plant and equipment at the
higher postwar price levels, so depreciation charges rose.
Furthermore depreciation charges were low just after W orld War
II because our capital plant relative to our needs was small since only
the most essential plant construction was permitted during the war.
During the period since 1948, capital plant increased substantially
more than output. One major reason for the high percentage of
corporate gross product accounted for by depreciation rests on the
underutilization of these fixed assets which are being depreciated.
Every businessman knows that those extra sales dollars he can
generate are typically high-profit dollars, in part because his deprecia
tion charges in dollars are the same whether he operates at a high
or a low rate of output. This is illustrated by the experience since
the last trough in the GNP, namely the first quarter of 1961.
Over the first six quarters of expansion since that trough, the
GNP increased 11 percent, labor income increased 10 percent, while
corporate profits increased 28 percent. Furthermore, it is interesting
to note that from about 1955 on a 1-percentage-point increase in the
rate of plant utilization has produced a 1.5- or 2-percent increase in
the profit share of national income. This provides clear evidence of
the stake o f business in the President’s tax program.
I would also like to call your attention to the fact that this tax
program is a conservative program. Recognizing the need for a
temporary active deficit to overcome our chronic and passive deficits,
the President could have chosen two paths.
An expansion of Federal programs and Federal expenditures could
achieve the same result as a tax cut and, indeed, at the cost of a some
what smaller deficit. Taking the tax cut route, however, preserves
the maximum freedom of choice of households and business .
The tax route will allow changes in tax rates and structure that
will encourage incentive, reduce inequity, and accelerate the long
term rate of growth.
Investment is generated by greater profit possibilities. Greater
profit possibilities are generated not only by expanding aggregate
ECONOMIC REPORT OF THE PRESIDENT
241
demand but also by technological change, which improve productvity
and provide new products and new processes.
In the United States we are justifiably proud of the rate of tech
nological advance which our economy has generated over the decades.
Indeed, this is a primary ingredient of our economic growth. Our
expenditures on research and development in this country, further
more, have been increasing at a phenomenal rate. It is estimated that
in the 5 years, 1950-55, we spend $18 billion for research and develop
ment; this is as much as had been spent during the entire previous
century and a half. In 1962 alone, $15 billion went into R. & D.
But most of this research and development money is going into
the military and space research programs. Only an estimated $4
billion is being spent by industry for civilian purposes. And only
about $1.5 billion of the $4 billion is aimed at work which is likely
to increase productivity—the new technology that increases the total
productivity o f our plant. This $1.5 billion is less than one-third
of 1 percent of the gross national product.
The distribution of the R. & D. effort among industries is very
uneven. In many industries which are important contributors to
the GNP—textiles and construction, for example—there is relatively
little research and development.
On the other hand, the 300 manufacturing companies spending the
most on R. & D. account for 80 percent of all the industry-financed
R. & D. but for only 60 percent of manufacturing sales and employ
ment. Furthermore, the industries in which research and develop
ment are large have characteristically had the fastest growth rates.
The chemical industry, the electrical equipment and communications
industry, the aircraft industry, the pharmaceutical and instrumenta
tion industries now perform half of the industrially sponsored re
search and development.
Thus it seems clear first that only a small portion of our massive
research and development effort is in the civilian sector; second, that
R. & D. is concentrated in a small number of large firms; third, that
the industries which typically spend a great deal on R. & D. are
generally the growth industries; and fourth, that some important in
dustries spend relatively little on research and development.
Simply for the sake of faster economic growth, therefore, we should
increase the expenditures on research and development in general
and especially m those industries where such expenditures are now
relatively small. But there is still another compelling argument.
Our major industrialized competitor countries in the world markets
are not so burdened with huge expenditures on advancing the tech
nology in the military and space fields.
Mr. Chairman, I could not overemphasize that. They can devote
almost their entire scientific and technical effort to developing the
civilian economy. West Germany, for instance, spends a far larger
portion o f its total resources on civilian needs and product develop
ment than we do for our civilian industries.
One of the great strengths of the United States in international
trade has been the technological superiority of its manufactured
pnoducts. Our machinery exports alone account for roughly 20
percent of our total export trade, and technological advantage is
critical in many other export commodities as well.
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I f we do not take steps to improve our technological advantage,
we may find our margins of technological superiority shrinking. In
deed, many would argue that this has already been happening. I f
we are to improve our imbalance of payments we must expand and
make more effective our industrial technology to enable us to better
compete for world trade.
In order to increase the rate of technological advance in the civilian
sector, we must break the main bottleneck, the shortage of technically
educated people. Even if we were prepared to double our outlays
for civilian research and development, we could not double our effort
because we simply do not have enough scientists and engineers. In
1963, the supply of scientists and engineers for research and develop
ment is expected to increase by about 30,000. But space research
alone will require almost the entire supply. Because of our fear that
our technological superiority in many fields may be disappearing,
the Department o f Commerce has launched a civilian industrial
technology program under the direction of the Assistant Secretary
for Science and Technology in Commerce. As part of this program,
Commerce is asking Congress for funds to develop such a program.
Eesearch and development expenditures in some industries are rela
tively modest because the firms in the industry are so small that the
probable payout from a research project paid for by an individual
firm is not big enough to justify the expenditure. This no doubt helps
explain the low research expenditures in, for example, the construc
tion industry.
In this industry the technological advances have come largely from
the suppliers o f construction equipment and materials. Especially for
these industries in which R. & D. is now limited, the Department of
Commerce as part o f its civilian industrial technology program wishes
to stimulate industrial and local initiative in establishing industry
wide research institutions.
As a third component o f the civilian industrial technology program,
the Department o f Commerce is recommending an industry-university
extension service. Here the local university, business community and
the local government would combine their resources to aid in the
solution o f problems affecting industry in the community. These cen
ters would address themselves to the local technical problems such as
the experiment station does in the case o f agriculture. Finally, the
civilian industrial technology program would improve the dissemina
tion o f technical information so that industry can be better informed
about the latest technological developments.
By these various means we hope to stimulate the rate o f technolog
ical advance, thus providing greater profit possibilities, and therefore
greater investment and economic growth as well as greater technolog
ical advantage in world markets. In the immediate future our
growth—our ability to compete in foreign markets as well as our
military and space supremacy—will depend largely on the effective
ness with which we develop and use new technology.
Another specific method for accelerating the rate o f economic
growth and generally improving the performance of the economy is
through programs designed to assist these areas of the country where
the underutilization of resources is especially serious.
ECONOMIC REPORT OF THE PRESIDENT
243
The Area Redevelopment Administration in the Department of
Commerce, now approaching its second birthday, is beginning to make
a measurable impact on the hard-core unemployment areas of the
Nation. The A R A effort, based on local initiative, investment, and
planning plus AR A “ seed money,” already involves nearly 600 ap
proved projects in virtually every State. More than 27,000 direct new
jobs have been created and nearly 19,000 additional jobs have been
generated in supporting activities.
In addition, more than 15,000 jobless workers have been, or are be
ing, retrained and equipped with new skills so they have a chance to
fill existing job vacancies.
These impressive results have been accomplished with about $75
million in Federal funds, two-thirds of which is in the form of loans.
This investment has been at least matched by private individuals and
firms plus their State and local governments.
More than 400 additional projects are currently being evaluated in
Washington. These could lead to a Federal investment of more than
$200 million, creating nearly 90,000 additional direct and indirect
jobs.
Yet there remains a large group of workers idle; between the ARA
and labor surplus areas, they account for well over half o f all the job
less in the Nation. These areas have an enormous deficit in public fa
cilities such as roads, sewers, water systems, hospitals, and public
buildings.
To help these jobless workers find useful employment and to help
these communities overcome public works deficits that have hampered
their long-range economic growth, the Congress last fall enacted the
accelerated public works program. In the new months since, our Area
Redevelopment Administration, coordinating the work of more than
20 Federal agencies whose regular programs are involved, has been
able to institute public works projects which were “ on the shelf”—
planned, engineered, and ready to go.
With the first $400 million appropriated by the Congress and al
ready programed, we expect to generate in the neighborhood of 500,000
man-months of employment on useful, needed projects. This pro
gram can be pressed even further if the $500 million more which was
authorized is appropriated.
Thus, the regular A R A program, combined with the public works
effort, should go far toward relieving local unemployment problems
and bringing depressed areas into the mainstream o f the country’s
economic growth.
I noted earlier that although our mechandise exports rose substan
tially in 1962, from $19.9 billion to $20.8 billion, our merchandise trade
balance actually fell from $5.4 billion to $4.7 billion. I f we are to
continue to move toward equilibrium in our balance o f payments with
out restricting our other international transactions unduly, we must
continue to press hard for increased exports.
The Department of Commerce, with the cooperation of other agen
cies of the Federal Government, is giving top priority to the export
expansion problem. In 1962, the President appointed a National Ex
port Expansion Coordinator. Working from within the Department
of Commerce but with all affected Federal departments, he is directing
our efforts to bring to the attention of businessmen the profit oppor
tunities in export markets and to provide businessmen with the as
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ECONOMIC REPORT OF THE PRESIDENT
sistance they need in the development of foreign markets. The Gov
ernment can do little directly to increase exports; this can be done
only by private firms, with a few minor exceptions. But the Federal
Government can do much to ease export credit problems, provide mar
ket information, and alert businessmen to new export opportunities.
These export expansion efforts can succeed only if our prices re
main competitive, if our technological superiority in manufactured
products is maintained or enhanced, and if we can continue to press
for freer trade in world markets.
Here, the negotiations with other nations, particularly those in the
European Common Market, are especially important.
We must continue our attempts to eliminate nontariff barriers as
well as tariffs themselves if we are to maximize our sales into the larger
foreign markets. Over the long run, successful negotiations under the
Trade Expansion Act should ease the export problem.
Several steps have been or are being taken to encourage export
expansion. The combined programs of the Export-Import Bank
and the Foreign Credit Insurance Association have been improved
so that American exporters now enjoy credit facilities which are
believed to be equal to those anywhere in the world. The number
of export trade opportunities developed by Foreign Service com
mercial officers ana trade missions has increased by a huge margin:
nearly 17,000 in fiscal 1962 compared with less than 10,000 the previous
year. We have organized the first do-it-yourself trade mission, spon
sored by an industry group, in which the members of the mission pay
their own expenses. Thirty-four regional—about a thousand men—
export expansion councils have been organized across the country and
are launching local export expansion drives. New, permanent U.S.
trade centers have been opened in London, Bangkok, and Frankfurt
and two more will be opened soon, in Tokyo and Milan. U.S. partici
pation in trade fairs abroad is also being expanded.
The Department of Commerce is requesting Congress for funds to
continue and expand substantially this export effort. Only through
an all-out export expansion drive can we assure ourselves that we are
doing our utmost to improve our balance of payments situation as
rapidly as is possible. We must make this effort even though no one
can promise full success.
Besides the export expansion drive, the U.S. Travel Service is also
making a helpful contribution to the balance of payments problem.
In 1962 the number of oversea foreign visitors to the United States
increased by 17 percent over the previous year, bringing in an esti
mated $40 million in extra outside trade over 1961.
Nevertheless, U.S. citizens still spend about a billion dollars more
abroad than foreign travelers spend in coming to the United States.
Increased promotion and attention to the problems faced by foreign
travelers coming to this country should permit us to make further
progress in encouraging more people to come see the United States.
To sum up my views on the state of the economy in January 1963,
we should not be satisfied with our level of unemployment and of
unutilized capacity, nor with our rate of economic growth for the last
several years. The tax program, however, if adopted should make
great progress toward putting us where we need to be, to the benefit
of the business community and the consuming public.
ECONOMIC REPORT OF THE PRESIDENT
245
Our balance-of-payments problem is still a matter of concern. But
with a more rapidly advancing technology and intensified efforts to
expand exports, we should move toward an equilibrium which would
permit us to meet necessary obligations abroad and give us a more
productive economy at home.
Mr. Chairman, ladies and gentlemen, thank you very much.
Chairman D o u g la s . Thank you, Mr. Secretary.
Mr. Secretary, the tax reduction program of the administration
was largely based upon the assumption that this reduction in taxes
ultimately will come to $8 to $10 billion and will result in an increase
in consumers’ demand of a greater magnitude than the reduction it
self. In other words, it will be a multiplier which will be applied to
the reduction.
I wondered if you or your economists have done any work on the
relative magnitude of this multiplier.
Secretary H o d g e s . Mr. Chairman, I suppose there are differences
of opinion about the multiplier. I think I would say as a layman
that certainly when you put a dollar in circulation and it keeps moving
and makes its contact and creates additional expenditures, that you
will get something in the way of a multiplier. I have heard it esti
mated from 2 to 2%. times—that you would get, if you had an $8
billion tax cut, you might get back $16 or $20 billion.
Chairman D o u g la s . Has your Department done any concrete work
on this trying to get a quantitative estimate of the size of the multi
plier?
Secretary H o d g e s . Dr. Holton may answer more specifically, but I
think that is generally the figure.
Mr. H o l t o n . We do not have a concrete answer on this. The
range would be 2 to 2y2 times. Mr. Paradiso, do you want to press
this?
Mr. P a r a d is o . Over the years we have done a considerable amount
of work, but, as you recognize, we cannot get accurate results because
the multiplier is dependent on the composition of the goods which are
being produced, who is spending, who is saving. But on the whole
we have applied numerous methods and used various types of models.
As you know, Mr. Chairman, there is a considerable amount of
literature where various models have been developed to ascertain the
magnitude of the multiplier. We also have explored simpler meth
ods such as running through the accounts, from gross national prod
uct, to personal income, to disposable income, how much is saved,
then going back to see how much the consumption influences the gross
national product again, running the effects down to a progression so
as to see how much of a multiplier you would get under certain
assumptions.
So we have done a great deal of work. On the whole, the mul
tiplier seems to center around two, perhaps a little more than two. I
don’t know that we have ascertained that the differences vary as be
tween consumption and investment. My feeling is that the multiplier
is somewhat bigger for investment items and a little smaller for the
consumption items.
Chairman D o u g la s . O f course, the increased consumption will also
stimulate investment.
Mr. P a r a d is o . Quite right.
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ECONOMIC REPORT OF THE PRESIDENT
Chairman D o u g la s . When you join the two together, when you
join what is known as the accelerator principle to the multiplier prin
ciple, ck> you have an estimate as to the combined effects, because I
take it your figure of 2 and 2y2 is the pure effect on consumption iso
lated on its effects on production ?
Mr. P a r a d is o . It is a little larger. The best I can say now is 2%.
Chairman D o u g la s . For consumption alone?
Mr. P a r a d is o . For both combined.
Chairman D o u g la s . Our economists come out with a figure of about
four for the combined.
Mr. P a r a d is o . On the investment alone I would say it is consider
ably higher. After all, the consumption represents two-thirds of
the gross national product.
Chairman D o u g la s . I wonder if you would submit your figures so
that we may make a comparison.
Mr. P a r a d is o . I will be glad to do what I can. This is a very
nebulous area, as you know.
Chairman D o u g la s . It is very important, though.
Mr. P a r a d is o . Very important.
(The information is as follow s:)
The question has been raised regarding the multipliers presented above and
whether they would be different by reason o f the fact that increased output it
self induces expansion in investment which in turn has income effects. What
is referred to here is the familiar concept o f the acceleration principle.
Since we are initiaUy interested in the effects over the next 2 or 3 years, there
is some question whether the accelerator principle in its direct form is entirely
applicable. With many industries operating at less than capacity there is no
apparent reason why an increase in output should call for additional invest
ment. The Office o f Business Economics has developed and analyzed various
relations involving consumer expenditures and GNP and investment and GNP.
Estimates o f the multiplier obtained from these relations and on the basis of
various models vary considerably and depend on the complexity and sophistica
tion of the underlying assumptions in the model for the economy or on the
period considered in the relationships. In fairly elaborate models, which more
closely reproduce the complexity o f our economy, multipliers have been derived
which are in the neighborhood o f 2, the actual number depending on the period
covered— quarterly or annually.
The model in use at the Office o f Business Economics is a short-run quarterly
model and ignores the accelerator effect in its direct form as not applicable to
short-run movements. Investment, however, is made partly dependent upon
the ratio o f current output to output at capacity and posits that economic be
havior will be different depending upon whether the economy is or is not oper
ating at near capacity. It is apparent that inducements to invest will differ
depending on the rate of capacity utilization and other factors. The multiplier
derived from the OBE model is somewhat around 2 but is expectedly small
because o f the short time period considered. It already takes the short-run
investment effect into consideration in that short-run changes in output do
generate some change in capacity. Values for the multiplier given above have
been confirmed by various researchers in this field using models o f varying
complexity.
It is, of course, true that if we assume that output continues to rise, forces
will be at work to bring investment in plant and equipment in line with the
long-run relation with output. These are long-run effects, and it is difficult to
approximate the timing o f such changes. Under these conditions for a given
expenditure, the combined effect of the multiplier and a version o f the accelera
tor, which makes investment responsive to the level of output rather than to
the rate of change of output, will show considerable variation, depending on the
particular combination o f psychological, economic, political, and international
forces prevailing at the time. I f we assume that the secular relationship is op
erative, a multiplier of 2 would be changed to about 2%, but for reasons re
ECONOMIC REPORT OF THE PRESIDENT
247
garding capacity utilization already referred to it is questionable whether a
relatively high value such as this is appropriate in the short run.
Theoretically the multiplier effects abstract from the numerous other forces
which are operating in the economy at any given time. Additional expenditure
brought about by a tax cut, for example, must be superimposed upon estimates of
the net effect o f these forces before a realistic appraisal can be made o f the
future behavior o f the economy subsequent to changes in the tax laws. A tax
cut which is to small or which is introduced at a time when the economy is level
ing off or even beginning to turn down may not lead automatically to an increase
in output. This is the reason why an examination o f the past relations involving
tax cuts or other multiplier-inducing actions on the subsequent behavior o f out
put is so inconclusive. W e find a variety of net effects arising from an expendi
ture which has multiplier effects—namely, output rising, leveling, and even
turning down. To fully appraise such changes in the tax laws or other actions
we would have to determine the most likely behavior o f the economy in the
absence o f such changes. This is a difficult task. In the absence o f such direct
experience resort must be made to some model of the economy and the individual
relationships encompassed in that model must be grounded in past experience to
the best o f our ability. Given a sufficiently large initial impact so that the
behavior o f the business community in subsequent periods is affected, the longrun multipliers can become substantially larger than the initial impact factors.
The Office of Business Economics has not explored this area as o f now. Results
elsewhere, however, with fairly complex and realistic models similar to the one
at the Office o f Business Economics, suggest that over a period of 5 years, for
example, the long-term multiplier can be considerably more than 2 or 2.5.
I f we assume that each year the economy must expand its GNP by $10 billion
over the productivity rise in order to take care of the jobs needed to employ
the additions to the labor force, then in 1965 it is necessary to raise GNP by an
extra $20 billion (on top o f productivity increases) so as to be able to absorb
the new entries into the labor force from 1963 to 1965. In 1965 the tax cuts will
have their full effects. These will provide $10.2 billion additional income to
individuals and corporations. Assuming that in 1965 the multiplier yields an
additional GNP of 2% times the size o f the total o f the tax cuts, this will yield
an added GNP o f more than $25 billion in addition to the automatic rise in GNP
stemming from the increase in productivity. Thus, in 1965 job opportunities will
be more than sufficient to not only absorb the additions to the labor force of
about 1 million per year, but to close some o f the gap between actual GNP and the
potential associated with full employment. The assumption is made that as
we move into 1966, the capacity will be close to full utilization and the multi
plier effect o f the tax cut should be greater than that assumed above. Thus in
that year the economy should reach a full employment position. It is assumed,
of course, that there would be an orderly schedule o f demand and no untoward
disturbances which would alter drastically the various economic relations. I f
this picture is correct, then the tax cut proposals need not be larger than those
made. To try to achieve full employment sooner than in 1966 raises many ques
tions and problems such as the consequences on price and wage pressures, the
Government deficit and problems of financing it, and repercussions on the balance
o f payments. Furthermore, this relatively slow progression toward full employ
ment would provide time for the economy to adjust to the various supply, price,
and demand pressures.
Chairman D o u g la s . Now, Mr. Secretary, the Trade Expansion
Act, which I supported very vigorously last year, was based on two
assumptions. First, that Great Britain would be admitted to the
Common Market. Second, that the Comman Market would be will
ing to meet us and reduce some of its tariffs if we reduced ours.
The first assumption was definitely invalidated yesterday. Great
Britain is not going to be in the Common Market for some time.
The attitude of the Common Market suggests that at least as far as
agricultural products are concerned, that France wishes to have the
European market primarily for itself. Prospects are that the ex
portation of agricultural products, including grains and chickens and
the rest, to the Continent of Europe will be diminished. As a result
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ECONOMIC REPORT OF THE PRESIDENT
of this our balance-of-payments problem will actually become more
severe.
I wondered if, in anticipation o f these very untoward events of the
last few days, the Department o f Commerce has made any plans for
meeting them and counteracting them.
Secretary H o d g e s. Naturally, Mr. Chairman, we have been watch
ing this very carefully. Answering your specific question, nothing
in the last few days. Let me say first o f all, sir, that your reference
to the act, and l remember very well your support o f it, we did not
say that the acit, itself, was dependent upon Britain joining.
One pliiiae o f th^ act, namely, the reduction to zero authority section
was dependent, and you had an amendment, I recall, on that. I do
not feel, and I said this to Governor Herter before he went to Europe
a cdu^ie jof w e ^ ^g(^ I said I assume with the De Gaulle pronounce
ment tiiat JBritaM might not get in, but we felt that it was just as
important, maybe more so, that we prosecute our program in connec
tion with the Trade Expansion Act.
I have always been vefy much disturbed about the attitude o f the
Oommou Market, particularly on agricultural products. I didn’t
know France would be as intransigent as she is. I think we are going
to have a tdugh tiiner I think they are going to be tough traders.
That is the reason I am on record a hundred times that we have to be
just as tough.
Chairman D o u g la s . It is well to hope for the best, but one must
also prepare for the Worst. Let us assume that there is a possibility,
and we should o f course explore it and try to eliminate it, that France
will say, “W e are going to become the agricultural suppliers for the
nations inside the Common Market. We will raise the price of wheat
to $2.40 or $3 a bushel, $2.70 possibly. We will produce a large por
tion o f the bread which Europe eats.”
In this event, certainly, it will cut down the American exportation
of wheat and also o f feed grains. While I know this is not your pri
mary responsibility, because you are Secretary of Commerce and not
Secretary of Agriculture, it does affect the balance o f payments, be
cause it will directly diminish American exports, and consequently
make our situation more difficult. I wondered if you had any plans
which you would be willing or thought it proper to disclose for meet
ing this situation.
Secretary H o d g e s. I do not know the details, Mr. Chairman, ladies
and gentlemen, of the agricultural exports. I know, generally speak
ing, on your wheats and feed grains we would have more of a problem.
We would have less of a problem on the soybeans and poultry and so
forth. So I think we would have a better market there.
I would hate to think that France can completely control what hap
pens in agriculture in Europe, although she certainly has a great
influence.
My answer is just this simple. I think that will call for us to re
double our efforts in the exports of other items and manufactured
goods.
Chairman D o u g la s . Manufactured goods?
Secretary H o d g e s. Absolutely. I think we ought to use the tariff
situation in our discussion o f agriculture. I think we ought to play
one against the other.
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249
Chairman D o u g la s . You know the remark which a leading official
in the Common Market made. He said that every association has to
have an idealistic watchtower and a bargain basement. That the
idealistic watchtower in the case of the Common Market was the
Treaty of Some. The bargain basement was not only implicit—yes,
an implicit agreement—between France and Germany that France
would have the agricultural market within the six nations but that
Germany would have the market for manufactured goods inside; the
six nations.
You are perhaps aware o f some of the difficulties which we had
when we were negotiating with Erhardt, trying to get him to take
in more American coal. We hope that the Common Market will not
go protectionist. But this is the way at the moment they seem to be
moving. I f this is so, should we not begin to make plans as to what
we wifl do if and when this finally develops to be the case?
Secretary H o d g e s . I think that is right, Mr. Chairman. It will be
some months before we are ready to even start anything in that con
nection. I think this country has had some sober moments since Mr.
de Gaulle’s pronunciations.
Chairman D o u g la s . Senator Miller?
Senator M i l l e r . Thank you.
Mr. Secretary, getting back to the multiplier problem, as I under
stand it, we have been given roughly a 2^4 multiplying factor. I f this
is valid, I am wondering why we would be proposing an $8 billion
tax cut. Why not a $16billion tax cut or a $24 billion tax cut?
Secretary H o d g e s. Senator, you could reach either absurdity or po
litical unrealism on how much you put out. I don’t think you could
afford psychologically, economically, or politically a tax cut of that
proportion at one time.
Senator M i l l e r . Where would you draw the line, though?
Secretary H o d g e s . I would draw the line where we have it. We
are standing at the line.
Senator M i l l e r . I wonder if it would be feasible to have your peo
ple, when they come up with these figures that Senator Douglas asked
for, test this out to try to come up to a, let us say, point of diminishing
returns on this multiplier effect.
I recognize you could carry it on to absurdities. But offhand I just
would like to have some basis for picking $8 billion rather than $9
or $10 or $16 billion. There ought to be some solid basis for that.
I f they they could come up with some kind of a factoring to show us
where the point of diminishing returns would be, I think it would
be very helpful to us.
Secretary H o d g e s. We will do whatever we can, Senator Miller.
But I will have to point this out to you in all realism. You simply
cannot measure in statistical form psychological reaction or political
reaction or anything else. You have to make a choice somewhere
along the line. The Treasury experts and the rest have picked these
figures. We will do whatever we can on it.
Senator M i l l e r . Thank you. I would just like to follow on with
this matter o f agriculture and the Common Market.
Secretary of Agriculture Freeman made a pretty stiff statement
over in Paris recently pointing out that if the Common Market per
sisted in discriminating against our agricultural exports, we would
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be compelled to retaliate. I would like to find out whether you and
Secretary Freeman are in agreement on this matter?
Secretary H o d g e s. Yes, sir; we are in agreement in principle. We
both are fighters.
Senator M i l l e r . Thank you. This is a little bit complicated. Do
you have a copy of the Economic Indicators before you? I would
like to lay this out as a foundation for my question, because I think
it might be rather important.
On page 2 of the January 1963 edition o f Economic Indicators,
we have in the chart a gross national product set o f statistics. In the
second column, down at the bottom of the page, it shows that from
the end or starting with the end of I960, we grew from a gross national
product o f $503.4 billion to $555.3 billion as o f the end of the third
quarter o f the last year.
Secretary H o d g e s. Yes, sir.
Senator M i l l e r . That is an increase of $51.9 billion in gross national
product, at least from these figures.
Secretary H o d g e s. Yes, sir.
Senator M i l l e r . Y o u have projected this forward to the end of
the year, but for my purpose, I would like to use these figures here.
Secretary H od g e s. Yes, sir.
Senator M i l l e r . In the next column, however, this gross national
product is adjusted in terms of 1961 prices. Not 1960 prices. I
suspect that if we use 1960 prices, the figures would be even more
startling. But using 1961 prices, we find that the gross national
product increase has only been $37.7 billion. The difference between
the two is $14.2 billion, and that is due to inflation. Now, I would
like to tie that into another figure.
On page 35, we have the public debt at the end of certain periods
over in the last column on the bottom. Unfortunately we don’t
have the December 31, 1960, figure but we could take the average,
and incidentally the difference is rather small. We can take the d if
ference between the fiscal year 1960 and the fiscal year 1961. That
comes out to about 1.4 billion, and adding it to the fiscal 1960 figure
we come up with a beginning debt for this period of about $287.9
billion.
As of the end of September 1962, we find the national debt increased
to $300 billion or an increase for this period of a little over $12 billion.
My point is that it appears from these figures that for about every
$1 billion that we go further into debt, we have a billion dollars of
inflation. We have a proposed budget of about $12 billion further
into debt for the fiscal year 1964.
I also note that during that same period the taxpayers are supposed
to receive a net tax cut of about $4 billion. Just using a rough rule
of thumb, we might, I would suggest, expect an inflation o f around
$10 billion on this $12 billion increased indebtedness. I am wonder
ing how stimulating it is going to be to have a tax cut on the one hand
of $4 billion and inflation on the other hand of $8 to $10 billion. I
suggest that it is going to have a retarding effect rather than an
encouraging or stimulating effect.
I certainly want to be openminded about this, but I would like
to be persuaded to the contrary.
ECONOMIC REPORT OF THE PRESIDENT
251
Secretary H o d g e s. Mr. Chairman, I think you have a pretty good
member from the other side on the committee. He has done a little
homework. He didn’t present the question to me, but it was very
much involved beforehand. You can prove anything with figures,
as you are doing there. But I don’t believe there is a relationship.
I have these professional economists on either side of me to comment,
if they wish. I don’t believe there is any direct relationship between
going in debt a billion dollars and in having inflation, because if you
have guidelines which hold down your cost of living, and so forth,
you won’t have this. You didn’t put those in until a year or more
ago. I don’t think there is that relationship. You can take your
figures, but I don’t think so.
Senator M i l l e r . May I say this. We do have the figures, so we
do know what has happened. Whether it will happen in the future,
you might not think sk>. I personally do. I would like to ask you
this. I f we do have an increase in inflation which will at least
offset the tax cut increase, would you consider this to have the
stimulating effect that we should have?
Secretary H o d g e s . No, if you cancel out your situation, it is not
as good. But I point out to you that if you had the inflation of $4
billion and didn’t have the tax cut o f $4 billion, you would be $4
billion worse off. So you do balance out from the taxpayer, whether
he be corporate or individual.
Senator M i l l e r . In the course of your statement on the bottom of
page 6, you pointed out that the President could have chosen two
paths.
Secretary H o d g e s . Yes, sir.
Senator M i l l e r . One which you label a conservative path. I must
say that I have a little different concept o f that word. The other is
the expenditure path.
Now, Mr. Secretary, isn’t it possible that there might have been a
third alternative, and the third alternative I would suggest—this is,
incidentally, not my idea, this is what I am receiving from many of
my constituents in the mail—is a tax cut and an expenditure cut to
make room for it. That would be a third choice.
I was wondering if that would not have a stimulating effect, or do
you think they would tend to cancel each other out?
Secretary H od g e s. Senator, I think you are saying to those o f us
here that the difference in point of view of conservative depends on
what you are talking about. It depends on the premise.
We were talking about the question o f whether or not you got this
advance and this relief by tax cuts or by Federal expenditures. I
say it is more conservative to get it by a tax cut than spending more
Federal money, because in your next question you raised the question,
don’t spend any more Federal money but spend less than you are now
spending.
Senator M i l l e r . And have a tax cut at the same time.
Secretary H o d g e s . And have a tax cut at the same time.
Senator M i l l e r . Yes.
Secretary H o d g e s. Nothing would please me more than to see the
situation in such a way that you could have less spending. I par
ticularly refer to the very tremendous spending we are having to do
oil our defense and space. Some day, pray God, we will be where we
93762— 63— pt. 1------- 17
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won’t have to spend that kind of money. But if you tried now to
start cutting down, you would have to cut primarily, to have any
effect in total dollars, in those two fields.
I f you add to that the national interest and the veterans’ thing, I
give you the four which seem to be sacrosanct in Congress as well as
elsewhere, and you haven’t got much left.
Eepresentative C u r t is . I would certainly add foreign aid.
Secretary H o d g e s . I would not put it in the same category, although
you could, Mr. Curtis, you could if you wish.
Eepresentative Curtts. It is a sizable amount. It is around $4
billion.
Senator M i l l e r . I don’t want to belabor the point, but I did want
to get your policy. Your position would be that if we could make
room for the tax cuts with spending cuts, you would prefer this as
against the first two choices ?
Secretary H o d g e s . I will say this. I said my own conviction was
that I wished we were at that point. I didn’t admit we were at that
point.
Senator M i l l e r . I realize that. I want to get your thinking on
this.
Secretary H o d g e s. I don’t think anybody would disagree with that
point of view, that you would rather cut down spending than to in
crease spending if you could have your economy going all right.
Senator M i l l e r . Thank you very much, sir.
Chairman D o u g la s . Congressman Eeuss?
Eepresentative E e u s s . Mr. Chairman, thank you.
Mr. Secretary, I want to commend you on the fine job that you and
your associates are doing for the business sector of the community.
When you look at the action last year of faster depreciation allow
ances, the investment credit, the present proposal for the reduction of
corporate income taxes, the action that you are taking in invigorating
the private travel industry, and the private research activities of
industry in general, some of which you have detailed today in your
report, it seems to me that your carrying out your job as that Cabinet
officer most intimately concerned with American business is outstand
ing, and I want to congratulate you on it.
Secretary H o d g e s . Thank you, sir.
Eepresentative E e u s s . T o take up where Chairman Douglas left
off on this vital point of how do we expand our export surplus. You
pointed out that, unfortunately, our export surplus actually dimin
ished last year due to increased imports.
In your statement I think you show how important it is that we
continue to press for freer trade in world markets, mentioning specifi
cally the European Common Market, and you say in your last sentence
on that page: “ Over the long run, successful negotiations under the
Trade Expansion Act should ease the export problem.”
I agree with that, but because I think we have an immediate prob
lem here, I would like to ask what about the short run, and whether
it is not possible to be a little more vigorous in our use of the new
Trade Expansion Act which was signed into law last October. I hear
it said from the State Department that we are going to get around
to bargaining on that sometime late in 1964.
ECONOMIC REPORT OF THE PRESIDENT
253
I have here in front of me the Trade Expansion Act and the Tariff
Classification Act of 1962, and the General Agreement on Tariff and
Trade. As I read those three documents, I can’t see any reason under
the sun why within the next few weeks the Tariff Commission could
not file its list of what it proposes to bargain on in the great new tariffcutting round ahead of us, which holds out so much promise for
American business, and then promptly take the 6 months which under
the act is necessary for your hearings and for people who disagree
with the agenda to make known that disagreement, and then there
is nothing in the GATT which says we can’t, that next day, go before
the signatories of the General Agreement on Tariffs and Trade and
say, “ AH right, here is our program; we would like to start bargaining.”
I don’t see any reason why we can’t do this in 1963 rather than 1964*
I f my sensing of our balance-of-payments predicament is accurate,
that is precisely what we need to do. Since you are a go-getter, I
would like to ask you about this.
Secretary H o d g e s. Thank you, Congressman Reuss. I don’t agree
that it has to be the end of 1964. I might point out to you that under
the act you don’t look to the State Department to tell you what is
going to happen. You look to the President’s special representative,
the Honorable Governor Herter. He and his staff are working along
that line.
I could answer more specifically and more surely after Governor
Herter’s return from Switzerland and Belgium.
When the administration presents a list of items on which it wants
to bargain, it has to go to the Tariff Commission to be published and
wait 6 months. I would guess, subject to this present muddle we
have in Europe as a whole, that we ought to get to it toward the end
o f 1963 and me early part of 1964. That would be my present guess.
Representative Reuss. I hope your voice, which is a very important
one in this whole matter, will be frequently exercised, because I think
that a little more energy may be needed in our total governmental
councils. Unless somebody can show me that I read these statutes;
and agreements wrong, I can’t see anything but administrative^
lethargy and inertiia which is holding us back. I would like to see us:
move faster on it.
I have a moment left of my time, Mr. Chairman. I would like to
give a preliminary answer, Mr. Curtis, to the question you raised this
morning. When I said this morning that there were those who were
prepared to accept a 5 percent unemployment rate, Mr. Curtis asked
me to identify and specify these gentlemen, and I would like, there
fore, to call Mr. Curtis’ attention to the report of the Joint Economic*
Committee, Document No. 140, 81st Congress, particularly to page 9
et sequitur thereof, in which people like Phillip Taft in his book
“ Economic Problems in Labor,” Mr. Nourse who was once a member
o f the Council o f Economic Advisers, Mr. Yntema, who is now vice
president of Ford Motor Co., all are quoted as saying that they would
regard an unemployment rate of on the order of 5 percent as normal.
I will have some more citations to submit. That is enough for this
afternoon.
Representative C u r t is . I would say I appreciate this detail, and I
am glad to note that it is 5 percent and not a 6 and 7 percent rate,
which the gentleman used, and which attracted my attention.
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Representative R e u s s , The gentleman this morning, when his at
tention was attracted, talked about a 5 percent. He may have had 6
or 7 percent in his mind, but the reporter on the stenotype put you
down for 5 percent.
Representative C u r t is . I have nothing to say in response, except
that I question the 4 percent rate used by the Council of Economic
Advisers. I was questioning your 6 or 7 percent that you said certain
people were advocating, and I wanted to know who those people were.
I appreciate your identifying some people who discussed the 5 per
cent rate.
Representative R e u s s . Anyway, the main point that I was making
was simply this: That those who accept a somewhat high rate of
unemployment as normal I think disregard an important social prob
lem ; namely, that if you have a 5 percent overall unemployment rate,
this falls with disproportionate intensity upon the young people in our
'community. They come out o f that average with something like 10
or 15 percent or a higher percent of unemployment. My point, there
fore, was that we should not be blithe about accepting these averages,
because they may conceal within themselves a very real social problem.
I am sure, Tom, that you recognize that problem and want to do
something about it; don’t you?
Representative C u r t is . Certainly. That is why I raised the ques
tion. You were assuming that there were people who were blithe
about it. I don’t know anyone who is. Even these people who make
remarks after economic studies have as much humanitarianism with
in them as you or I do. So I don’t think there is a blithe approach
to it.
Chairman D o u g la s . Congressman Curtis, you have 10 minutes.
Representative C u r t is . Thank y o u , Mr. Chairman.
In going through your remarks, Mr. Secretary, I am attracted to
a statement where you say that the reason our 1962 growth rate fell
short of expectations was largely because investment inventory and
expenditures were considerably less than had been anticipated. Then
you point out—and I happen to agree with this—that investment ex
penditures were not lower than anticipated because savings were too
small. Actually personal savings rose.
You say that it is difficult to avoid the conclusion that investment
expenditures were lower than expected because of limited profit op
portunities, not a shortage of funds.
I think there is the key. The question is, then: Why does the Coun
cil of Economic Advisers suggest a tax cut designed to bring more
money into the purchasing or investment sector? W ill it help this
situation ? It is not money we need because there is not a lack of funds.
The very fact that savings rates were high indicates that consumers
were willing to save. Thus, it comes down to limited profit oppor
tunities.
Therefore, I would say you have a different solution to our economic
problems than a tax cut.
Secretary H o d g e s . I think the tax cut is part of the solution. W ith
out knowing specifically what other people may recommend, I think
that the profit situation is one of the main keys to a recovery to the
point we are talking about. Mr. Curtis, if you have this tax cut,
you immediately make available, multiplier or otherwise, more money
ECONOMIC REPORT OF THE PRESIDENT
255
for two groups. You make it for the individual, the householder,
the consumer, who spends it.
Representative C u r t i s . Wait. You went too fast. Who will spend
it? The point is, as you point out very well, that personal savings
were running at about 7 percent. That means they were not spending
it. Why do you assume that if you give them more money they are
going to spend it?
As you said, it goes two ways. One is that it goes to the investment
dollar. But you have already said it is not lack of investment dollars
that is causing the problem. So I again go back to the question: Why
do you think that a tax cut, either to the consumer for consumer pur
chasing power or to the investor, is going to help if your diagnosis
is accurate?
Secretary H o d g e s . I only gave you one-half o f my answer; namely,
that you have affecting the consumer who will spend it. H e will
spend around 7 percent or somewhere around 6 or 8 if it is traditional
and will spend more if it is the same percentage. To me, when he
spends, when he loses a glass or destroys a glass or wants a better
glass, then he goes to a store and buys it, and he replenishes his stock
and increases his inventory, and by doing that he causes the starting up
of two more machines.
Representative C u r t i s . I understand that multiplier theory. Let
us go on to the second.
Secretary H o d g e s . What I am saying is that if you get this cor
porate tax down from 52 to 47 percent, if you reduce many of these
wealthier top people from 91 to 65, you do certain things psychologi
cally and you also do certain things which make corporations which
are run by human beings who have wives, who say how much they are
going to spend here and there, they decide to invest a little more. This
incentive, if given to them, will make them put more into investment.
Representative C u r t i s . D o you think this will increase profits?
Secretary H o d g e s . I know it will increase profits because I have
been in a couple of kinds of businesses and I can give you specifics
that when you get above a certain percentage most o f the extra volume
is profit.
Representative C u r t i s . N o w let us return to the premises. You
used the term that the 6 to 8 percent saving rate is traditional. I re
gret to disagree with you. It is not. In the thirties the figure was 3
percent. In the twenties it was 5.5 percent. Furthermore, studies
have been made that reveal that the higher the income groups, the
higher the rate o f savings. And we are moving our people up this
income ladder constantly.
Secretary H o d g e s . The average.
Representative C u r t i s . The premise that they will spend, Mr. Sec
retary, is not well-grounded, I would say.
Now again, you said it was not a shortage o f funds that deterred
investment expenditures, but rather profit opportunities. So I think
we narrow your theory down to the fact that a tax cut will increase
business profits.
Secretary H o d g e s . Sure it will.
Representative C u r t i s . I am not arguing. I am just saying this
is the extent o f your argument. I am willing to look at that.
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Don’t you think there are other better ways of increasing profit
opportunities than in this particular area? For example, I think yop.
discuss in your next paragraph the discipline we have now on prices
which relate to the foreign market because o f our balance-of-pay
ments situation.
We get into this very serious question of costs. With our costs here,
can we indeed raise our prices so there can be any profits? Income
tax is only on profits. You have to make the profits before you pay
the tax. I f the costs keep rising and we can’t increase the prices to get
the profit. We are in a bind. That is what I would like to hear you
discuss.
Secretary H odges. Mr. Curtis, you don’t necessarily raise prices in
order to make greater profits.
Representative Curtis. Y ou don’t ? What do you do ?
Secretary H odges. I can tell you. I f you have lower taxes, the costs
are immediately lowered, and if you get greater consumer demand for
goods and services, you get a greater volume, and that is the greatest
thing I know for raising profits. It is just natural.
Representative C urtis. So you are talking about increasing the
volume?
Secretary H odges. That is exactly what we are talking about.
Representative Curtis. Fine. I am perfectly willing to go along.
But I want to follow this in an orderly fashion. Let us examine our
sectors. I f we were to increase consumer purchasing power, for in
stance in your own field of textiles-----Secretary H odges. My former.
Representative Curtis (continuing). Would we increase the de
mand in our society for textiles ?
Secretary H odges. I f you did what ?
Representative Curtis. Increase consumer purchasing power.
Secretary H odges. Sure you would.
Representative Curtis. H ow do you figure that ?
Secretary H odges. Gracious alive, my wife bought three dresses
yesterday.
Representative Curtis. This is no joke.
Secretary H odges. This is not a joke. I am talking as seriously as
I can.
Representative Curtis. Let us take the agriculture sector which will
be even more apparent. Here we have had great and fast technological
advancement, and yet we have great unemployment.
Secretary H odges. Yes, sir.
Representative Curtis. We have a great underutilization of plant.
Do you think that increasing consumer purchasing power will do any
thing in regard to the amount o f food that people eat.
Secretary H odges. Mr. Curtis, you put your finger on the one ex
ception in all the world. You can only eat so much.
Representative Curtis. Y ou can only eat so much. That is really
why I mentioned this other area. I think we have not used up all our
demand in other sectors and in the clothing field. But there is a point
where we will stop buying more clothes just as we do food.
Secretary H odges. I don’t agree with that at all, sir.
Representative Curtis. Y ou think we can have 10 suits apiece ?
ECONOMIC REPORT OF THE PRESIDENT
257
Secretary H o d g e s. Absolutely. I f we had goods selling in this
country, lots of courtesy and new ideas, I would go out and buy two
more suits tomorrow.
Representative C u r t is . I see my time is just about up. Along this
same line, let us examine the steel industry. We point out very fre
quently that it is operating at only 60 percent of capacity, or less;
is that right ?
Secretary H od g e s. I don’t know what it is at the moment; it is
roughly that.
Representative C u r t is . My question is, capacity to do what ? To
produce what? It seems to me that whatever sector we examine,
whether it is textiles, agriculture, or steel, we have to find out what
this capacity is. I suggest that the bulk of it is obsolete. For ex
ample, the steel industry, which is operating below 60 percent ca
pacity, spent about $1 billion last year to increase capacity. This was
needed to produce a new thin steel sheet to compete with plastics
and other materials. Again it appears that the base of economic
growth is not consumer demand, but rather technological advance
ment. As the consumer demand shifts, there is a demand for new
goods and services.
I think McGraw-Hill pointed out that 30 percent of the goods and
services available to our consumers today were unknown 5 years ago.
This is rapid economic growth. Yet, the very thesis upon which this
administration has presented its recommendations to Congress stresses
that we have a tired and sluggish economy. They say “ tired blood.”
To me, our problems are those of growing pains. That is why I re
lated it to these questions.
I think you made a very fine case for my point of view.
Secretary H o d g e s . Thank you, sir.
Chairman D o u g la s . Senator Proxmire ?
Senator P r o x m ir e . I appreciated the statement very, very much as
I told you just before we began. I think it is awfully good. I think
the emphasis that you put on the assistance for small business through
investing the corporation income tax so 80 percent o f our corporations
would get a 25-percent tax cut is mighty welcome. The revenue loss
from that particular change would be small.
Secretary H o d g e s. That is basically correct; yes, sir.
Senator P r o x m ir e . Then, also, the emphasis on civilian industry re
search. Your Dr. Holloman has done a lot of work on this.
Secretary H o d g e s. Yes, a very great deal. I think he has put his
finger on one o f the most significant truths in America that practically
nobody has paid any attention to, namely, that we are spending our
selves, in defense ana space, out o f the competition with the rest o f the
world.
Senator P r o x m ir e . Exactly. The only answer you get is the side
effects. The side effects may be there, eventually, in some areas by
happenstance, but, as he points out, there is no case really that has been
documented that by engaging in extensive research in space and de
fense, which we agree is necessary, you are going to get much help
for industry. You have to do the direct industrial research, too. We
are not doing it.
Secretary H od g e s. We are doing a very small percent compared to
what you do if you do it directly.
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Senator P r o x m ir e . We may likely lose our markets in competition
with other countries because they are doing much more.
Secretary H o d g e s. That is right, sir.
Senator P r o x m ir e . Believe me, Mr. Secretary, this is not meant
to embarrass you at all, but simply for purposes o f getting an answer,
which I am sure you are very capable of giving.
I notice that the Department of Commerce, which represents our
business people, and is very conscious o f their desires and their feelings,
has greatly increased its personnel in the coming year. The budget
in 1963 provides for 32,800 employees. I am talking from page 48
o f this budget document. In 1964 it will be 36,299. That is an in
crease of 11 percent. The only agency that is anywhere near the size
o f the Department o f Commerce that is expanding by the same
amount is space.
This seems to me to be a very big increase in governmental spend
ing in a nondefense sector. From my association with business people,
I think this is one thing that they would disapprove and would hope
that in the future we could prevent. It seems like a very rapid
bureaucratic growth in 1 year.
Secretary H od g e s. I will be very glad to go over that with you and
defend it completely before the Appropriations Committee because
we knew what these various programs are. They are primarily new
programs and primarily devoted to either this local development o f
the A R A or to the civilian technology and export expansion. Much
o f it is along those lines.
Senator P r o x m ir e . Are there any older programs that could be cut
back?
Secretary H od g e s. Y o u put your finger on one of my favorite sub
jects that I probably won’t need to discuss today. I think that is a
problem with all governments, and this included. You never cut
back old ones. That includes the Congress. But you always add
new ones.
Senator P r o x m ir e . Parkinson’s law.
Chairman D o u g la s . Mr. Secretary, there is a sort o f an impish
desire which takes hold of me at this moment. I have a vague memory
that once you declared that you felt that the Department o f Com
merce could operate more effectively with 10 percent fewer employees.
Is my memory at fault f
Secretary H o d g e s. N o ; you have the basic idea right. The exact
quotation is not correct. I made the statement before an Appropri
ations Committee. I have done it on several occasions. I f the Con
gress will say, which they will not do, after asking them time and
time again, will allow flexibility o f appropriations where you could
take old programs, tired blood, Mr. Curtis, and cut them down or
eliminate them or what not, and take that money and put it into
things that are more modem and up to date such as civilian tech
nology, the whole science of technology, that you could save 10 per
cent. I said that.
Chairman D o u g la s . I congratulate you on being an honest man and
an honest administrator.
Senator P r o x m ir e . Y o u are told, for example, to cut 5 or 10 percent
o f your employees. You feel that would not be a terrible disaster for
the Department of Commerce provided you had the discretion in
making the cut where you want it ?
ECONOMIC REPORT OF THE PRESIDENT
259
Secretary H o d g e s. I have learned a lot in the last couple of years,
and if the President of the United States and the Congress should
say, “We will cut 5 or 10 percent,” I will be very happy to join. 1
would have no difficulty.
Senator P r o x m ir e . Very good.
Secretary H od g e s. On the overall, I am not going to go it alone any
more. I have tried it.
Senator P r o x m ir e . I take it that the reaction to Senator Douglas’
question and the question by Senator Miller on the multiplier is that
there is a feeling on the part of both you and your experts that this
is a pretty nebulous concept. It is a very shaky one to work with.
I f you come up with any specific figures, they are subject to all kinds o f
assumptions. You can’t really rely on it very much. While there
may be—there is undoubtedly—some kind of multiplier effect, that
you can’t be at all precise, and the whole thing may be upset by cer
tain psychological factors that just wash it out.
Mr. H o l t o n . This is certainly the case. After all, what we would
really like to have here is a multiplier and accelerator for the future.
We are looking at the historical material only as a basis for a projec
tion. When you look especially at the accelerator and think of the
many factors which influence the level o f investment expenditures, it
is difficult to come up with a precise figure that you can be really com
fortable with.
One thing that clearly was influential in determining the level of
expenditures in the immediate postwar years was the backlog of tech
nological advances that had accumulated during the war. Inow there
is some question as to whether we have anything like that backlog
o f technological advances which will or can operate to stimulate in
vestment. So this is just an illustration of the kind o f uncertainty
these estimates involve.
This particular case underscores the importance o f the science and
technology program, the civilian technology program, because we do
know that with any given amount o f funds available for investment,
more will be invested if you have some recent technological advances
which are around to be implemented.
Senator P r o x m ir e . The second is enormously important. You can
have the extra funds and as the Secretary said in his statement, they
may not be utilized.
Secretary H o d g e s. That is right.
Senator P r o x m ir e . The argument was made by the President in
one of his statements, I believe, and very briefly made by Dr. Heller,
and I don’t find you making it today, but I would like to ask you
about it because you are an expert in this field, that the tax cut will
somehow benefit us in our adverse balance of payments.
I can understand how that might help us reduce our costs, the
corporate tax cut especially. On the other hand, the main thrust
<>f this tax cut is in the consumer-spending area and if it works at all
it will increase our demand. The old classical theory was that you
get your trade equilibrium because as income increases in a country
and as wages increase, as exports increase, costs tend to increase, and
prices tend to increase. As demand increases, prices increase.
Oradually you price yourself ahead o f the competitor who is suffering
from recession or depression. His prices drop. Therefore, he is able
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ECONOMIC REPORT OF THE PRESIDENT
to sell in your market and you are not able to sell in his. This ten
dency, it seems to me, would flow from this kind of a tax cut.
We increase the demand of our people for goods. They buy goods
that are produced abroad and goods that are produced here. There
fore imports would be inclined to go up. I would think the pressure
possibly, eventually moderate on our own prices would tend to drive
our prices up a little bit. Therefore, it would seem to me that th®
tax cut, itself, as distinguished from other phases of the President’s
recommendation, would tend somewhat to diminish or rather to
worsen our adverse balance of payments rather than to help it.
Secretary H o d g e s . I don’t think that is entirely true, Senator Prox
mire. I think if we keep in mind—using these round figures—that if
you have an 82-percent utilization of capacity now, and you have 10
percentage points spread to get it up to what ought to be optimum,
you are not going to have much danger of inflation or higher prices.
I think that is pretty correct.
Senator P r o x m ir e . Let me say at that point you recognize that
this is very uneven. The operation of 82 percent in industry. This
is the average. Steel is far below that. Other industries are below it.
Others are crowding that optimum figure and might increase their
prices if they sell a little more.
Secretary H od g e s. That is right. You are dealing with averages
and would have to pick out every individual industry if you were to
analyze it. I think basically what we want is two things: W e want
lower costs and more funds from this tax reduction to get greater
capital investment and greater incentive to use the money they get.
Senator P r o x m ir e . I think we want all of these things. I think
there is a great benefit in the tax cut. I can’t see it helping our ad
verse balance o f payments. It seems to me that the main thrust will
be to make our balance of payments a litle more adverse.
Secretary H o d g e s . I can’t quite follow why it would be adverse.
Senator P r o x m ir e . Because our demand increases.
Secretary H o d g e s . That is right.
Senator P r o x m ir e . We are buying.
Secretary H o d g e s . Your demand for imports is not extraordinarily
high from that point of view. You have abroad now as these in
dustrialized nations, taking any of them in the Common Market or
Japan, the competition is getting keener by the day. Their rates of
wage increases are running two to three times o f our rate o f increase.
It is getting more competitive all along. I f we do these things I am
talking about, I think we can hold our own and increase our exports
which is the one answer to the balance o f payments in my book.
Senator P r o x m ir e . I think this is as good an answer as I can have
but I still think this is a tendency. Let me ask in another field.
In your statement, I think on page 5, you say businessmen for some
time have been acutely aware of the profit squeeze. You indicated
that the corporate income tax cut may help somewhat in this regard. I
call attention to a document that was prepared by our staff after our
extensive hearings last August in which we say on page 843 o f the
“ State o f the Economy and Policies for Full Employment” that, “ the
so-called profit squeeze is not found to exist. In the first place, the sig
nificant measure o f profitability is not profits alone but total after
tax income including depreciation. In other words, the significant
ECONOMIC REPORT OF THE PRESIDENT
261
income measure is not profits but the total income to capital. Second,
as has been previously pointed out income to capital is a function ox
the rate at which capital is used. A t lower rates of utilization, cor
porate incomes are lower. A t high rates o f utilization, corporate in
comes are higher. Furthermore the volume varies much more widely
than the volume of production.” The attached memorandum finds
that capital has not been squeezed in recent years but rather the
converse. Since 1956 the total ratio of cash earnings to invested
capital has been substantially higher than ever before and has been
climbing at a very rapid rate. The analysis does not take into ac
count the shortened depreciation guidelines announced by the Treasury
last month.
Dr. Langam presented a very significant paper last August in which
he showed that between 1946 and 1961 we had an increase in cash
earnings from $17 billion to $48 billion. This was a much more rapid
increase than the increase in plant and equipment outlays. As a
matter of fact, the relationship now is about 75 percent more in cash
earnings than investment in plant and equipment whereas it was only
30 percent more in 1946. It has been rising all the time.
My point is that one effect of this tax cut which some people seem
to have implied, and perhaps you do in your statement, that corpo
rations will have more funds available to invest and therefore will
invest more after the corporation income tax does not seem to be a
valid point in view of the fact that corporations seem to have had more
than they need for some time now.
I know corporations always want a tax cut.
Secretary H o d g e s. N o ; they didn’t have enough money for plant
investment. That is what he said. That is the reason they wanted
to raise prices. That was the basis of the reason they were using. I
will say this: I think this will do more good to these hundreds o f
thousands of small business firms.
Senator P r o x m ir e . I agree with that.
Secretary H o d g e s . Who need $2,000, $20,000. It will do more good
there than anywhere else.
Senator P r o x m ir e . I agree with that.
My time is up.
Chairman D o u g la s . Congresswoman Griffiths.
Representative G r i f f i t h s . Thank you, very much, Mr. Chairman.
I always enjoy hearing you, Mr. Secretary. It is a real pleasure.
I would say I have some sympathy with Senator Proxmire’s statement
that a tax cut may worsen the balance-of-payments problem but for a
different reason. In my judgment anything that makes the American
market better, and I think a tax cut would make it better, decreases the
tendency o f American firms to compete albroad. I think this is the
main problem. I would like to congratulate you on the effort you
have made. How much money did you spend last year in your depart
ment promoting American sales abroad ?
Secretary H o d g e s. A limited amount. We hardly got started. I
can’t give you the exact figure. We have been carrying on, for a long
time, studies and so-called reports. But we have spent a very modest
amount to do this. It was mainly trying to get volunteers together,
about a thousand men, to go out and see their counterparts and get
them to sell goods.
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ECONOMIC REPORT OF THE PRESIDENT
Representative G riffiths. H ow many firms were represented
abroad in these do-it-yourself programs ?
Secretary H odges. We had about 10 or 15 trade missions where we
sent 6 to 8 specialists abroad. They would take with them 400 to 500
trade opportunities for sales from the United States to that country
and in turn so many from there. We only sent the one do-it-yourself
trade mission abroad where they went on their own expense.
Representative G riffiths. How many people went in that mission?
Secretary H odges. About eight, I think.
Representative Griffiths. How many of them had ever sold goods
abroad before?
Secretary H odges. Practically none. I talked with them in a brief
ing session in Paris the first week in December, and these are top names
in that particular industry. They said we are absolutely and posi
tively ashamed o f ourselves for what we have not done in the last
decade or so in selling goods. We have not scratched the surface and
have not tried, but we are going to do something about it.
Representative G riffiths. I think that is the real answer.
Secretary H odges. I do, too.
Representative Griffiths. I was in Thailand and I found that a con
cern there had sent an order to an American company some 6 months
before for $17 million worth o f goods. They had the money in the
bank in New York City. Six months passed and they never received
an answer. The order was finally placed in Europe. 1 was told by the
consulates in Asia that one of the problems was that American firms
really didn’t seek the business. That they had no knowledge o f pack
aging for those areas. That the difficulty in Asia was air conditioning
in which we are first, but we are not sufficiently pushing the sales.
I would like to ask you, if you will, if you will develop the actual
amount o f money that you have spent out of your department or any
other department that pushes the sales of American goods abroad,
and if you w ill consider that as costs and the increase last year o f sales
as sales. What is the relation of cost to sales ?
Secretary H odges. Yes.
(The following was later received for the record:)
In fiscal year 1962, the Department of Commerce received direct appropriations
o f $5,775,000 to assist U.S. industry and business to expand its exports. In
addition, the Department received an allocation in accordance with the pro
visions o f the “ Mutual Education and Cultural Exchange Act o f 1961” (Public
Law 87-256), amounting to $553,700 to send trade missions abroad.
Within the $5,775,000 direct appropriations, the amount of $4,900,000 was
appropriated to the Bureau of International Commerce, $675,000 was included
in the appropriation for the Office o f Meld Services, and $200,000 was included
in the appropriation for the Business and Defense Services Administration.
Total U.S. exports (excluding military grants-in-aid) in fiscal year 1962
totaled $20.7 billion as compared with $19.9 billion in fiscal year 1961.
While exports increased $800 million during the year, a determination of the
increase directly attributable to the funds utilized by the Department in en
couraging and assisting industry to expand its trade horizons is not possible as
industry and business do not report accordingly.
Representative G riffiths. I would also like to ask you, the theory
o f the tax cut at the lower levels is to develop consumers, isn’t it?
Secretary H o d g e s . Tes.
Representative G r i f f i t h s . T o push consumers ?
Secretary H o d g e s Yes.
ECONOMIC REPORT OF THE PRESIDENT
263
Representative G r i f f i t h s . I f in place of cutting it there as much as
that, or in cutting it anywhere as much as that, if more billions were
put into pushing American sales abroad, couldn’t you actually achieve
a better result?
Secretary H o d g e s . Y o u would on the short term, Mrs. Griffiths, if
you put enough money. It doesn’t take billions. It takes a very few
million to do this export promotion. You would get a quicker result
that way. Long term I think you have to have the other in order to
accent the investment to get newer ideas and newer processes.
Representative G r i f f i t h s . But money spent on developing custo
mers abroad, on teaching American business how to sell abroad ?
Secretary H o d g e s . You come nearer getting an answer to help your
balance of payments that Senator Proxmire was talking about, just
as we did this on this little travel bureau. With an expenditure of Jess
than $3 million we brought in $40 million in new money. That is just
the beginning. We would pay for that 10 times over every year. It
is that kind o f thing that you promote and get people interested as this
group that I talked to in Paris. I had the same experience you did.
It makes you feel badly. I was in Italy and I talked to two very pro
minent people there in manufacturing. They said we wouldn’t think
o f ordering anything from you over mere because if you got the order
you would answer it. I f you answered it, you would not answer it in
our language. Secondly, you would not ship it if you found a domes
tic customer that found it first. I f you wanted to ship it, you couldn’t
do it because of the longshoremen strike.
Representative G r i f f i t h s . That is right. That is really the answer.
So i f you had money in your department which actually sent small
American businessmen abroad with a little American ingenuity they
might make a few sales.
Secretary H o d g e s. I think they would make a lot of sales.
Representative G r i f f i t h s . I think they would, too. Then if you
had somebody in your department who could help them to package,
we might do quite well ?
Secretary H o d g e s . I couldn’t agree with you more.
Representative G r i f f i t h s . I am for putting the money in that de
partment and reconsidering some of the other programs.
Secretary H o d g e s. Y o u are going to have a chance to vote on it, Mrs.
Griffiths.
Representative G r i f f i t h s . Thank you very much.
Representative P r o x m ir e (presiding). Senator Pell.
Senator P e l l . Mr. Secretary, I want to congratulate you, too, on
your presentation. Looking back a couple of years ago when some of
us were getting elected, the area redevelopment program was regarded
as a panacea at that time. It has done a very good job in specific loca
tions but I notice from your report that only 27,000 new jobs have been
created by it. Do you have any thoughts as to how the agency can
achieve results matching our earlier expectations?
Secretary H o d g e s. I don’t recall, Mr. Pell, that we forecasted ex
actly so many jobs.
Senator P e l l . It was never specific ?
Secretary H o d g e s. There are more potential jobs under these addi
tional 400 projects that are now under consideration.
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ECONOMIC REPORT OF THE PRESIDENT
As you probably know, if you are working on the economic planning
of a community, the communities that need these things the most have
the least ability to get them ready for you. That is a natural situa
tion. I think that we are going to accelerate in a very high progres
sion in the next 6 or 8 months.
Senator P e l l . You are optimistic.
Secretary H odges. Very much so.
Senator P e l l . Another area of concern to me, as you may be aware,
is that in the Northeast we have a serious transportation problem.
The President, I believe, is requesting you to make a study with par
ticular regard to megalopolies and the problem of rail and various
other forms of transportation. Do you have any idea how long it
would be before we can hope for the results of that study ?
Secretary H o d g e s . We are doing some preliminary work that we
iiave now. We have an item in the budget which would set up a real
staff on that. I couldn’t tell you whether it is 3 months or 9 months. I
really couldn’t at the moment.
Senator P e l l . It would be less than a year ?
Secretary H o d g e s . I hope so.
Senator P e l l . Y o u mentioned earlier the problem o f tariff reduc
tions and the Common Market, and said that now that we cannot ex
pect Great Britain to enter it for some time, it meant we would not take
advantage of the zero authority section o f the act. By that I presume
you meant only with respect to certain goods. W e would still be able
to get down to zero in the goods that the Common Market is producing,
would we not?
Secretary H o d g e s . Without Britain there is not a thing we can get to
that, except aircraft. That is the only item in which you have more
than 80 percent between the Common Market and ours.
Senator P e l l . In connection with our exports abroad, it has often
struck me that there is quite a market behind the Iron Curtain for some
o f our soft goods that have no relationship to defense or strategic ma
terials. Has the idea developed at all of exchanging soft goods for
hard dollars?
Secretary H o d g e s. Yes, sir. I said a year ago through the State
Department to the President that I thought we ought to take a good
long, hard look at that rather than selling to the Soviet behind the Iron
Curtain choice prototype things they can copy. I f we are going to do
any business we ought to sell them things that would not hurt us any
but will help us a lot. I don’t know what the problems are. You still
have things unsettled from the standpoint of lend-lease and so forth.
But I would like to do it that way.
Senator P e l l . In your statement, there are some figures in the
second paragraph that I would like to ask you about. I was wondering
if you could explain them to me. I don’t really understand them. In
the first six quarters of expansion since the 1961 first quarter trough
in the GNP the GNP has increased 11 percent, labor income has in
creased 10 percent, while corporate profits increased 28 percent. That
is a very interesting figure from the viewpoint of business. I am won
dering if you can show how those figures were arrived at and if I am
correct in understanding the implications.
Secretary H odges. They are actual figures that illustrate very sim
ply, Senator Pell, that as you get this higher volume, even though you
ECONOMIC REPORT OF THE PRESIDENT
265
h a v e ju s t s o m u c h m o r e , th a t y o u g e t in y o u r la s t 2 o r 3 p e r c e n ta g e
p o i n t s o f s a le s a v e r y h i g h p r o f i t .
S e n a t o r P e ll. S o i t w o u l d g o i n a g e o m e t r i c r a t i o ?
Secretary Hodges. That is right. You will go from 82 to 92 percent.
Instead of making $50 billion before taxes, I think the figure would
go like that. [Gesturing upward.]
• Senator P e ll. I would be interested to know, in answer H
oSenator
Miller’s question, instead of $8 billion, why could we not substitute
another larger figure and look for a similar multiplier effect? Could
one follow the same economic theory there or not ?
S e c r e t a r y Hodges. Y o u a r e a s k i n g s p e c i f i c a l l y a b o u t t h i s t w o t i m e s
m u lt ip lie r a n d s o fo r t h ?
Senator P e ll. Yes.
Secretary Hodges. That, as I said, is the best figure I have seen or
read from the professional economists. That you usually run around
two times, plus. Dr. Paradiso answered the question about the ac
celerator. There is a very definite difference of opinion when you
run into what acceleration that brings out in the way of further
investments and borrowing of money in order to make the dollar go
much faster. I can’t answer that myself but we will be glad to look
at it and give you the answer as best we can.
Senator P e ll. My final question: Do you have any views as to how
the investment situation will project itself in the next couple of years
with the passage of the President’s tax bill ?
Mr. Paradiso. On total investment ?
Senator P e ll. Yes.
Mr. Paradiso. For this year probably a rather moderate rise be
cause even with the passage of the tax bill, as you know, it takes 6
months to 1 year before business actually undertakes an expansion.
They probably will have to wait until demand really rises to bump
against capacity. So we do have a rather modest rise for this year.
For the next year, going that far ahead is always very risky, but
we expect the rise to be substantially more. I can’t tell you how much
because we don’t know what is going to happen to the tax bill, once
we have an idea there we can develop some pattern subject to all
the limitations of the forecasts of the economists.
Senator P e ll. Thank you very much.
Senator Proxm ire. Senator Miller.
Senator M ille r . Mr. Secretary, getting back to the improvement
of our competitive position for exports, it is my understanding that
the Soviets are providing the free world petroleum companies and
particularly our own with very severe competition in the petroleum
world market. Is that understanding correct ?
Secretary Hodges. Senator, in total I would not be able to answer.
I think they have done enough dumping and of breaking the prices
to create some concern in certain parts of the world; yes, sir.
Senator M ille r . I was wondering what the proposed tax alteration
revolving around the percentage depletion of oil companies might
do to their competitive position vis-a-vis the Soviets.
Secretary Hodges. You have asked one I can’t answer.
Senator M ille r . Would it be feasible for you to have some one in
your Department give us an evaluation of that ?
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ECONOMIC REPORT OF THE PRESIDENT
Secretary Hodges. I would rather pass that question, which is both
difficult and political, on to the Treasury Department, if you don’t
mind. I will be glad to take it.
Senator M ille r . I propose to ask Mr. Dillon that question also.
But it seems to me that the economic impact or the commercial
impact, the foreign trade impact, might lie within your jurisdiction. #
Secretary Hodges. It does from that point of view. At least we*
have an interagency part in that and we are deeply concerned about
it. From the standpoint of what you do, and I don’t even know
what is proposed if anything on the 27% percent.
Senator M ille r . I was just wondering if you would check to see
whether or not anybody in your Department might have made a
survey of this. I think it would be helpful to us to get the com
mercial or the trade impact on the present state of affairs as far as
this Soviet competition is concerned.
Secretary Hodges. We can do that for you. We can find out what
the Soviet actions have done to the market and we can take what
has been proposed in the legislation as to what effect, if any, that
would have.
Senator M ille r . I would appreciate it.
(The following was later received for the record:)
The proposed change in the tax treatment of oil-production costs wonld have
a negligible effect on our comparative position in the world market for crude
petroleum. In each of the 3 years 1960-62, the United States produced between
2,575 and 2,670 million barrels of crude oil, but we exported only 2 or 3 million
barrels each year or about 0.1 percent of our production. The value of these
crude oil exports is about $8 million annually. Therefore, our crude exports
are very smaU indeed, and our balance of payments would be affected very
little even if our crude exports were to drop to zero.
In 1961 the Soviet Union quoted prices (f.o.b. Black Sea loading points) at
$1.25 to $1.65 per barrel for Western Europe, Egypt, Japan, Brazil, and Cuba,
and $2.97 for the East European satellites. Western oil companies quoted
prices of about $2.21 at pipeUne terminals in eastern Mediterranean ports this
same year.
It is doubtful that any change in U.S. taxes would have any direct effect on
Soviet oU exports to the free world. If the problem were that simple or that
directly related, our difficulties with the Soviet oil offensive could be soon solved.
Basically the Russians export oil because they have more than they need and
because it provides them with needed foreign exchange. Unlike free world
oil suppliers, the Russians can ignore operating costs and arbitrarily establish
the price of oil at levels which will produce the sales dictated by political con
siderations. Their price structure can therefore be far below free world prices
as indicated above. The willingness of certain free world governments to
barter or buy Soviet oil in order to promote the sale of goods embodying ad
vanced Western technology further complicates the problem of U.S. or other
free world oil companies attempting to meet Soviet oil penetration.
Senator M ille r . Tied in with that, and you can tell me if this does
lie outside of your jurisdiction, I was wondering whether or not any
studies have been made on the impact of the prices of gasoline ana
home fuel and industrial fuel that would arise from any change in
this tax treatment.
Secretary Hodges. I am sure no study has been made on that in our
Department.
Senator M ille r . Would it be feasible for that to be done ?
Secretary Hodges. We can look at it. I won’t make a definite
promise on it.
ECONOMIC REPORT OF THE PRESIDENT
267
(The following was later received for the record:)
Questions relating to fuels policy and prices are largely in the domain of the
Department of Interior and so the Department of Commerce has no studies on
this matter. It would seem, however, that in the short run the supply of gaso
line and fuel oil on the U.S. market would be little affected by the proposed tax
change since the latter affects only the accounting treatment of drilling and
development costs. Texas wells are currently pumping only about one-third of
capacity and consequently production from existing U.S. wells could be greatly
expanded over the next few years and hence supply could be increased markedly
even if no new wells at all were developed.
Senator M iller . Thank you. I had a question regarding the bal
ance of payments.
Secretary H odges. Yes, sir.
Senator M iller . I am deeply concerned about this, as I believe
everybody else is. I had been led to believe that the figures were
a little bit different than those that you have given in your report
regarding the amount of the deficit for 1961 and for 1962. I am
wondering if the difference might arise from the fact that the figures
I have seen included were adjusted to reflect an accelerated payment
on foreign loans or foreign debts to us. Can you tell me whether
or not the 2.5 billion in 1961 and 2 billion in 1962 is after an accel
erated payment by a foreign debtor ?
Secretary H odges. I can’t answer that. I would presume that it
reflected the actual situation. I would presume that the next year
would reflect the actual situation because you might have another de
velopment along the same line.
Senator M iller . I wonder if you could have your people furnish
the committee with a picture of how much of that includes, if any,
an accelerated or prepayment of foreign debts.
Secretary H odges. That has been published. We will be glad to
get it for you.
Senator M iller . Thank you.
(The following was later received for the record:)
The accelerated debt repayment in both 1961 and 1962 was about $670 million;
the deficits in the balance of payments for both years were calculated after
adding these accelerated debt repayments to the receipts.
Senator M iller . N ow I would like to clear up your comments re
garding the area redevelopment program on page 10. At the bottom
of the page you state that more than 27,000 direct new jobs have been
created. Are those jobs filled, or are these merely job positions ?
Secretary H odges. These are people who were not working before
who will be working when the approved projects become fully
operable.
Senator M iller . In other words, 27,000 more people are working
than were working?
Secretary H odges. Yes sir; after the projects become operable,
although the figure does not include temporary construction workers.
Senator M eller. Then we have 15,000 jobless workers who have
been or are being retrained, equipped, and so on. How many of those
are back on the payroll ? Would you have the figure on that?
Secretary H odges. N o ; but I can get it for you as to what our
experience has been.
93762—63—pt. 1——18
268
ECONOMIC REPORT OF THE PRESIDENT
Senator M iller . I would like to try to get a picture of how many
of our unemployed people have actually gone back on the payroll
since we went into this program.
Secretary H odges. Out of the 15,000 that are getting the retrain
ing, I can bring that up to date for you and see how many of the
15.000 have jobs.
Senator M iller . That would be fine.
(The following was later received for the record:)
We are informed by the Department of Labor, which administers the training
and retraining features of the Area Redevelopment Act, that approximately
15.000 jobless workers have been approved for retraining to date. Of this
number, some 10,000 or 11,000 have entered training or have completed training.
To make a completely accurate accounting of the status and progress of the
program at a specific date requires a canvass of the various State employment
security agencies which directly administer the program. The Labor Depart
ment is conducting such an overall canvass. The results of it, however, will
not be available in time to incorporate into this testimony. However, we are
informed the average experience with trainees who have completed their train
ing period under this program and have had an opportunity to seek jobs has
been that 60 to 66 percent have actually secured jobs. Ultimately on the basis
of this experience, it can be reasonably expected that 9,000 to 10,000 of the
15.000 approved trainees will be actually at work shortly following completion
of their training.
Senator M iller . N ow the last question. Because of my time I
didn’t have a chance to get into a fourth alternative. You remember
I suggested there might be a third.
Secretary H odges. Yes.
Senator M iller . As I understand it, you indicated that if it were
possible you would prefer this third one?
Secretary H odges. I said if you can get the thing we needed in the
economy I thought everybody would prefer the third.
Senator M iller . I am wondering if we might pursue a fourth
alternative, and that is to not have any tax cuts for a taxpayer, say
a business, except as to their growth income. Take a business or a
small corporation that makes a hundred thousand dollars a year. We
want them to grow and provide for job opportunities. So let us say
they grow $50,000 more net* income in the next year. Why not give
them the tax cut on that ? The reason I suggest that—and it would
be a substantial one, maybe just half the tax rate instead of 52 percent
corporation rate—26 percent on that $50,000 growth income—
the idea behind that being to provide a real incentive to growth.
Because under the present proposed tax cut everyone gets it whether
he really earns it or not. This would be calculated to provide an
incentive to grow and the benefit would be only to the person or the
business that grew. Another benefit would be that the tax cut would
come in the growth area so you would not end up going deeper into
debt as a result of it. I was wondering if you have given any thought
to that as a possible fourth alternative.
Secretary H odges. N o, sir; I have not. That is an intriguing idea.
Senator M iller . Would you care to have that kicked around in
your shop?
Secretary H odges. I am afraid it would be kicked around. I will
say that I think we need the tax cut for all the people because I think
they have been paying too much taxes. But I think we need some
of the other kind of things. I would agree with you immediately if
ECONOMIC REPORT OF THE PRESIDENT
269
you wanted to put it on export growth where it would do the most
ood. I would make an incentive for a man who added another
50,000 to his exports.
Senator M ille r . I am trying to satisfy you because you say you
can’t cut expenditures. I am trying to satisfy the taxpayer by giving
him a cut. So we end up having our cake and eating it both. We
don’t have any deficit as a result of the tax cut and we don’t cut ex
penditures. Leave the expenditures where they are. But we give
them the tax cut, and a big one, in their growth area. If you could
kick it around and kick it favorably I would appreciate it.
Secretary Hodges. Thank you.
(The following was later received for the record:)
f
One of the basic difficulties in tliis proposal is to set forth a proper definition
of growth income. In periods of strong economic upswing, a large proportion
of companies will experience an increase in income. However, even under such
favorable conditions, there will always be companies which wiU show no in
crease in income due to forces beyond their control such as strong competition,
changes and shifts in demand, and higher costs. The question is how to define
the growth income—should all companies showing increases over the previous
year’s income be included? Or should the tax apply only to the so-called “true
growth” companies— those which have had a reasonably long period of continu
ous gains?
In any case, the growth companies will enjoy a marked advantage over those
which failed to show an increase in income in a particular year. Over time,
this would lead to higher taxes for those corporations least able to pay. These
latter companies will be placed at an even greater competitive disadvantage
since the additional after-tax income of the growth companies would enable
them to increase their efficiency and develop and market new products at the
expense of companies not receiving the tax advantage. And how should the
partnership be treated? If it is competing with a growing corporation, it would
find its own taxes increasing more rapidly, as it grows, than do the taxes of the
corporation. This would seem unduly onerous for the partnerships. The net
effect of this proposal might well result in large increases in bankruptcies and
in widespread mergers.
Senator Proxm ire. Mr. Curtis.
Representative C u rtis. Mr. Secretary, do you have any of the study
papers or charts that were used in computing the multiplier?
Secretary Hodges. No, sir.
Representative C u rtis. I thought you might have some of that ma
terial which would be available to the committee.
Secretary Hodges. I don’t think we would have anything that would
help you more than this general estimate.
Representative C u rtis. Just your estimates and your narrative.
Secretary Hodges. Yes, sir.
Representative C u rtis. I had a hard time keeping from biting my
tongue in the exchange you had with Mrs. Griffiths on “The Ugly
American.”
Secretary Hodges. We were not talking about an ugly American, we
were talking about a fat American.
Representative C u rtis. All right, the fat American—whatever you
want to call him.
Incidentally, I am very much in favor of our improving our exports
abroad, but I think you presented an unfortunate picture.
Let me give some statistics to show how improper a picture that
was. In 1950, our merchandise exports abroad were $10 billion.
That doesn’t sound like Americans were ignoring foreign markets.
By 1960, these exports were almost $20 billion. Services amounted
270
ECONOMIC REPORT OF THE PRESIDENT
to $2 billion in 1950 and approximately $4 billion in 1960. The total,
I might say, in 1950, $13.8 billion, and in 1960, $27 billion. I happen
to think that our private sector and American businessmen are doing a
good job. It is time we gave them a little lift, instead of the kicks
that I have been listening to here. I want to criticize this in context.
I know we can improve it. The work the private sector has done in
South America is so superior to that I have seen done by the govern
mental sector that I want to clear the record on that point. I might
say, Mr. Secretary, I don’t want to see the Government entering this
area too strongly. I like your spirit and desire to encourage our
people to look at investment and exports abroad. But, I must say,
that the Government’s policy in the tax bill of 1962 was just the re
verse of encouraging foreign investment. I might also add that our
use of cartel agreements in foreign trade, specifically in textiles, is
neither going to free trade nor increase it.
Secretary H odges. Before you leave that, I would like to put some*
thing in the record, too.
Eepresentative C u rtis . Certainly.
Secretary H odges. I don’t want you to even intimate to the public
and to the country or your party or my party that we have anything
against the businessman. I had 30 years as a businessman. I still am
as much interested as you could possibly be. What Mrs. Griffiths and
I were talking about was a situation that is true in too many cases.
It is not a reflection on the average businessman. He is a great per
son. He is doing a good job. But he is not doing anything like what
he ought to do in our exports. Let me give you a figure.
Representative C u r t t s . AH I can say is that the increase in mer
chandise exports from $10 billion to $20 billion in 10 years is very
good. All I am asking is that we have our criticism in context. This
is why I wanted to correct the record. If it had been left as it was,
the colloquy between you and Mrs. Griffiths, would certainly not have
given the picture of the fine average American businessmen you are
now talking about. We can improve and we must point to specific
inadequacies. I want to do that. But I made a mental note to check
into this incident in Laos. So often I find these horrible and dramatic
examples are caused by other reasons. People are not as foolish as
these extreme cases indicate. Sometimes they are. But until I cleared
up the record, it presented a case that is all too common in America
today. We tend to whip the private sector in order to build up the
Government.
Mrs. Griffiths’ remarks were very clear. She wanted to expand the
Government’s effort in encouraging exports. I frankly don’t want
Government in that business. I want Government to leave our private
enterprise system alone. They are doing enough damage now and
have been for years. The main job of the Federal Government is to
encourage growth, instead of figuring out new ways of impeding it.
ECONOMIC REPORT OF THE PRESIDENT
271
Secretary Hodges. I think that is true. Federal Government from
time immemorial, including both administrations.
Representative C urtis . This has nothing to do with the adminis
trations.
Secretary Hodges. Let me put in the record because you put in the
10 billion and 20 billion, Mr. Curtis, we are the lowest industrialized
nation in the entire world in the percentage of goods we sell abroad.
Representative C u rtis. Because our own domestic market is so
large.
Secretary Hodges. Exactly.
Representative C u rtis. In absolute figures, our percentage of
gross national product in foreign trade is meager. Incidentally, I
ought to identify where I read my figures: 1962 Supplement to Eco
nomic Indicators on page 82, U.S. export and imports of goods and
services.
Surely, you prepared it.
Secretary Hodges. Therefore, it is good.
Representative C u rtis. Of course it is good. That is the very
reason I don’t like you to downgrade it. I don’t think it was done
intentionally.
Secretary Hodges. No ; it was not, Mr. Curtis.
Representative C u rtis. I would like to examine corporate liquidity.
You say that in terms of current assets and current liabilities it has
been remarkably stable over past years. Do you have these figures
broken down by companies? I think in certain areas this liquidity
is very worrisome. But I suspect that the reverse is true in areas of
growth. This accounts for the increased interest rates.
Do you have studies that break it down into component parts so
we could identify the tightness ?
Secretary Hodges. Mr. Paradiso may answer.
Mr. Paradiso. We may have some information by industries. By
companies we would have to look into that.
(The following was later received for the record:)
As indicated above the liquidity ratio for all industries has been fairly
constant over the the past several years. However, examination of the ratios by
industries clearly indicates that the ratios show a very substantial degree of
variability—some industries being in a rather easy position while others are
in a more difficult situation. The two tables which follow show liquidity ratios
for manufacturing industries by quarters on two bases for the 2 years 1961
and 1962. These data show that while the total liquidity ratio for aU manu
facturing companies has been quite constant over the past 2 years, the ratios vary
substantially by industries. For example, in the third quarter of 1962 the
liquidity ratio as measured by current assets to current liabilities in the third
quarter of 1962 varied from the high of 3.95 for tobacco manufacturing to the
low of 1.48 for the aircraft and parts industry. Undoubtedly, this type of
wide dispersion exists among companies as well as among industries.
272
ECONOMIC REPORT OP THE PRESIDENT
Liquidity ratios of U.S. manufacturing corporations
[AI C U R R EN T ASSETS TO C U R R E N T LIABILITIES
1961
I
All manufacturing corporations, except
newspapers.........................................
Transportation equipment_________________
Motor vehicles and equipment........................
Aircraft and parts......•_.....................................
Electrical and machinery equipment and
supplies...........................................................
Other machinery-........................- ...................
Metalworking machinery and equipment___
Other fabricated metal products____________
Primary metal industries-................................
Primary iron and steel.....................................
Primary nonferrous metals...............................
Stone, clay, and glass products........................
Furniture and fixtures.-..................................
Lumber and wood products, except fumiture.
Instruments and related products...................
Miscellaneous manufacturing and ordnance..
Food and kindred products.............................
Bakery products...............................................
Alcohol beverages.............................................
Tobacco manufactures_____________ _______
Textile mill products........................................
Apparel and other finished products________
Paper and allied products........................... —
Printing and publishing except newspapers. .
Chemical and allied products..........................
Basic chemicals.................................................
Drugs.............................. ..................................
Petroleum refining and related industries__
Petroleum refining............................................
Rubber and miscellaneous plastic products__
Leather and leather products..... .....................
i Not given.
1962
n
II
III
IV
2.64
2.55
2.53
2.48
2.48
2.47
2.45
1.99
2.47
1.45
1.99
2.43
1.47
2.00
2.50
1.46
1.92
2.26
1.47
1.94
2.29
1.47
1.93
2.22
1.49
1.93
2.25
1.48
2.37
2.75
2.84
2.76
2.89
2.70
3.36
2.85
2.57
2.50
2.95
2.53
2.47
2.42
2.73
2.93
2.64
2.97
2.84
3.28
2.83
2.54
2.44
3.05
2.36
2.55
2.43
2.86
2.91
2.65
2.96
2.77
3.41
2.81
2.46
2.42
2.99
2.44
2.42
2.14
3.57
4.19
2.69
1.79
2.65
2.26
2.77
2.78
2.75
2.61
2.62
2.97
2.37
2.35
2.85
2.83
2.68
2.94
2.77
3.34
2.81
2.53
2.41
2.86
2.43
2.34
2.22
3.47
3.36
2.93
1.91
2.67
2.17
2.69
2.66
2.64
2.54
2.54
2.89
2.43
2.31
2.79
2.73
2.68
2.89
2.71
3.34
2.84
2.53
2.42
3.03
2.48
2.43
2.24
3.96
3.53
2.76
1.91
2.64
2.29
2.78
2.70
2.79
2.45
2.45
2.78
2.37
2.35
2.76
2.80
2.57
2.96
2.80
3.33
2.69
2.43
2.35
2.96
2.36
2.5
2.20
3.80
4.00
2.66
1.86
2.62
2.19
2.77
2.70
2.89
2.42
2.42
2.71
2.46
2.36
2.80
2.92
.2.58
3.01
2.84
3.41
2.75
2.43
2.17
2.83
2.35
2.37
2.20
3.44
3.95
2.65
1.81
2.52
2.22
2.76
2.70
2.75
2.37
2.37
2.79
2.36
0)
3.87
3.78
2.74
1.91
2.79
2.35
2.82
2.88
2.92
2.65
2.66
2.90
2.48
0)
3.68
4.65
2.64
1.82
2.73
2.35
2.79
2.86
2.88
2.71
2.73
2.93
2.49
I
III
ECONOMIC REPORT OF THE PRESIDENT
273
[B] T O T A L C A S H A N D U .S. G O V E R N M E N T S E C U R IT IE S T O
T O T A L C U R R E N T L IA B IL IT IE S
1962
1961
n
III
IV
0.48
0.48
0.47
0.49
0.45
0.44
0.42
.44
.78
.10
.49
.84
.11
.40
.70
.11
.41
.66
.12
.39
.64
.10
.44
.70
.10
.39
.62
.09
.33
.45
.55
.46
.70
.74
.60
.69
.42
.43
.63
.36
.39
(>)
.52
.15
.36
.19
.58
.53
.61
.62
.79
.82
.82
.32
.28
.33
.44
.54
.42
.76
.83
.59
.67
.42
.42
.60
.32
.40
.32
.49
.54
.45
.75
.79
.63
.70
.40
.40
.62
.33
.38
.80
.55
.13
.33
.16
.54
.44
.58
.52
.71
.71
.72
.38
.27
.33
.49
.54
.49
.73
.77
.62
.76
.43
.41
.63
.38
.38
.86
.50
.13
.39
.23
.60
.48
.62
.56
.77
.78
.78
.41
.31
.29
.44
.48
.42
.68
.71
.61
.66
.38
.40
.64
.36
.37
.83
.48
.12
.31
.19
.50
.47
.56
.49
.76
.71
.71
.27
.24
.29
.42
.49
.39
.72
.77
.62
.61
.34
.38
.58
.32
.39
.79
.45
.16
.30
.17
.49
.43
.56
.50
.78
.65
.66
.26
.27
.27
.44
.54
.41
.74
.80
.62
.62
.35
.34
.58
.28
.37
.69
.45
.12
.30
.16
.45
.42
.56
.52
.71
.58
.58
.27
.25
I
A ll manufacturing corporations, except
newspapers___________________________
Transportation equipment_____ _______ _____
M otor vehicles and equipment______________
Aircraft and parts.,
_
.
Electrical machinery, equipment, and sup
plies ________________________________________ _
Other machinery____________________________
Metalworking machinery and equipment___
Other fabricated metal products_____________
Prim ary metal industries____________________
Prim ary iron and steel______________________
Prim ary nonferrous metals__________________
Stone, clay, and glass products______________
Furniture and fixtures______________________
Lum ber and wood products, except furniture.
Instruments and related products___________
Miscellaneous manufacturing and ordnance. _
F ood and kindred products_________________
Bakery products____________________________
Alcohol beverages___________________________
T obacco manufactures______________________
Textile mill products...........................................
Apparel and other finished products_________
Paper and allied products. .................................
Printing and publishing, except newspapers..
Chemicals and allied products_______________
Basic chemicals_____________________________
Drugs_______________________________________
Petroleum refining and related industries
Petroleum refining__________________________
Rubber and miscellaneous plastic products__
Leather and leather products________________
(9
.46
.16
.32
.18
.55
.49
.58
.57
.76
.78
.79
.34
.27
I
II
II I
i N ot given.
Source: Federal Trade Commission, Securities and Exchange Commission, Quarterly Financial Report
for Manufacturing Corporations.
Representative C urtis . D o you know whether my premise is
correct?
Mr. P aradiso . It sounds correct. I think you find an average like
this always this kind of picture where some are often better off and
some worse off.
Representative C u rtis . I think it is particularly true when you
have an economy such as ours that is growing so fast. These shifts
from manufacturing into service areas create bottlenecks of shifting
capital. This becomes important as Senator Proxmire was pointing
out while discusing the interest rate. We have a relatively high in
terest rate for our society, although not compared to those abroad.
It would seen^that if there were an excess of investment funds, and
you say there is not a shortage, the rate would come down. I think
the bottlenecks within these aggregates produce this confused picture.
This is why these components are very important.
Mr. P aradiso . May I make a comment on this excess amount of
funds?
Representative C u rtis . Yes.
Mr. P aradiso . Y ou are quite right there was an excess amount of
funds in the period 1961 to 1962. In other words, there was a rise in
retained earnings plus the depreciation allowances. This is not com
mensurate with what we would like to see on plant and equipment
spending.
274
ECONOMIC REPORT OF THE PRESIDENT
Now, why? It was not because business didn’t want to spend on
plant equipment. I think basically the demand for goods and services
did not increase enough so as to narrow the very large excess ca
pacity which existed here and there. This in my judgment was the
basic reason why business did not utilize the amount of funds which
it had on hand for plant and equipment spending.
Now if we can move the demand for goods and services up toward
a position where businessmen feel a pressure on their capacity, and
at the same time they have these funds plus some more, it seems
to me that this would be the motivation for going ahead and spend
ing the funds that they have available. What is an example of this?
I think the period 1955-57 is a good illustration, where there was
a large expansion in the cash flow, the same time a large expansion in
the demand for goods and services, and this was accompanied by a
very sizable expansion in the plant and equipment spending.
Representative C u r tis . N ow you are getting back to the theme
of the administration which is different from this paper. In his
statement, the Secretary said that it was not a shortage of funds
but rather limited pront opportunities, which hindered investment.
I happen to think this is the key. That is the reason I want to
conclude with this one point. The Secretary said that cutting
taxes would encourage investment. Mr. Secretary, suppose you had
“$1 million invested and you had a return of 2 percent, $20,000. With
a 50 percent tax, you net $10,000. You cut your tax from 52 to 47
percent corporate rate, or 5-percent cut in the rate.
Secretary H odges. A 5-percentage-point cut—10-percent cut.
Representative C u r tis . It gives you $1,000, or a tenth of a percent
additional, so you have a 2.1-percent profit. I suggest this is not
the answer to our problem. That type of incentive means very little
compared with the prospects of selling more. If you were more
•efficient, you might increase your profit to 3 percent. If you go up
1 percentage point, from 2 to 3 percent, you gain $10,000. This is
the area of profit. The proposed tax cut is not going to improve
profit opportunities if this analysis is correct. It clearly demonstrates
that where business profit opportunities exist, as they did in thin
sheet steel, they can be multiplied a hundred times over. This socalled idle plant capacity, which is essentially obsolete must be han
dled with, as I often say, a rifle and not a shotgun.
We must improve these areas of obsolescence. We are experiencing
rapid economic growth, not tired blood.
Senator P roxm ire . I have just a couple of more questions, Mr.
Secretary, and I apologize for detaining you. I notice in 1957 our
merchandise exports were $19 billion. In the third quarter of 1962
on an annual rate they were $20 billion. In other words, in the last
5 years, it fluctuated but it seems we made very little progress in our
exports. This would seem to confirm your notion that we can do a
great deal better, we must do better and various steps were suggested
to increase exports. I would ask a little bit more about the stimula
tion of this tax cut. I have gotten the impression from Mr. Paradiso—
maybe I am wrong—that in this particular case, at least to begin with,
the accelerator effect of this tax cut might be quite modest and maybe
negligible for a while at least in view of the fact that we now operate
at 82 percent of the capacity in general. Therefore, before business
ECONOMIC REPORT OF THE PRESIDENT
275
buys more plant, or expands plant, at least, it could proceed profitably
to utilize more fully tne plant it already has. The whole impact of
the accelerator, as I take it, is the effect of increased demand, making
it necessary for manufacturers to buy more capacity so that they
can meet that demand, and that buying of capacity stimulating more
consumer spending.
# Mr. P aradiso . There would be in addition to that, of course, the
kind of situations which Representative Curtis has mentioned;
namely, in a period of expansion there will be need for certain types
of capacity additions to even out existing capacity. In the steel indus
try you don’t have a situation where the capacity rate of operations
are the same all through the structure.
Senator P roxm ire . Seasonal differences and so on.
Mr. P aradiso . Seasonable differences or differential impact of de
mand. For example, if the automobile industry should expand ter
rifically you might need more steel sheets and that might put
somewhat earlier the pressure on the steel industry to expand this
type of capacity. When I was talking about a general lag, it is a
lag considering the economy as a whole. In specific cases, if a new
product is developed you will get some additional capacity there. I
think you will have a mixed picture. But as far as the total invest
ment is concerned I really believe there will be some considerable lag
until these demands catch up with the bulk of the existing capacity.
Senator P roxm ire . At any rate, if we assume that the funds are
readily or relatively available now, if we assume, and I tend to dis
agree with Mr. Curtis and you may disagree, that the incentive is
not very great in the corporate income tax cut we suggested par
ticularly in the first 2 or 3 years corporations will actually be paying
more taxes—it will be 1965 and 1966, before they get the full effect of
the cut, because of the speedup—then we are left only with the demand
increases.
Is it not true that the multiplier effect depends strictly on the pro
pensity to save? That is, if there is a tendency for this tax cut to be
translated into increased savings very largely, and even if that
tendency is to increase only from 6 percent savings to 8 percent savings
the whole effect of the tax cut could be washed out.
Mr. P aradiso . I don’t agree with that.
Senator P roxm ire . Why not?
Mr. P aradiso . I don’t agree with that because past experience has
shown that while there is this variation in the rate of saving or con
sumption, varying from 92 percent to 94 percent or 6 to 8, as you
described it, the variation is to some degree correlated with the amount
of durable goods which consumers buy. In other words, when incomes
rise consumers and jobs are created, more people are employed, con
sumers tend to buy automobiles, furniture, and housing. Under these
conditions they have to borrow. In the process of borrowing this
tends to reduce the rate of savings. What I ’m saying is—I can supply
you a table if you wish—there are periods where you can demonstrate
that in an expansionary condition the durable goods sector favors
from that situation and this results not in a 92-percent rate of con
sumption but in a 94-percent rate of consumption.
Senator P roxm ire . You recognize that this kind of tax cut for most
people is a tax cut of $4, $5, $6 a pay check. It seems to me very few
people are likely to buy a home or car with that.
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Secretary H odges. That is right.
Senator P roxm ire . On the other hand, if you do these two things:
No. 1, cut out the 10 percent excise tax on automobiles, the taxes of
that kind that directly increase the cost, and at the same time you have
monetary policy that will reduce interest rates moderately, then the
tendency to buy a house because interest is the biggest element in cost,
buy a car, it would seem to me would be increased. If you follow the
policy of simple monetary stimulation you don’t have the deficit. You
don’t have the burden in the future. As a matter of fact, the reduced
interest rate would mean the burden of servicing the national debt
would be decreased.
Secretary H odges. I don’t disagree with you but I don’t think you
should minimize the effect of an additional $6 or $8 per week in the
hands of a particular family.
Senator P roxm ire . Do you agree with Dr. Heller that they will buy
an extra pair of shoes ?
Mr. P aradiso . N o. We have aggregates in buying. This creates
some additional equipment which the shoe company people will have
to have. These people then feel they have a j ob which is secure. They
are the ones who go ahead and buy the car. It is not necessarily the
initial beneficiary of the tax, the $6-a-week family that does it, but it is
the new people who become employed and who feel they have more
security in a job which they probably didn’t have before.
Senator P roxm ire . I am inclined to think the main beneficiary and
I suppose I should support the tax cut for this reason, is the beer in
dustry in Milwaukee because the boys will buy an extra couple of beers
on the way home because they have that kind of extra money and that
is all they have.
I understand from this committee staff particularly, that the work
you have done on capital stock, the statistics you have or are working
up on capital stocks, plant and equipment has been very helpful to
them, and I appreciate this work. Telling us about an inventory of
American industry. We like this. It is very helpful. We hope it
will continue.
The other thing is that I am happy to see on page 204 of the budget
the reference herein, science and technology to a program of support
of industrial research in which you say a variety of techniques will
be used to support and facilitate industrial research and development
through grants and contracts primarily with universities and non
profit institutions for basic innovation. I might say the University
of Wisconsin can do a great job for you and we would be delighted to
have you entertain us as a source.
Secretary H odges. Thank you very much.
Senator P roxm ire . Are there any other questions ?
Senator M iller . Just to add that Iowa State University at Ames
can also help you.
Eepresentative C u r tis . In the discussion of demand, one point has
not been emphasized sufficiently. Disposable personal income con
tinues to rise throughout most of the postwar recessions. This was
true even during the recent one, although it lasted only one quarter.
As Senator Proxmire was interrogating, I was examining consumer
and real estate credit in the January Economic Indicators. Going
back to 1952, there is a constant rise of consumer credit.
ECONOMIC REPORT OF THE PRESIDENT
277
There is no problem here as to consumer purchasing power, which is
the combination of actual money plus availability of credit. Demand
is not the problem in this area. The thesis, as I understand the Gov
ernment’s case, is on the demand sector. They examine the aggregate
instead of the components. I just wanted to point that out.
Secretary H odges. Thank you, sir.
Senator P roxm ire . Thank you very much, Mr. Secretary.
(Whereupon, at 4 :45 p.m., the hearing was recessed.)
JANUARY 1963 ECONOMIC REPORT OF THE PRESIDENT
THURSDAY, JANUARY 31, 1963
C ongress of th e U n ited S tates ,
J o in t E conom ic C o m m ittee ,
Washington, D.O.
The committee met at 10:05 a.m., pursuant to recess, in room AE-1,
the Capitol, Senator Paul H. Douglas (chairman of the Joint Eco
nomic Committee) presiding.
Present: Senators Douglas, Sparkman, Fulbright, Proxmire, Pell,
Javits, and Miller.
Representatives Reuss and Curtis.
Also present: Henry H. Fowler, Under Secretary of the Treasury.
William Summers Johnson, executive director; John R. Stark,
clerk; James W. Knowles, senior economist; Roy E. Moor and Donald
A. Webster, economists.
Chairman D ouglas. Our meeting time having arrived, the commit
tee will come to order.
We are very happy to have as our witness today the distinguished
Secretary of the Treasury, Mr. Douglas Dillon.
Before you begin, Mr. Dillon, I want to personally congratulate you
on the many fine things you have done as Secretary, and especially
commend you for putting long-time bonds up for competitive bidding
for the first time m recent history, and I believe you have effected a
saving by doing this.
Some of us m Congress has been advocating this for some years.
We want to congratulate the executive department for being willing
to take advice, even from such lowly persons as Senators and Con
gressmen.
You may proceed.
STATEMENT OF HOW. C. DOUGLAS DILLON, SECRETARY OP THE
TREASURY
Secretary D ill o n . Thank you very much, Mr. Chairman.
I
think you are quite right in your description. We were quite
pleased with the results of that operation.
Mr. Chairman and members of the Joint Economic Committee:
The recent performance of the American economy has already been
reviewed in the economic message of the President and in the report
and testimony of the Council of Economic Advisers. The compelling
and overriding theme of their remarks can be simply stated.
t h e need for faster growth
Nineteen hundred and sixty-two was, against the background of
recent experience, a good year. Employment, output, and incomes all
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ECONOMIC REPORT OF THE PRESIDENT
reached new records. Almost 2 years after the last recession, the
economy appears free of those excesses and imbalances that in the
past have signaled a new downturn. Virtual price stability has been
maintained throughout the expansion period. And, despite the sub
stantially higher level of imports generated by rising business activity,
the pattern of increasingly large deficits in our balance of payments
that characterized the years 1958-60 has been reversed.
Nevertheless, our recovery since early 1961, reassuring as it has
been, has not achieved the kind of decisive transition to dynamic,
self-reinforcing growth that is well within our means. The past 5
years have left us with a residue of unemployment that a recovery
of only normal proportions cannot eliminate. Excess productive
capacity and pressures on profits continue to chill the incentives
to invest and expand upon which our economic vitality depends. Not
only has our progress at home been limited, but also our ability to
provide expanded markets for other nations struggling to find the
means for a better life within a framework of individual freedom. At
the same time, the deficit in our international payments has remained
uncomfortably large.
We want to increase our rate of economic growth and improve our
living standards because it is basic to our way of life. We are con
cerned that too many of our citizens are unemployed, that others do
not have a fair share of the national prosperity, that there are de
pressed economic areas, that our economy is not growing as fast as
others. We are not willing to accept these as inevitable and we believe
a combination of appropriate Government policies and private initia
tive, consistent with our political and economic traditions, can help
to ease these problems.
Our difficulties are not those of crisis—a sharp domestic recession—
an unmanageable drain of international reserves—an early relapse
into inflation. Rather, the problem lies in a gradual accumulation of
deficiencies over a period of years, each interacting with the other to
retard our progress. Slow growth and less-than-capacity operations
inevitably dull incentives to invest, encourage inefficient make work
practices, and lead to pressures on unit costs and profit margins. In
this setting, investment opportunities abroad, within the borders of
our rapidly growing foreign competitors, become magnets to Ameri
can capital, burdening our balance of payments today and diverting
potential new jobs and efficient productive facilities from our shores.
And, in terms of the Federal budget, our underemployed economy
is not able to generate the revenues needed to cover the costs of Gov
ernment—even though increases in spending for fiscal year 1964 are
being held to the essentials of national security, space, and interest
payments.
THE LINK BETWEEN OUR DOMESTIC AND BALANCE-OF-PAYMENTS GOALS
One lesson of the past 5 years is that our goals of domestic growth
and external balance cannot safely be separated. We live in an open
economy—an economy whose performance powerfully influences our
trading partners, rich and poor alike, and which is itself subject to
strong competitive pressures from abroad. Our growth—or failure
to grow, the efficiency with which we produce, the climate for domestic
investment, and our success in achieving price stability all affect the
ECONOMIC REPORT OF THE PRESIDENT
281
flows of goods and capital between nations. And the strength and
stability of our currency concern every nation with a stake in freely
flowing trade and a durable international payments system, for side
by side with gold itself, the dollar serves the free world as its chief
reserve and trading currency.
The continuing need to reconcile our domestic and international
objectives sometimes limits the kind and scope of specific actions that
we can take in pursuit of one goal or the other. But fundamentally
these goals need not be incompatible; indeed, they can reinforce each
other. Faster growth at home and an efficient industry, able to pour
out the new products eagerly sought in world markets, both depend
upon a higher level of domestic investment, incorporating the latest
technology and exploiting the fruits of new research. A dynamic
domestic economy, alive with new and profitable investment op
portunities, is ultimately the only way—consistent with our free mar
ket system—by which we can discourage excessive outflows of capital
and attract funds from abroad. Price stability is essential both to
broaden our export markets and to achieve balanced growth at home.
The continuing challenge before us is to seek out and apply that
blend of practical policies that, taken together, promise to support
both our domestic and international objectives. This requires, first of
all, a clear appraisal of existing trends—not just for recent months
or the past year, but for a long enough period to appreciate the under
lying forces at work in the economy. It is in this longer perspective
that the performance of the past year, while gratifying in many
respects, has demonstrated the need for new approaches.
THE KEY ROLE OF INVESTMENT
One fact that stands out in our recent experience has been the
sluggishness of business investment—the kind of spending that both
generates current income and enlarges our productive potential. This
is true in relation to both our earlier postwar record and that of our
aggressive foreign competitors. To be sure, business spending for
plant and equipment rose by 9 percent in 1962. But the gains slowed
appreciably after the early months of recovery and, in dollar volume,
outlays barely surpassed levels reached as long ago as 1957. In real
terms, spending is actually below earlier peaks. We have been adding
to our capital stock at a rate of little more than 1.5 percent per year
since 1957—well below the amounts that are needed to support a
vigorously growing economy. Moreover, businessmen, once the threat
of a steel strike was eliminated early last year, have followed in
creasingly cautious inventory policies, adding to stocks only where
clearly needed to support their current level of sales.
The explanation for these conservative business policies is not hard
to find. With many industries faced for some time with more capacity
than they could effectively use, and with profit margins under pres
sure over a period of years, businessmen understandably have confined
their investment spending largely to those replacement and mod
ernization projects offering clear and prompt cost advantages. With
fast deliveries assured, and with constantly improving methods of
inventory control allowing smaller inventories to serve a given level
of demand, incentives for adding to their volume have been weak.
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These investment and inventory practices, rooted in the experience
of the past 5 years, are one reason why the danger of serious reces
sion in the months ahead appears remote. But, in an economy with
a growing labor fore© and steady increases in worker productivity,
we cannot be satisfied with stability or creeping advance. And the
fact of the matter is that we need, and could effectively utilize at a
high level of employment, much more investment tlian has been
forthcoming.
Much of the difficulty lies in an absence of sufficiently strong and
assured markets—markets more in line with our potential capacity
to produce. After 5 years of inadequate progress we cannot con
fidently sit back in the hopes that such markets will appear spon
taneously, without the encouragement of fresh incentives and the
release of new purchasing power.
Residential housing, for instance, had a good year in 1962—helped
by the prevailing ease of mortgage credit. But it would be unrealistic
to expect, within the limits set by family formation and current in
comelevels, that that sector can supply the further expansionary drive
that is needed. Government expenditures, at all levels, are also ris
ing, but not appreciably faster than current tax rates are draining
income from other sectors of the economy. To permit expenditures
to rise further, in areas of less than compelling need, merely as a means
of expanding demand would clearly violate important considerations
of public p<5icy. Finally, consumers—accounting for two-thirds of
our whole gross national product—have regularly been spending a
normal share of their after-tax incomes. Further increases in their
outlays can be expected, but only as we generate a rise in income and
employment from other sources.
THE TAX PROGRAM AND DEBT MANAGEMENT
We have at our command an instrument that will permit us to
cut through this impasse. A broad consensus has developed among
leaders from all sectors of our economy that fresh incentives for in
vestment, for risk taking, and for personal effort—supported by the
release of additional purchasing power through tax reduction—offers
a practicable means for breaking through the sluggish performance of
recent years to achieve the difficult transition to sustained and self
reinforcing prosperity. This consensus is embodied in the program
of tax reduction and reform that the President presented to the Con
gress last week, and that lies at the core of our economic and financial
policy. I shall be testifying on that program in detail before the
House Ways and Means Committee next week, and am not in a posi
tion to treat the specifics at any great length here today. Rather, I
would like to consider the program in the perspective of the overall
financial policy of this administration, for tax reduction, however,
vital, can be only a part of a well-conceived financial program for the
mid-1960’s.
Ultimately, one result of our proposed tax program will be a higher
level of Federal revenues than can reasonably be expected if we con
tinue to hold back our productive power with a tax structure that
saps initiative and drains off such a large fraction of income that rea
sonably full employment becomes an ever-receding mirage. The rea
son is very simple—revenues reflect not only the level of tax rates, but
ECONOMIC REPORT OF THE PRESIDENT
283
also the level of incomes to which they are applied. Our own experi
ence—most recently following the 1954 tax reduction—shows that this
kind of stimulus to an idling economy can be the surest path to vig
orous expansion and budgetary balance. And the record of the past
5 years also demonstrates the futility of deferring action in the hope
that some other stimulus—always just beyond the visible horizon—
can do the job.
None of us can be happy with the temporary increase in the deficit
that our tax program implies for fiscal 1964—although I should point
out that the estimated net revenue loss of $2.7 billion is small when
compared to the $9.2 billion deficit that we face in any event as a con
sequence of the failure of our economy to achieve reasonably full
capacity operation. The phasing of the full program over 3 years,
but with enactment in a single package, is designed to minimize the
transitional deficit^ before balance can be restored, without delaying
the impact on business incentives. And I am confident that we will
be able to manage a deficit of the magnitude we foresee without en
dangering either our record of price stability or our balance of pay
ments position, just as we have successfully financed our deficits of the
past 2 years.
We have been aided in that task by a rising flow of savings that
individuals and businesses have been willing to commit to investment
for a substantial period of time. Almost all the deficit in 1962 was
financed outside the banking system. Moreover, the increase in out
standing Government securities maturing in more than 5 years was
substantially greater than the total rise in the public debt. Under
the circumstances, it was possible to achieve this progress toward
restructuring and funding the marketable debt—symbolized by a
7 ^ -percent increase in its average maturity—without diverting funds
from productive use elsewhere m the economy. In fact, most long
term interest rates drifted down below their recession lows over the
course of the year.
As we move ahead in financing the deficit, we will remain alert to
the need to maintain a debt structure that will not contribute to
inflationary pressures as full employment is restored. This will re
quire distribution of the debt among the various maturity areas and
investor groups in a manner that avoids excessive liquidity, either in
the form of new money creation or short-term Treasury securities.
O f course, at a tim e o f unem ploym ent and excess capacity like the
present, the use o f short-term securities or com m ercial bank financing
is fu lly justified in appropriate amounts. A grow ing economy needs
more money and other liquid assets, and short-term Governm ent issues
m ay help to fill these needs. T he com pelling policy requirement—
and the guide that we have consistently observed— is to insure that
the grow th o f liqu idity instrum ents o f a ll kinds does not run ahead
o f the ability o f the economy to absorb them w ithout inflation.
While hard and fast mechanical rules cannot be set down in advance,
this guide implies a continuing need to tap longer term savings—
either directly, or through the complex of savings institutions—for a
portion of the funds required to finance our forthcoming deficit. We
are fortunate, in approaching this task, that techniques have been
developed that permit us to raise funds in the intermediate and
longer term sectors of the market with a minimum of disturbance to
93762—63—pt. 1---- 19
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ECONOMIC REPORT OF THE PRESIDENT
other borrowers. I am thinking partly of our advance refundings,
which have now been tested and found useful in six instances over
the course of two administrations. I am also thinking of our recent
experience in auctioning long-term bonds through competing syndi
cates of security dealers—an experiment that owes much to the con
tinuing interest and support of Senator Douglas. I am happy to
report that our initial venture in selling $250 million of long-term
bonds by that means was highly successful in achieving a wide dis
tribution of the new securities, in this instance at an interest cost
virtually equivalent to the prevailing yield for comparable outstanding
securities. While it is still too soon to permit a judgment concerning
the ultimate role of this new technique within our total debt manage
ment program, the initial success provides every reason for further
testing from time to time as market conditions and our own objectives
make that desirable.
Chairman D ouglas. Mr. Secretary, have you made an estimate as to
the probable interest savings which you effected by competitive bid
ding for these $250 million of long-term securities ?
Secretary D illo n . We have not made one, but I have seen one made
independently which I do not think was far off the mark.
Chairman D ouglas. Well, I made an estimate.
Secretary D illo n . I think that is the one I am referring to.
Chairman D ouglas. I made an estimate that the yield, I believe, on
the present securities is 4.01 percent.
Secretary D illo n . That is right.
Chairman D ouglas. I made an estimate that if you had disposed of
them under the former method, that you would have been compelled
to have a yield of 4y8percent, or 4.125, is that true ?
Secretary D illo n . I said I thought that was roughly right. It
might have been a 4.10 yield. It is close.
Chairman D ouglas. And, therefore, the savings have been in the
nature of one-tenth of 1 percent a year, somewhere around that ?
Secretary D illo n . Something like that, yes.
Chairman D ouglas. That would be $250,000 a year. For 30 years,
that would be $7,250,000. I congratulate you.
Secretary D illo n . Thank you.
FINANCING THE TRADITIONAL DEFICIT
It is sometimes argued that, to the extent we tap savings in financing
the deficit, the desired stimulus from our tax program will be offset—
that we will, in effect, take back with one hand the money that we
provide with the other. This oversimplified account of the financing
process overlooks several important considerations. First of all,
however the deficit is financed, it will leave untouched the spur to the
economy from the greater incentives for productive effort and new
investment brought on by tax rate reduction. Equally important,
there is every reason to believe that, until we return closer to full
employment, the flow of longer term investment funds generated by
rising levels of business activity will continue to exceed the combined
borrowing requirements of individuals, businesses, and State and local
governments—just as has been the case over the last 2 years.
An increased volume of savings will not require decisions to reduce
spending by business or consumers, but rather will flow from higher
ECONOMIC REPORT OF THE PRESIDENT
285
incomes. The act of saving may itself be the end product of a long
sequence of prior spending decisions, each of which will tend to add
to the level of business activity and the incomes of workers. The
taxpayer himself, when he devotes part of his tax saving to purchases
of goods or services, will be only the first link in this chain of spend
ing, income generation, and saving that lies at the heart of the ex
pansionary process. Under these circumstances, it is quite possible
and practicable for the Government to absorb some of the new savings
for its own use, without bringing undesirable upward pressures on
interest rates or diverting funds from use in other investment
channels.
As the economy reaches full employment, and potential savings
can be fully and productively employed in financing our expanding
private economy, the situation becomes quite different. Then, it is
quite true that wedging Government bonds into an already taut capi
tal market will raise interest rates and curtail private spending*
And, in a potentially inflationary situation, that could be appropriate.
Even more to the point, that would clearly be a situation in which
Government policies should be directed toward budgetary balance
and surplus, thereby restraining demand and (through debt retire
ment) releasing funds for productive use by other sectors of the
economy. I am confident that, as the economy does reach its full
potential, the tax rates we are proposing will in fact generate revenues
adequate to cover the essential expenditures of Government.
The course of interest rates in the months ahead will be affected
less by Treasury debt management decisions than by the course of
the economy itself, and by the policies of the Federal Eeserve in re
sponse to emerging developments both domestically and in our balance
of payments.
Whatever the future may bring in this respect, it is clear that easy
money and ample availability of credit has been a major factor sup
porting the economy throughout this period of expansion, and remains
so today. Seldom in our history—certainly not since World War
II—have most long-term interest rates actually declined during a
recovery period. I was interested to see recently a report that the
larger New York banks charged an average of one-eighth to onefourth percent less per annum for new term loans in 1962 than was
the case a year earlier—a striking reflection of the downward pres
sures on the rate structure and aggressiveness of banks in seeking out
new borrowers, even while the so-called prime rate remained un
changed. The record volume of mortgage financing in 1962—coming
at a time in the expansion period when tight money has often sharply
curtailed homebuilding—is another sign of the really unique char
acter of this period.
TAX POLICY AND THE BALANCE OF PAYMENTS
The continuing need for striking an appropriate balance between
domestic and external considerations in the execution of debt man
agement and monetary policies will not be fundamentally changed
by our tax proposals. However, we have developed the tax program
so as to reduce the possibility of serious conflicts arising. For one
thing, it will take on a good part of the burden for encouraging ex
pansion that is being borne by monetary policy, thereby easing the
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problems of the monetary authorities should they one day find them
selves compelled to deal more vigorously with the balance of payments.
Equally important, the stimulus to domestic investment, the new
incentives for cost cutting and modernization, the encouragement for
industrial research, and the higher profits implicit in the tax program
will support and reinforce our more specific efforts to deal with the
balance-of-payments problem. Some capital that is now inclined to
seek employment abroad will find new opportunities opening up in
this country. The productivity of our industry should be reinforced,
bettering our competitive posture in markets at home and abroad.
Our leadership in research and its application to industrial products—
products that account for a large portion of our total exports—will
also be further bolstered.
To realize these potential benefits for our balance of payments, it
remains critically important that we maintain price stability. The
wage and price guideposts reiterated in the report of the Council of
Economic Advisers clearly set forth the general standards by which
price and wage decisions may appropriately be evaluated from the
standpoint of the public interest. The increases in take-home pay
and profits implicit in our tax program should make it easier for both
sides to accept wage settlements and to make pricing decisions that lie
well within these guideposts, effectively supporting our goal of price
stability.
BALANCE-OF-PAYMENTS RESULTS
One of the disappointments of the past year has been the relatively
slow improvement in our balance of payments. The preliminary
figures presently available, indicating that our overall deficit remainea
somewhat over $2 billion, demonstrate conclusively that we must seek
out and apply even more vigorously measures specifically aimed at
restoring lasting equilibrium in our international accounts.
With merchandise imports rising by $1.6 billion last year, the
moderate progress recorded in reducing our deficit from the $2.5 bil
lion of 1961 was possible only because the concerted efforts to stem
the dollar drains directly associated with Government activities have
begun to bear fruit. Most importantly, net military spending over
seas declined by almost $600 million (on the basis of incomplete data),
reflecting offsetting purchases of military goods and services by our
allies. The vigorous efforts to economize on our own military spend
ing overseas merely served to hold the overall total level while absorb
ing the costs of larger forces and higher foreign price levels. Pre
payments of loans by France, Italy, and Sweden amounted to over
§650 million, approximately comparable to our 1961 receipts from this
source. A larger proportion of our aid to the less developed coun
tries was directly reflected in purchases in this country, and fully
three-quarters of this fiscal year’s new AID commitments will result
in American exports in coming years.
Further savings in Government spending overseas are clearly neces
sary. I am confident that they will emerge as the new Governmentwide control system for international transactions, established within
the Bureau of the Budget, becomes fully effective as an administrative
device for budgeting our foreign exchange outlays.
Improvement developed in other directions as well. Commercial
exports rose moderately, despite slower growth in Europe—our most
ECONOMIC REPORT OF THE PRESIDENT
287
rapidly expanding export market. The steady increase in earnings
on our oversea investment provided a factor of long-term strength.
Short-term capital outflows, which had reached exceptionally high
levels in 1960 and 1961, declined, although they still remain a major
factor in our payments difficulties. These outflows, including items
not specifically recorded in our balance-of-payments statistics, ac
counted for approximately 70 percent of our total defict as compared
to about 80 percent in 1961.
Last year’s deficit resulted in a gold loss of $890 million as compared
to $857 million in 1961. Toward the end of last year, and continuing
into early 1963, 10 weeks passed in which there was no net decline
in our gold stock. This situation could not be expected to continue
in the face of our payments deficit, and the gold outflow resumed in
January. Further moderate outflows can be expected in the coming
weeks and months.
The improvement in our balance of payments thus far is simply
not good enough if we are to maintain a strong dollar and fulfill
our basic commitments for aid and defense. The hard job of search
ing out and penetrating new foreign markets has only begun, and
the President has therefore proposed a sharp step-up in our export
expansion program. Our long-term capital exports continue to re
flect the absence of effective alternatives abroad to our own well
developed capital markets, as well as the inadequate investment op
portunities at home. And the burdens of aid and defense must be
more equitably shared.
STRENGTHENING THE INTERNATIONAL PAYMENTS SYSTEM
We cannot take comfort in the thought that an “easy” solution
can be found in some new monetary arrangement that will shield us
from the necessity for taking corrective action. Any effective mone
tary arrangement necessarily presupposes, not balance every year,
but an ability and willingness to avoid large and continuing deficits,
as well as the full confidence of a group of willing lenders.
We need a stable monetary system, resistant to the strains and
shocks that can quickly develop as a result of sudden and massive
flows of funds between countries, and capable of meeting the needs
of a growing world economy for international liquidity and access
to credit. During the past year, we have made great strides toward
strengthening the existing system. The prompt ratification and im
plementation of the special IMF borrowing arrangement—making
available in time of demonstrated need a pool of up to $6 billion
of convertible currencies—was a source of special gratification. More
over, we have now tested in a wide variety of situations the usefulness
of operations for our own account in both the spot and forward for
eign exchange markets, of reciprocal currency agreements by the
Federal Reserve with the monetary authorities of other industrialized
countries, and of Treasury direct borrowing at short and medium
term from other countries in a strong payments position. The ef
fectiveness of these arrangements, supplementing the resources of
the IMF itself, in meeting incipient strains of various kinds—whether
directed against the dollar or other currencies—was demonstrated at
the time of the stock market disturbances last spring, and again
during the Canadian exchange crisis and the Cuban situation. Simi
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larly, the new cooperative arrangements in the London gold market
have been helpful in dispelling a potentially speculative atmosphere,
and the price of gold in that market declined toward the end of last
year. For much of January, the price has been below $35.06, touching
the lowest level since 1959.
No doubt there is room for further innovation and improvement
in these areas. We are continuing to study these questions in co
operation with other interested countries. But no monetary mecha
nism can effectively substitute for the hard and continuing task of
steadily improving our own balance of payments. The “easy,” obvi
ous savings have already been made—the hard core of the deficit that
remains will require the conscious effort and understanding of all
groups in the economy, as well as the cooperation of our friends abroad
who now find themselves in a strong position.
In this connection, I was much interested in reading the report of
your own subcommittee, chaired by Congressman Eeuss, that recently
made available a mass of valuable and provocative material on the
balance of payments and related monetary arrangements. The em
phasis in your own conclusions on the fundamental necessity for work
ing with our allies to achieve a more equitable sharing of the burdens
of defense and aid, with full recognition of the increased capacity and
economic strength of other industrialized nations in recent years,
seems to me entirely appropriate. And I also share your view that
we can find no solution to our problems by simply multiplying guaran
tees for dollars in the hands of foreigners.
THE NEED FOR PRICE STABILITY
But there is one sort of “guarantee” that is vitally necessary if we
are to maintain the confidence of our friends abroad and successfully
achieve our twin goals of domestic expansion and balance in our inter
national accounts—that is a pledge that we will conduct our affairs in
a manner that will maintain our recent record of price stability. That
is why it is essential that we finance our deficit in a prudent way, with
an eye toward the future as well as the present. That is why we need
to maintain a flexible monetary policy, alert to developments as they
emerge. And, above all, that is why it is so important that labor and
business alike, as the stimulus from our tax program takes hold, con
tinue to seek out more efficient methods of production and display
restraint in their wage bargaining and pricing decisions.
This process should be greatly facilitated by the new incentives and
the increases in after-tax incomes of individuals and business enter
prises alike which will be provided by our tax program. It is in this
context of responsible citizen action within a framework of effective
public policy that tax reduction will be a 'boon to us all.
Thank you, Mr. Chairman.
Chairman D o u g l a s . Thank you, Mr. Secretary, for your very a b l e
statement.
Am I correct in inferring that there are these two general purposes
behind the administration’s tax proposals:
First, an effort to stimulate the economy so that we may more fully
reach our potential and bring a closer approach to full employment;
and,
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289
Second, to make our tax laws as just as possible? Am I correct in
that?
Secretary D illo n . I think that is correct, yes, sir.
Chairman D ouglas. And you think the stimulation will result from
releasing additional monetary purchasing power that otherwise would
not be spent or invested, thus stimulating total demand?
Secretary D illo n . It will come in two ways. I think it will come
from that, and it will also come from the effect of rate reductions
which will increase incentives for effort and for investment oppor
tunities for profit.
Chairman D ouglas. Even though there is already a large supply
of savings which are not invested ?
Secretary D illo n . Yes.
I think that the advantage will be that if investment looks more
profitable—for two reasons, first, because demand is higher and the
economy is moving more rapidly, and, second, because of lower tax
rates—when this begins to take hold, this supply of uninvested sav
ings, or liquid savings, will begin to be going down.
Chairman D ouglas. May I ask if it is not true that without the tax
reform proposals, the proposed tax cut would reduce the tax liabilities
for the lowest income bracket by approximately 28 percent, those with
less than 3,000 of taxable income; and to about 22 percent for those
in the $50,000 bracket and over ?
I get these figures from page 24 of the President’s message printed
in House Document 43, and on page 25 in the mimeographed release
which was issued prior to printing. It is the third column.
Secretary D illo n . Yes; I see that column. That is correct.
Chairman D ouglas. From 28 percent for the lowest income group
to 22 percent for the highest income group ? In other words, divorced
from tax reform, the people in the upper income brackets, or upmost
income brackets get almost the same tax reduction, proportionately,
as those in the lower brackets ?
Secretary D ill o n . Yes. It is only modestly different.
Chairman D ouglas. And in absolute terms, which is shown in the
first subdivision of table 3 at the head of the page, of the total tax
reductions of $11 billion, only $410 million would go to the lowest
roup, or 4 percent; about $1.1 billion would go to those $3,000 to
5,000, or 10 percent; or the two lowest groups, those with taxable
incomes of less than $5,000, would get only roughly 15 percent of the
total tax reductions even though they comprise about 40 percent of the
taxpayers, is that not true?'
Secretary D illo n . That is correct.
Chairman D ouglas. On the other hand, those with incomes over
$20,000, the two higher brackets, would get total reductions of $2.3
billion, or one and a half times as great in absolute amount as the low
income groups, and they would receive about 20 percent of the dollar
amount of the tax cut.
Secretary D illo n . That is roughly correct, yes.
Chairman D ouglas. Yet, they form only 2 percent of the total
number of taxpayers.
Secretary D illo n . 2.5 percent.
Chairman D ouglas. Now, the degree of progression which is con
tained within the total program of the administration depends pri
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marily, does it not, upon the tax reform proposals, rather than upon
the tax reduction proposals?
Secretary D illo n . Yes.
I think the tax reduction proposals were generally of the same
order of magnitude. They were 30 percent in the very lowest bracket
and 29 percent-----Chairman D ouglas. 28 percent. I mean the tax reform.
Secretary D illo n . I said the reductions were just about the same.
Chairman D ouglas. Yes.
Secretary D illo n . Because the reduction from 20 percent to 14
percent is a 30-percent reduction. The reduction from 91 to 65 is 29
percent, and the bulk of rates in between were reduced about 20 per
cent.
Chairman D ouglas. Yes.
Secretary D illo n . So th at was-------
Chairman D ouglas. On the other hand, the so-called tax reforms as
indicated in the fourth column at the bottom of pages 24 and 25, re
spectively, would add a further benefit of 10 percent to the lowest
income group and a loss of 13 percent to the upper income group,
and that provides for a differential cut of 39 percent for the lowest
group below $3,000, 28 percent for those from $3,000 to $5,000, and
of 9 percent for those $50,000 and over.
Now, we all went through the experience last year, Mr. Secretary,
of the way Congress treated the tax reform proposals of the admin
istration, and. while some people in the administration regarded that
as a victory ror tax reform, I certainly did not regard it as any ap
preciable victory for tax reform. Quite the contrary, I think most
of the tax reforms were thrown out of the window by Congress.
Now, suppose Congress in its lack of wisdom refuses to put the tax
reform proposals into effect. Would you be willing to accept the re
sults of Congress, or would you battle for a reduction in the tax bene
fits given to those in the upper income groups, since they are the ones
who, as a class, not necessarily individually, benefit from the so-called
loopholes or truck holes in the tax system?
Secretary D illo n . Well, I think it depends, to some extent, on
what individual reforms we are talking about. One of them which
undoubtedly will require considerable discussion is the recommenda
tion that was repeated from 1961, the repeal of the dividend credit
and exclusion. I think the record shows the way that particular pro
vision applies. By far the greater benefit of it goes to those in the
higher income brackets, so that the President specifically pointed out
in his message that, if that one was left out, the revenue should be
recovered from those in that particular bracket.
Som e o f the other reform s affect taxpayers m ore across the board.
Chairm an D ouglas. W h a t about the depletion allowances on gas
and oil which benefit prim arily those in the upper income groups?
Secretary D illo n . I think that is true, too. It is our feeling, that
most of the benefit there is in the corporate area, and might have some
impact on what we could do with the corporate tax generally.
Chairman D ouglas. Now, may I ask this question.
Is it not true that a tax cut will have a greater stimulative effect
if it goes to those who will spend the cut on consumption items rather
than putting it in savings ?
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291
Secretary D illo n . I think, from the point of view of the immediate
stimulus given to consumer demand, there is no doubt that that is
correct. There is this other aspect which we consider equally impor
tant, which is the effect of the reduction in rates on incentives.
Chairman D ouglas. Is it not true that the upper income groups
spend a smaller fraction of their total income and a still smaller frac
tion of their incremental income on consumption items than the lower
income groups, and that, as you go up the scale the propensity to save
increases?
Secretary D illo n . That is generally correct.
Chairman D ouglas. Therefore, to have the greatest stimulus, a
tax cut should go, should it not, in the largest part, to those in the
lowest income brackets, who will spend it on consumption items?
Secretary D illo n . Yes, certainly, from the point of view of increas
ing demand, which is vitally important, that is right.
I keep saying there is this other incentive aspect to the program
which we consider highly important also.
Chairman D ouglas. Is it not true, then, that if you take the Presi
dent’s program as a whole, it will have this effect, but if you strip it
of its reform features, that it will not have this effect ?
Secretary D illo n . It will have this effect much more, taken as a
whole, than it would otherwise. The larger part of any tax reduction
goes to those who are in the lower middle ranges—who would, pre
sumably, be likely to spend—just because they happen to be the big
gest taxpayers. That is where we get most of our money from. So
any change in that area, naturally, is important.
Chairman D ouglas. Mr. Secretary, you know the practical situation
which you are likely to face. Everyone will be for the reductions
in taxes and want even more, but they will be opposed to those specific
features which may hit them.
Now, is it not true that if you take each class as a unit, that they will
benefit more by the cuts than they will lose by the reforms ?
Secretary D illo n . Oh, very much so, that is correct.
Chairman D ouglas. And should this not be constantly brought
home in the discussion ?
Secretary D illo n . I think I have seen some erroneous reports that
certain income groups or certain areas of our social structure—the
middle classes and the upper middle classes and those in the upper
brackets—might actually be paying more under this program than
they do now. It might be possible, and probably would be possible,
to construct a few individual cases where that would be true, where
taxpayers were receiving all their funds from the oil business or some
thing of that nature. But, taking a class as a whole, and taking a
very great majority of taxpayers within a class, it is not true at all.
Chairman D ouglas. Thank you very much.
Are there questions, Congressman Curtis?
I wish to announce, with the courtesy of Congressman Curtis, I
was permitted to overrun my time by a minute and a half.
Representative C u rtis. Thank you, Mr. Chairman.
Mr. Secretary, in reading your statement, I find no reference to
expenditure policy. Is that an accident or doesn’t expenditure policy
concern the Treasury Department?
Secretary D illo n . N o, it concerns it very much, and I think ex
penditure policy has to be tied in with tax policy.
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Representative C u rtis . Would you comment then on what your
expenditure policy is and whether or not you feel t
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