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JANUARY 1963 ECONOMIC REPORT OF
THE PRESIDENT
H E A R IN G S
BEFORE TH E
JOINT ECONOMIC COMMITTEE
CONGRESS OE THE UNITED STATES
E IG H T Y -E IG H T H C O N G R E SS
FIRST SESSION
PU R SU AN T TO
Sec. 5(a) of Public Law 304
(79th CONGRESS)
Printed for the use of the Joint Economic Committee
PART 2
Statem ents o f Economic Interest Groups
JANUARY 1963 ECONOMIC REPORT OF
THE PRESIDENT
H E A R IN G S
BEFORE T H E
JOINT ECONOMIC COMMITTEE
CONGEESS OE THE UNITED STATES
E IG H T Y -E IG H T H C O N G R E SS
FIRST SESSION
PU RSU AN T t o
Sec. 5 (a) of Public Law 304
(79th CONGRESS)
Printed for the use of the Joint Economic Committee
PART 2
Statements of Economic Interest Groups
U .S . G O V E R N M E N T P R I N T I N G O F F IC E
W A S H IN G T O N : 1963
93762
For sale by the'_Superintendent of Documents, U .S . Government Printing Office
Washington 25, D .C . - Price 55 cents
JOINT ECONOMIC COMMITTEE
(Created pursuant to sec. 5(a) of Public Law 3 0 4 ,79th Cong.)
P A U L H . D O U G L A S , Illinois, Chairman
R I C H A R D B O L L I N G , Missouri, Vice Chairman
H O U SE OF R E P R E S E N T A T IV E S
SE N A TE
J O H N S P A R K M A N , Alabama
J. W . F U L B R I G H T , Arkansas
W I L L I A M P R O X M I R E , Wisconsin
C L A I B O R N E P E L L , Rhode Island
J A C O B K . J A V IT S , N ew York
J A C K M I L L E R , Iowa
L E N B . J O R D A N , Idaho
W R I G H T P A T M A N , Texas
H A L E B O G G S , Louisiana
H E N R Y S. R E U S S , Wisconsin
M A R T H A W . G R I F F I T H S , Michigan
T H O M A S R . C U R T I S , Missouri
C L A R E N C E E . K I L B U R N , N ew York
W I L L I A M B . W I D N A L L , N ew Jersey
J a m b s W . K n o w l e s , Meetdive Director
J o h n R . S t a k e , Clerk
n
CONTENTS
P ago
Letter requesting submission of comments on the 1963 Economic Report of
the President from Chairman Paul H. Douglas to economic interest
groups________________________________________________________
List of organizations to w h o m letter was sent------------------------
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640
STATEMENTS A N D LETTERS
American Bankers Association, statement submitted by Charls E.
Walker, executive vice president_________________________________
American Federation of Labor and Congress of Industrial Organizations,
statement of Walter P. Reuther, vice president_____________________
Chamber of Commerce of the United States of America, statement of
Emerson P. Schmidt, director, economic research department_________
Commitee for Economic Development, statement of T. O. Yntema, Chair
man, Research and Policy Committee----------------------------Conference on Economic Progress, statement of Leon H. Keyserling,
president-----------------------------------------------------Consumers Union, letter from Colston E. Warae, president------------Federal Statistics Users’ Conference, statement of members____________
Life Insurance Association of America, letter from James J. O ’Leary, vice
president and director of economic research_______________________
Machinery and Allied Products Institute, statement of George Terborgh,
research director_______________________________________________
National Association of Manufacturers, statement of George G. Hagedorn,
director of research____________________________________________
National Association of Mutual Savings Banks, letters from Grover W .
Ensley, executive vice president, to Senator Paul H. Douglas and
Walter W . Heller---------------------------------------------“H o w Federal Mutual Savings Banks Can Benefit You, Your C o m
munity, State, and Nation”---------------------------------The National Grange, statement of L. Alton Denslow, associate legal
counsel________________________________________________________
in
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693
697
815
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787
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JANUARY 1963 ECONOMIC REPORT OF THE PRESIDENT
The following letter was sent to 19 organizations inviting them to
submit written comments on the materials and recommendations con
tained in the 1963 Economic Report of the President. The comments
were given consideration by the Joint Economic Committee in the
preparation o f its annual report on the President’s Economic Report.
J a n u a r y 23,1963.
D e a r --------------- : The Joint Economic Committee is again calling
upon a number of leaders of banking, business, labor and agriculture,
and consumer organizations in order to secure economic facts and
counsel for consideration in the preparation o f our annual report on
the Economic Report of the President.
Because of the pressure of time, and a statutory deadline of March 1
for filing our report, our hearings this year must necessarily be brief,
and, further, in order that the members of the committee may have
time to consider written statements, these statements should be received
no later than February 15.
W e would appreciate having your comments on the materials and
recommendations contained in the 1963 Economic Report o f the Presi
dent, including, o f course, the appended report or the Council of
Economic Advisers. I am enclosing a copy o f the report for your
convenience, in the event you are able to prepare comments.
In addition, I am enclosing a list o f the other organizations that
have been invited to submit written comments, as well as a list o f the
individuals who have been invited to testify the first week of the
hearings.
It would be o f assistance to the committee if we could have 20 copies
of your comments. Such comments as you care to give us will be made
available to the public through a printed compendium o f the invited
statements.
Sincerely yours,
P aul H . D ouglas, Chairman.
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ECONOMIC REPORT OF THE PRESIDENT
Listed below are the organizations which were invited to submit
written comments:
American Bankers Association.
American Farm Bureau Federation.
American Federation of Labor and Congress of Industrial
Organizations.
Chamber o f Commerce o f the U .S . A .
Committee for Economic Development.
Conference on Economic Progress.
Consumers Union, Inc.
Federal Statistics Users’ Conference.
L ife Insurance Association of America.
Machinery & A llied Products Institute.
National Association of Manufacturers.
National Association of Mutual Savings Banks.
National Farmers Union.
National Grange.
National Independent Union Council.
National League o f Insured Savings Associations.
Railway Labor Executives Association.
United Mine Workers of America.
United States Savings and Loan League.
(The statements and letters of the organizations which submitted
statements to the committee follow :)
T H E A M E R IC A N B A N K E R S A S S O C IA T IO N
N ew Y ork, N .Y ., February
1963.
Hon. P aul H . D ouglas,
Chairman, / oint Economic Committee,
£7.$. Senate, Washington,)D .C .
D eak S enator D ouglas : In response to your request for comments
on the materials and recommendations contained in the 1963 Economic
Report of the President (including the appended report o f the Coun
cil of Economic A dvisers), we are pleased to submit the attached
statement.
W e hope that this statement of views w ill be of some assistance to
the committee in the preparation of your annual report.
Sincerely yours,
C harls E . W alker ,
Executive Vice President.
C omments
panying
on the P resident’s E conomic R eport and the A ccom
A nn u al R eport of the C ouncil of E conomic A dvisers
IN T R O D U C T IO N
The President’s Economic Report and the annual report o f the
Council of Economic Advisers are comprehensive and thoughtful
documents, ranging widely over a large number o f today’s economic
problems and policies. Faced with the wealth o f detail and analysis
contained in them, we have chosen to lim it our comments to those
broader aspects of policies and problems which, in our judgment, will
deserve the greatest attention in the months ahead. Naturally, our
discussions tend to be concentrated in areas where our emphasis or
views differ, to a greater or lesser extent, from those expressed in the
reports on which we have been invited to comment.
W e share with the President and the Council the concern expressed
over the need for measures designed to improve the long-range growth
performance of the Nation’s economy. W e share, also, their conclu
sion that major tax reduction offers the most promising approach to
strengthening and reinvigorating the domestic economy. Obviously,
the use o f major tax reduction as a long-range stimulus to the economy
carries potential risks as well as potential rewards— the net results
being heavily dependent on the manner in which a program of tax
reduction is integrated into the overall financial policies o f the Gov
ernment, including spending policies, monetary policy, and debt man
agement. The rewards which can be secured by tax reduction ade
quately are detailed in the President’s Economic Report. In our
judgment, the potential risks which are incurred, and the implica
tions of these risks for Federal spending, monetary policy, and debt
management, do not receive sufficient attention. Nor, in some cases, do
specific recommendations in the report reflect recognition that these
risks are present.
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ECONOMIC REPORT OF THE PRESIDENT
The President and his Council find that a program o f major tax
reduction, coupled with further increases in Federal spending which
lead to the largest peacetime deficit ever planned, is compatible with
the need for domestic price stability, consistent with the requirement
for securing further balance-of-payments improvement, and respon
sive to the need for a faster growing economy. Moreover, the ad
ministration does not anticipate that the incurring o f a budget deficit
now estimated at almost $12 billion, and at a time o f serious imbalance
in our international accounts, will present serious conflicts among the
objectives to be served by debt-management and monetary policies.
W e accept, as desirable goals o f public policy, the objectives which
are outlined by the President and the Council: expanding output and
employment opportunities; price stability; and balance-of-payments
equilibrium. W e do not believe, however, that the President’s pro
gram is best designed to contribute to the achievement of these objec
tives. W e find particularly puzzling the light treatment given to
possible conflicts, at least in the short run, between the policies which
may be required to achieve each of the goals. The balance between
domestic growth and fu ll employment, on the one hand, and price
stability, on the other hand, has always been extremely difficult to
strike. Economic expansion, even within the framework of price
stability, is not necessarily compatible with balance-of-payments
equilibrium in the long run, and in the short run is likely to aggravate
our payments problem. Moreover, the decline in the Nation’s inter
national liquidity position makes it extremely doubtful whether mone
tary policy can serve the short-term interests o f both balance-of-pay
ments improvement and domestic economic expansion. These are
only a few illustrations o f the areas in which we may experience short
term conflicts in the pursuit of multiple economic goals. The admin
istration’s economic program, featuring heavy emphasis on economic
growth, reflects all too often the judgment that these economic objec
tives are mutually complementary in the short run as well as in the
long run.
The following sections contain a report o f our views, in turn, on
the fiscal, monetary, and debt management policies proposed by the
administration, and on the policies discussed with respect to our per
sistent balance-of-payments deficit. A final section reviews the Coun
cil’s wage-price guidelines for collective bargaining.
F IS C A L
P O L IC Y
A t its 88th annual convention last September, the American Bank
ers Association cited tax reduction as the major tool available for
stimulating longrun economic growth, but it cautioned that reductions
in tax rates would not in fact encourage sustained growth unless a
number o f safeguards were observed. One of the most important of
these safeguards was cited as follow s:
“Tax reductions must be implemented within the bounds of fiscal
prudence * * * (This) means that * * * Federal spending over a
protracted period must be strictly limited and effectively con
trolled * *
ECONOMIC REPORT OF THE PRESIDENT
643
In our judgment, the requirement for implementing a tax cut
“ within the bounds o f fiscal prudence” would not preclude a temporary
swelling of the Federal deficit if this increase resulted from a tax re
duction o f the magnitude proposed by the President. For practical
as well as economic reasons, our endorsement of tax reduction has not
been coupled with the demand that the reduction be accomplished
without exerting a temporarily adverse impact on the Federal budget.
W e regard tax reduction as an investment in future economic vigor,
and we look upon the accompanying temporary enlargement o f the
deficit as the price, though not the purpose, of the tax cut. Even a
temporary enlargement o f the Federal deficit resulting exclusively
from tax reduction is not without risk at this time— the risk o f gen
erating renewed inflationary pressures and compounding our balanceof-payments difficulties. Y et our confidence in the constructive forces
that tax reductions can unleash leads us to believe that the price, in
terms o f a temporary and manageable swelling o f the deficit, can and
should be paid.
Despite our confidence in the stimulative powers of tax reduction,
we remain concerned about the size o f the projected deficit for the
coming fiscal year. W e note particularly that the increase in the defi
cit is much more a product of further increases in Government spend
ing than of revenue losses attributable to tax reduction. In our
opinion, fiscal planning which results in the projection of a $12 billion
deficit for the coming fiscal year borders closely on economic brinksmanship, and our concern over this development is further deepened
by the knowledge that in 5 of the past 6 fiscal years the budget deficit
originally has been underestimated, on the average, by $8 billion.
Thus, the incorporation into the 1964 budget of a $4.5 billion spend
ing increase represents one of the most disappointing aspects o f the
administration’s fiscal program. I f spending for the year ahead had
been budgeted at fiscal 1963 levels, the projected deficit would have
been held to the approximate level of the manageable deficits incurred
in each of the last 2 fiscal years. The exercise o f stricter discipline is
essential if we are able to afford tax reduction without running the
risk of allowing an unmanageable deficit to develop, and it will re
main essential in the future if we are to allow the process o f economic
expansion to produce a progressive strengthening in the Government’s
fiscal position. B y combining tax reduction with a significant in
crease in Federal spending for fiscal 1964, the administration has not
only magnified the risks which attend major tax reduction, but it also
has raised the question of whether or not, in the future, we can expect
the determined efforts to curtail Federal spending which are impera
tive if the process o f tax adjustment is not to result in a deterioration
o f the Government’s fiscal position. Unless these risks can be reduced,
and unless the capacity of the administration to curtail spending more
effectively can be demonstrated, the desirability o f embarking on a
tax reduction program must be expected to be appraised with consid
erable skepticism.
Our concern over the size of the deficit being planned for fiscal 1964
(and recognizing that the estimate of $12 billion could be significantly
short of the mark) reflects our appraisal o f the possibilities for fi
nancing a deficit o f unusually large magnitude without generating
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ECONOMIC REPORT OF THE PRESIDENT
renascent inflationary pressures and/or imposing a critical strain on
international confidence in the dollar. A failure, on either of these
counts would constitute a severe setback to our domestic economy and,
of greater significance, impair the economic security o f the entire free
world. Given our limited capacity to finance deficits without running
risks the consequences of which could be extremely grave, it is particu
larly regrettable that the deficit being forecast is so heavily weighted
by increasing Federal spending. In our present circumstances, these
spending increases are, dollar for dollar, both less effective and less
efficient m serving the long-range growth needs o f the Nation.
The administration’s judgment that unused capacity in the economy
safeguards against the renewal of inflationary pressures is question
able. A s Paul Samuelson points out in his basic text, Economics, “the
real difficulty with fu ll employment lies not in its rough definition
but in the fact that wages and prices may begin to soar while there is
still considerable unemployment and excess capacity.” This is partic
ularly true when a significant amount of the unemployment is struc
tural, and not cyclical, in nature.
Aside from the fiscal implications of the administration’s proposal
to reduce taxes, there also are questions related to the structure and
tim ing of the proposed tax cut. A t our annual convention last year,
we recommended the following structural and procedural approaches:
“ * * * both the magnitude and the character of rate reductions
must be tailored to provide additional incentives for sustained eco
nomic expansion, rather than simply to give a temporary one-shot
boost to the economy. This requirement dictates that reductions in
tax rates should be both substantial and permanent. Moreover, it
means that rate reductions must be designed specifically to provide
additional incentives for capital investment * * * upon which the
achievement of rising productivity is so heavily dependent.
“ * * * even with strict limitation upon Federal spending a gradual
transition to lower tax rates is almost certain to produce temporary and
moderately unfavorable effects on the Government’s fiscal position.
These effects can be minimized by providing for a gradual reduction of
tax rates according to a predetermined schedule, rather than by a single
major reduction * *
It is clear that the President’s tax program meets two o f the basic
requirements expressed above: that the reduction be substantial and
permanent, and not of the one-shot variety: and that there be a gradual
transition to the lower rates. W ith regard to the structure of the tax
reduction, however, our position has emphasized the provision of
“ additional incentives for capital investment * * * upon which the
achievement o f rising productivity is so heavily dependent.” This
emphasis suggests the need for concerned action to improve the slug
gish performance o f business investment by sharpening the profit
incentive. The most direct approach to strengthening this incentive is
by substantial and immediate relief from the heavy tax burden for
those most immediately concerned— corporations and individuals in
the middle and upper income brackets. In fact, in his 1962 Economic
Report, President Kennedy emphasized such incentives in speaking of
his plans for tax reform :
“Later this year, I shall present to Congress a major program of tax
reform. This broad program will reexamine tax rates and the defini
ECONOMIC REPORT OF THE PRESIDENT
645
tion o f the income base. It will be aimed at the simplification o f our
tax structure, the equal treatment of equally situated persons, and the
strengthening o f incentives for individual effort and for productive
investment.”
The statements in the 1963 Economic Report, on the other hand,
place greater stress on inadequate demand, and the proposed structure
o f tax reduction is weighted heavily by the desire to spur consumption
expenditures. A s stated by President Kennedy, “the most important
single thing we can do to stimulate investment in today’s economy is
to raise consumption by major reduction of individual income tax
rates.” Increasing consumption is regarded as the starting point for
acceleration of economic growth. Thus, the actual tax reduction and
reform program, as described in the President’s January message, is
skewed in favor o f the lower income groups; less emphasis is given to
relief for middle and upper income individuals and for corporations
more closely identified with the investment process.
W hile it is recognized that the causes and effects in the consumptioninvestment process scarcely can be separated but in theory, and that the
increases o f both are mutually interdependent, it nevertheless seems
evident that the structure o f the proposed tax reduction fails to strike
a proper balance between those features which can be expected to stim
ulate consumption directly and those which w ill operate primarily
to stimulate growth-producing investment. The crucial investment
mechanism in the economic process will fail to function properly,
regardless o f consumption stimulants, unless profit horizons are ex
tended directly by reducing the taxes applicable to the fruits of in
vestment.
The Council’s report recognizes that the shortfall in expansion last
year was in “the failure o f expenditures other than consumption to
rise as far as had been expected.” W hile consumption, wages, and
Government expenditures have all moved briskly ahead during the
past decade corporate profits and business investment have behaved
sluggishly. Surely this record lends support to the view that tax
reduction should concentrate more directly on incentive, the profit
motive, and investment.
M O N E T A R Y P O L IC Y A N D DEBT M A N A G E M E N T
Under the caption “Monetary Policy and the Balance of Payments”
the Council’s annual report points out th a t:
“W hile a balance must be continuously struck between credit and
interest rate policies in support o f domestic economic expansion and
policies to protect or improve the balance of payments, any conflict
is more a shortrun than a longrun one. In the long run, the U .S .
balance o f payments probably has much to gain from a fu lly oper
ating, rapidly gaining domestic economy.”
Unfortunately, Federal Reserve authorities have found themselves
in this “ shortrun” position for several years, and there seems to be
little likelihood that our balance-of-payments difficulties w ill soon
evaporate.
S till, the Council seems to stress the domestic side of the problem :
“W hat matters most at this time is that financial policy should be
designed to facilitate rather than retard the expansionary process
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ECONOMIC REPORT OF THE PRESIDENT
which the tax program is designed to launch * * *. W hen unused
productive resources are available, it is not inflationary to permit a
parallel expansion in the supplies of money and liquid assets and in
the availability of bank credit.”
The Council goes on to mention the concern sometimes expressed
that too much monetary stimulus “may be an embarrassment” at a
future time when the public’s excess liquidity could be used to “ add
fuel to inflationary flames.” In the Council’s judgment, however,
such a danger is lessened, since “the same mechanisms which supply
the economy with liquidity can be reversed— and very quickly— to
restrict liquidity and credit.”
I t is to be noted, however, that our experience suggests that prompt
withdrawals o f liquidity from the economy have been difficult to
accomplish successfully. A s a practical matter, we are most likely
to avoid overt inflationary pressures in periods o f economic prosperity
if the liquidity added to the economy during the preceding period of
slackness is not excessive.
Despite the constraints that balance-of-payments discipline has
placed on the monetary authorities, particularly with respect to the
level o f short-term interest rates, there has been no lack of credit
availability in this country. In 1962, the growth in the public’s
liquid assets, and o f bank assets, was unusually large. And measured
against gross national product, total liquid assets have been sustained
at a relatively high level.
In view o f our international payments problems, any additional
monetary ease would carry grave risks. Nor is there any indication
that additional monetary ease would prove helpful to the domestic
economy. Recent remarks o f the Chairman o f the Board o f Gov
ernors o f the Federal Reserve are to the poin t: “ M y present feeling
is that the domestic liquidity o f our banks and our economy in general
is now so high that still further monetary stimulus would do little if
any good— and might do actual harm.” This observation was rein
forced in January by the president o f the Federal Reserve Bank of
New York, who expressed his view that “if money had been easier
it would not have had any appreciable effect on business activity and
might have encouraged undesirable speculative excesses in some
directions.”
W e do not subscribe to the view that our balance-of-payments d if
ficulties stem primarily from excessively easy monetary policies, and
we do not look upon monetary restraint as containing the permanent
solution to our payments difficulties. Nevertheless, as our inter
national liquidity declines and as the prospects for fundamental
improvement in our international accounts remain uncertain, we are
forced to the conclusion that greater emphasis may have to be placed
on monetary policy as a defensive weapon in the protection o f the
dollar. The necessity for this approach can be reduced or eliminated
only by the vigorous implementation o f fundamental corrective actions
on other fronts.
W ith respect to debt management, the association’s resolution which
sets forth our views concerning the relationship between tax reduction
and the management of the public debt contains the follow ing relevant
ECONOMIC REPORT OF THE PRESIDENT
647
“ * * * the implementation of a program of tax reduction must be
accompanied by a willingness to employ maximum flexibility in the
use of debt management and monetary policy, including a willingness
to rely on market forces for the determination o f long-term rates of
interest * *
Under the circumstances of what might well be a peacetime high in
the Federal budget deficit, and given the risks discussed earlier of
inflation and/or further deterioration in our international financial
position, maximum flexibility in debt management is more urgent than
ever before.
The Council report notes that “the ‘proper’ way o f financing a deficit
is that which contributes to the goals of increased output, growth,
price stability, and payments balance.” W hile one cannot take excep
tion with the Council’s conclusion, it is pertinent to note that it offers
little evidence o f the recognition that in debt management, as well as in
monetary policy, serious difficulties can arise in attempting to serve all
of our economic objectives simultaneously. W ithin the context o f
our present economic problems, it would be reassuring to have the
administration’s unequivocal pledge that, if necessary, maximum ef
forts will be made to finance the deficit by sales o f obligations to
genuine savers, and that it is prepared to pay whatever rates o f inter
est are required to secure such a noninflationary placement of the debt.
Similar commitments to flexibility o f this kind have been voiced by
Treasury officials. In addition, monetary authorities have cited the
dangers o f efforts to maintain interest rates at artificially low levels.
The failure o f the President’s report— and o f the Council’s report—
to echo this sentiment is a source o f concern. Since the underlying
emphasis in each report is on the importance of securing a faster rate
o f growth, with secondary stress on the need for balance-of-payments
improvement and virtually no admission of the possibilities for a
renascence o f inflationary pressures, there is ample reason for suspect
ing that the administration might resolve the conflicting objectives
o f debt management policies in a manner which could be injurious to
our economic health.
Moreover, the failure o f the administration to recommend the re
moval of the 414-percent interest-rate ceiling on Government bonds
underscores the overall impression that the administration may lack
the dedication to flexibility in debt management and monetary policy
which the noninflationary financing of an unusually large deficit
requires.
Although the Attorney General has ruled that 41/4-percent bonds can
be marketed at a discount, thereby permitting a de facto breach o f the
4 % -percent ceiling, there is no assurance that his view would be sus
tained by the courts and, in any event, discount selling is a cumbersome
and inefficient way of marketing long-term securities. In the judg
ment of most market observers, the Attorney General’s opinion does
not provide the final answer to the problem o f the interest-rate ceil
ing, and ultimately the problem must be confronted.
The possibility o f higher interest rates should not be dismissed at
the outset in thinking ahead about the complex tasks facing debt
management and monetary policy. A s has been amply demonstrated
in fast-growing European nations, rising rates of interest are not an
enemy of domestic growth. This is not to say, by any means, that we
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ECONOMIC REPORT OF THE PRESIDENT
should tighten monetary policy prematurely. But the emphasis must
be on a flexibility free o f rigid views or commitments as we feel our
way along.
THE
B A L A N C E -O F -P A Y M E N T S D E F I C IT
The most urgent economic problem now confronting the United
States is, in our judgment, the persistent deficit in our international
accounts. Upon the resolution o f this problem rests not only the eco
nomic security o f the United States, but also the strength o f our free
world allies and our role as political and financial leader o f the free
world alliance. In view of the gravity of our international financial
probems, and of our recent failure to show significant balance-ofpayments improvement, the absence o f additional positive measures
for strengthening our payments position is a source of the utmost
concern.
Despite general observations that the payments deficit must be elimi
nated, the reports of the President and the Council of Economic
Advisers contain few specific proposals which could be expected to
result in permanent or fundamental relief to our payments position.
Quite to the contrary, the overall economic policies prescribed for the
coming fiscal year reasonably can be expected to produce an adverse
impact, at least in the short run, on our balance of payments. In view
o f the reduced volume of our international liquidity, these shortrun
complications are far too serious to be glossed over with the observa
tion that, in the long run, economic growth and balance-of-payments
equilibrium are compatible goals of public policy. In fact, whether
or not they are compatible depends not upon the rate of growth, but
rather upon the characteristics and structure of growth and upon the
trend of domestic cost and prices.
In the absence of measures which would reduce the dollar drain
associated with oversea spending by the Federal Government, it can
be argued that our balance-of-payments weakness creates the necessity
for relatively austere domestic economic policies. In striking con
trast, the President’s recommendations call for the introduction of
strong economic stimulants. These recommendations ignore the in
creasing short-term aspects of our balance-of-payments problem, and
they are based on the assumption that the United States has con
siderable time and maneuverability with which to redress the im
balance in its international accounts. W e do not share these judgments.
W e are particularly concerned over the administration’s emphasis
that balance-of-payments equilibrium must be achieved by increasing
the surplus on private accounts, rather than by reducing the deficit
on Government accounts. The notion that the private sector of the
economy should be held responsible for generating whatever pay
ments surplus is required to support a predetermined level of oversea
Government spending is indeed a novel one. To our knowledge it is
without precedent. Assertions to the effect that a cutback in oversea
spending would necessitate the sacrificing of national objectives should
not be allowed to obscure the fact that a failure to cut back such
spending can, by undermining our international financial position and
the world payments system, lead to incomparably more serious sacri
fices of our objectives.
ECONOMIC REPORT OF THE PRESIDENT
649
W e do not believe that the United States has either the time or the
maneuverability which would allow it to seek answers to its balanceof-payments problems in essentially long-range approaches. However
attractive such long-range remedies may appear to be, we can afford
short-range stimulus only if it is accompanied by measures which
produce immediate relief from the large dollar drain resulting from
heavy Government spending abroad. A program of domestic eco
nomic expansion would be a realistic prospect if accompanied by such
direct and forthright action. The failure of the President to propose
such action must stand, in our judgment, as a strong inducement for
reducing the risks in the expansionist economic policies which the
administration has outlined.
W A G E A N D P R IC E G U ID E P O S T S
The Council’s Annual Eeport restates the guideposts for “ noninflationary wage and price behavior” presented for the first time
in the 1962 report. The Council apparently feels that these guides,
stated in terms of an industry’s rate o f productivity increase, con
tinue to be useful as reference points in collective bargaining.
Opinions vary as to the influence the guidelines had in negotiations
last year. Some observers contend that their impact was limited to
large-scale negotiations in the concentrated industries, while they had
little or no impact in the smaller or more fragmented industries.
Others contend that they wrere a source of difficulty for Federal
conciliators, who found that unions usually seize upon the general
guide— the 3-percent trend rate of overall productivity increase— as
a minimum. Most everyone agrees that the guideposts were o f little
significance last year because of the generally stable economic
environment.
In earlier sections of this commentary, we have expressed our fears
that inflation may once again appear on the scene, particularly unless
the program to spur economic growth is implemented in a cautious
and well balanced manner. Even if prudent policies are followed,
the possibility of rising prices becomes greater as we approach a fu ll
employment situation. For these reasons, it is all the more important
to analyze and discuss the wage-price guides now, rather than later
when they may be a crucial reference point in wage negotiations.
W hile the economic theory on which these guideposts are based may
be sound, the practical implications o f their use as instruments of
public policy is another matter. The difficulty arises from the fact
that productivity gains both in the economy as a whole and in par
ticular industries are exceedingly difficult to measure with precision.
Such measurement is so difficult that opposing bargaining groups—
labor and industry— could easily come up with equally convincing
statistics to back their own special interests. This being the case, a
referee would have to come into the picture to settle the argument.
This referee probably would be the President, or his representative,
backstopped by statistics compiled by Govenment agencies, and, in
all probability, interpreted by the Council of Economic Advisers
itself.
W ith the effective mobilization o f public opinion, as illustrated by
the famous steel price incident, industry and labor could be forced, in
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ECONOMIC REPORT OF THE PRESIDENT
effect, to act as suggested by the Council’s interpretation of the
“guideposts.” In our judgment, this method of determining wages
and prices would be even more objectionable than wage and price
controls openly administered by a Government board— an arrange
ment acceptable only in wartime. Somewhere along the line, the re
sults could well be de facto determination of wages and prices by
the administration without a mandate from the Congress or the
people. Such a transfer o f decisionmaking from the market to the
Government simply could not be tolerated in a free enterprise society.
The answer to the problems of achieving noninflationary pricing
and wage decisions does not lie in allowing for public participation
in these decisions, either directly through legislation or indirectly
through moral suasion, but rather in assuring a market balance be
tween labor and industry. I f the economic environment is stable,
such a balance should result— on the average, but not invariably— in
noninflationary wage and price decisions in response to market forces.
There is no question that our Government is alert to the dangers to
a free market economy which are inherent in monopolistic price fixing
by business. Vigorous enforcement of antitrust laws should continue
to combat undue business concentration. A t the same time, undue
labor power must be curbed. There are indications that this vital
“half” o f the problem is beginning to be faced, but its solution must
be pursued with a great deal more vigor and candor if the principle
of equality o f bargaining power between labor and industry is to be
achieved.
There are various approaches to such equality, including the possi
bility o f applying the antitrust laws to labor as well as to business.
However, the important and indeed crucial need is for a recognition
and endorsement of this basic principle by the administration; once
that occurs, solutions to the problem can no doubt be found.
SUM M ARY AND
C O N C L U S IO N S
The foregoing comments on the economic reports o f the President
and the Council can be summarized by the following six points:
(1) There is no room for further increases in Government spending
at this time. The combination o f a large tax cut and additional Gov
ernment spending would violate standards o f fiscal prudence by bloat
ing the Federal deficit to inflationary proportions. The planned
spending increase should be eliminated.
(2) I f Federal spending is held constant, the magnitude and tim ing
of the President’s proposed tax reduction would appear to be appro
priate ; but it should be aimed more directly at stimulating investment.
Accordingly, corporations and middle- and upper-income groups
should be relieved o f their heavy tax burdens to a greater extent than
is now planned.
(3) In view o f the aggressive fiscal policy planned, the Treasury
must be prepared to finance increases in the public debt in a noninfla
tionary way, out o f savings, to the extent necessary. T o assure that
this is possible, the archaic 4*4 percent interest-rate ceiling on Gov
ernment bonds should be removed.
ECONOMIC REPORT OF THE PRESIDENT
651
(4) A ny further monetary ease would be largely ineffective in its
stimulus, could lead to a deterioration in the quality of credit, and is
unwarranted in view of the contemplated fiscal policy measures. Pos
sibilities for the necessity of higher interest rates as a temporary meas
ure for dealing with our balance-of-payments problem should not be
dismissed.
(5) Faster economic growth per se may or may not help to solve our
balance-of-payments problem. A t any rate, the primary burden of a
permanent solution should not be shifted from the Government sector,
which accounts for the larger part of the deficit, to the private sector.
The most obvious approach is to reduce the disproportionate burden
now borne by the United States in the common defense of the free
world.
(6) The Council’s wage and price guideposts are elusive in practice
and reliance on them could lead to de facto determination o f wages and
prices by the administration. Achievement o f noninfiationary wage
and price decisions lies in the principle o f equal bargaining power
between business and labor, which must include methods to curb
concentrations of labor power as well as of business power.
93762— 63— pt. 2------ 2
A M E R IC A N F E D E R A T IO N O F L A B O R A N D C O N G R E S S OF
IN D U S T R IA L O R G A N IZ A T IO N S
W a s h i n g t o n , D .C ., February 15, 1963.
Hon. P a u l H . D o u g l a s ,
Chairman, Joint Economic Committee,
New Senate Office Building,
'Washington, Z>.£7.
D e a r S e n a t o r D o u g l a s : Enclosed is a copy of M r. W alter P.
Reuther’s testimony, on behalf of the A F L -C iO , on the Economic
Report of the President.
Sincerely,
N
at
G
o l d f in g e r ,
Director, Department of Research.
S t a t e m e n t o n t h e P r e s id e n t ’s E c o n o m ic R e p o r t , P r e se n t e d o n
B e h a l f o f t h e A m e r ic a n F e d e r a t io n o f L a b o r a n d C o n g r e s s o f
I n d u s t r ia l O r g a n iz a t io n s b y W a l t e r P . R e u t h e r , V ic e P r e s i
d e n t , A F L - C I O ; C h a i r m a n o f t h e A F L - C I O E c o n o m ic P o l ic y
C o m m i t t e e , a n d P r e s i d e n t , U A W , F e b r u a r y 15,1963
America cannot afford and must not tolerate continuance o f the
tragic waste and human hardship resulting from high unemployment
and gross underutilization o f our capacity to produce.
Persistent economic slack deprives us of tens of billions o f dollars
of wealth each year. The wealth we lose is the wealth we need to
solve our most serious domestic problems and to begin to grapple
effectively with the problem of peace in the world.
Poverty continues to pervade our society despite the myth of a f
fluence. Our public services and facilities— in education, health,
urban renewal, mass transportation, resource conservation and de
velopment, and many other fields as well— are shamefully short of our
needs. Slums disgrace our cities and breed crime and juvenile delin
quency. The morale of the unemployed deteriorates, their skills rust,
and their fam ily life is subjected to severe stresses and strains. The
development o f our young people in dignity, self-reliance and a
sense of purpose and participation is stunted by denying them en
trance into the world o f productive work. The problems o f our mi
nority groups continue to burden the conscience o f the Nation as lack
of employment opportunities tends to perpetuate and aggravate their
second-class status.
These and the many other problems that flow from economic stag
nation damage the image of democracy in the eyes of the emerging
peoples of the world. Economic stagnation itself deprives us o f the
means to aid their rapid development in freedom which is the essential
condition to the preservation of democracy and peace in the world.
653
654
ECONOMIC REPORT OF THE PRESIDENT
These problems brook no compromise or delay. W e cannot be con
tent with halfway measures trimmed to appease ideologically blinded
mentalities incapable of grasping the economic realities o f the second
half of the 20th century. W e must not procrastinate and permit our
problems to m ultiply even as our ability to solve them increases.
W e have the means to solve these problems now. W e need only to
muster the w ill, the vision, and the daring to apply the bold programs
that can lift us quickly out of the mire of economic stagnation and onto
the high, road toward fu ll employment and vigorous economic growth.
In the interim before those programs can take hold, other quick-acting
measures must be applied to create jobs for as many o f the unemployed
as possible and to assure adequate sustenance for the fam ilies of those
for whom jobs cannot be provided immediately.
GROW TH
M UST TAKE
P R I O R IT Y
Above all, we must not be deterred from applying known solutions
to our m ajor problem— the problem of economic growth— for fear that
by so doing we w ill create or aggravate some other problem. W e must
view our problems in perspective. W e must recognize that fu ll em
ployment and growth have highest priority, and that adequate eco
nomic growth itself will in large measure facilitate the solution of the
problems advanced as reasons for not vigorously pursuing growth
policies.
F ull employment and growth will help to avoid the danger o f infla
tion by reducing unit production costs and by stimulating investment
in cost-reducing equipment and in expanded capacity to meet future
periods o f peak demand. Growth will help to meet the balance-ofpayments problem by reducing the costs ox producing American ex
ports and by keeping U .S . capital at home and attracting capital from
abroad as our expanding domestic markets provide profitable invest
ment opportunities. Growth will help to avoid budget deficits as an
expanding economy expands the tax base and generates revenues that
grow even more rapidly. Moreover, growth achieved through in
creases in public and private spending will create both the investment
funds and the investment incentives that some now seek to create artifi
cially through policies that would retard rather than foster growth.
F U L L E M P L O Y M E N T P O L IC IE S
Unemployment, idle capacity and retarded growth are clearly due
to lack o f adequate demand. The demand gap can be filled by a sound
combination o f tax, public spending, and private wage and price pol
icies. For this purpose we propose:
1. A n immediate tax cut, concentrated in the lowest income
brackets, o f the magnitude o f $10 billion per year.
2. A major increase in public spending to meet our social deficits
in such fields as education, health, housing, urban renewal, mass
transportation, and resource conservation and development, to
gether with a substantial increase in international economic aid.
3. A dynamic and positive wage policy designed to increase pri
vate consumer demand by increasing wages and salaries. The
Government must embark on a policy of active encouragement to
ECONOMIC REPORT OF THE PRESIDENT
655
collective bargaining for higher wages to make up for the lag of
real wages behind productivity and to correct the growing im
balance between consumer demand and capacity to produce con
sumer goods.
4.
Machinery to invoke the force of public opinion as a restrain
ing influence on administered price abuses. This is essential to
give maximum effect to demand-increasing measures, to avoid
their being perverted to inflationary ends, and to prevent in
creased public and private spending from leading to bigger ac
cumulations of idle funds in corporate treasuries where they do
the economy no good.
Tax cuts are proposed primarily as the swiftest means to give the
economy the stimulus it so urgently needs. Increases in public spend
ing take longer to put into effect and the process of raising wages to
the extent needed will be even slower. A s the combination of all three
demand-increasing measures lifts us toward fu ll employment, there
will be time to get our priorities in order and to develop tax, public
spending, and wage and price policies aimed at achieving the most
effective use o f the fruits o f sustained and healthy economic growth
to improve the quality of life at home and to aid the development of
the emerging nations.
Restoration o f full employment must be the first priority. A s we
move toward that goal we can consider the longer range problems of
reform o f the tax structure; the extent to which we plough growthcreated increases in Government revenues into tax reduction and in
creased public spending, respectively; and the wage policies consistent
with the priorities we establish as between increases in private and
public consumption within the framework of a stable price structure.
P O L IC IE S T O
HELP
TH E
UNEM PLOYED
Meanwhile, we must take steps immediately to relieve the plight
of the unemployed.
W e have no moral right as a nation to ask millions o f families to con
tinue to bear the hardships o f unemployment while we take our time
in applying programs to provide them with work. The unemployed
need our help now. They cannot wait until we set our national eco
nomic house in order. They must not be required to wait. W e must
move immediately to open up as many additional jobs as possible, as
quickly as possible and to provide more adequate incomes for those
for whom we cannot quickly provide jobs. For these purposes we
propose:
1. Increasing statutory overtime premium pay from time and
one-half to double time to deter unnecessary overtime work and
to encourage employment o f additional workers to perform the
work now done on an overtime basis.
2. Legislation providing rational reduction o f working hours,
such as flexible adjustment of the statutory workweek to create
jobs for the unemployed by reducing the workweek without loss
in weekly pay whenever demand is inadequate to provide fu ll
employment on a 40-hour-week basis.
3. Federal minimum standards for benefit amounts, duration,
and eligibility under the State unemployment compensation laws
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ECONOMIC REPORT OF THE PRESIDENT
with immediate temporary supplementation o f benefits and dura
tion up to those standards until the States have time to conform
to them.
These measure, and the reasons for them, will be discussed more
fully in the following pages.
GREATER
DEMAND
IS
B A S IC
NEED
There is general agreement that a substantial increase in demand
is now the primary need o f the economy. The Council’s report is
fu ll o f references to that need. For example :
“ The slowdown of 1962 was rooted in the prolonged sag of demand
below capacity that has continued since 1957. The forces that have
kept us below fu ll employment in the past several years persist. Our
challenge now is to overcome them.”
*
*
*
*
*
*
*
“ In the past 5 years, the economy has been consistently out of bal
ance— with too little demand to match our supply capabilities.”
*
*
*
*
*
*
*
“ * * * inadequate demand remains the clear and present danger to
an improved economic performance.”
THE
ENORM OUS
TASK
BEFORE
US
W e need to give increased demand the first priority in the program
to restore the economy to health, and the increase must be massive.
The enormous magnitude o f the task before us has been partially in
dicated by the Council of Economic Advisers. Its report shows, for
example, that the extent o f unemployment is far greater than the
official figures ordinarily published would suggest. W hen the loss of
man-hours due to part-time unemployment is added, it shows a total
work loss for 1962 equal to 6.7 percent of the labor force, the equi
valent of full-tim e unemployment for 4.8 million people. In addi
tion, there are 800,000 men and women outside the labor force, and
so not counted with the unemployed, who would enter the labor force
if there were job opportunities. B y any meaningful criterion, they
also are unemployed. This gives a true unemployment figure o f 5.6
m illion, or 7.7 percent of the labor force.
The report points out that, to employ the normal annual increase in
the labor force, to employ the added workers who would be drawn
into the labor market by strong employment opportunities, and to
reduce unemployment to the still unsatisfactory level of 4 percent by
the end of 1963, would require the creation of 3.1 m illion additional
jobs— exceeding the rate of increase for any postwar year except the
boom year of 1955.
But this is not the whole task. The report points out that many
workers w ill be displaced from their present jobs by mechanization,
technological advance or other sources o f productivity advance, and
new jobs must be found for them. The Council does not estimate the
number o f such jobs, but even with the slowing down o f the pace of
recovery in 1962, output per man-hour last year increased by 3.5 per
cent over 1961. A 3.5 percent rate of productivity advance in 1963
ECONOMIC REPORT OF THE PRESIDENT
657
would require the creation of 2.5 million new jobs just to hold our
own. A 4 percent rate of advance would require 2.9 million. There
fore it is safe to estimate that we would have to create 5 % to 6 million
new jobs altogether in order to reduce unemployment to a still exces
sive 4 percent by the end o f this year.
In terms of production, the report states:
“For the unemployment rate to be reduced from 5.6 percent to 4
percent within 1 year would require an 8 to 9 percent increase in
G N P at constant prices.”
This estimate is almost certainly too low, because the Council under
states the rate of productivity advance which can be expected in a
growing economy. But even this conservative estimate means that
G N P would have to increase by $44 to $50 billion at 1962 prices in
1963, rather than the $19 to $29 billion forecast by the Council. This
is a greater increase than the economy has achieved in any postwar
year, although the rate o f increase was slightly over 8 percent in 1950
and again in 1951 under the combined impact of the Korean war and
recovery from the 1949 recession.
In short, to achieve even the inadequate goal o f reducing unem
ployment to 4 percent this year, a major stimulus would have to be
applied to the economy very quickly.
C O N SU M E R D E M A N D IS T H E K E Y
The element o f demand which can be most quickly and effectively
increased is that o f consumer demand. This is also the most important
element in total demand, and the area of demand which has been most
seriously deficient. James W . Knowles, executive director of the staff
of this committee, has emphasized the latter fact. In a remarkably
comprehensive and penetrating analysis of the state o f the economy
which he gave to the American Statistical Association last Septem
ber, M r. Knowles said:
“ On the other hand, final demand for construction and goods com
bined is low by about 7 to 8 percent of potential output. O f this
shortfall in demand, about 5 to 6 percentage points, or 70 to 75 per
cent of the shortfall, can be attributed directly to the loiv demand of
consumers for goods and residential nonfarm construction. Inter
estingly enough, during the postwar period changes in the ratio of
consumption plus nonfarm housing construction to potential G N P
have tended to lead changes in the ratio o f plant and equipment spend
ing to potential G N P .” [Emphasis added.]
The last sentence has a particular bearing on the question of provi
sion of incentives to investment, with its clear implication that the
most effective incentive is an increase in consumption, which in turn
requires an increase in consumer buying power.
The deficiency of demand is partly a reflection of the continued
existence o f widespread poverty in our allegedly affluent society.
In 1960, according to the Commerce Department’s most recent de
tailed study of income distribution, 10.5 million multiperson fam i
lies— 23 percent o f all families— had incomes under $4,000 before
taxes, the before-tax incomes of almost 3.3 million o f these families
were less than $2,000. A n additional 4 million unattached persons
who lived alone— 37 percent of the total— had incomes o f $2,000 or
658
ECONOMIC REPORT OF THE PRESIDENT
less. The vast majority of these families and unattached individuals—
approximately 20 percent o f America’s men, women and children—
were living in poverty by the current standards o f our society.
In addition, the income share of the 60 percent of all fam ilies at
the bottom of the income ladder— whose needs are the greatest— ac
tually declined between 1955 and 1960. Their share o f all fam ily in
come has probably continued to decline in the past 2 years.
The income share o f the wealthiest 20 percent o f American fam i
lies rose between 1955 and 1960— particularly after account is taken
of capital gains and expense-account living.
A t the same time, the share of accumulated wealth o f the richest
fam ilies has been climbing. The share of all personally held wealth
o f the Nation’s richest 1 percent of families rose steadily from 24
percent in 1953 to 26 percent in 1956 to 28 percent in 1961, according
to Robert J. Lampman’s study of wealth holding in the United
States.
The number o f millionaires rose from 27,000 in 1953 to 100,000 in
1961, according to Lampman. And the very rich— with holdings o f
$5 million or more— increased 500 percent, from 2,000 to about 10,000.
Clearly we need programs that will add to the buying power o f those
who have the least and need the most— not those who already have
the most, and who in recent years have been increasing their share
at the expense of those at the bottom o f the income ladder.
A D M IN IS T R A T IO N ’ S PROGRAM S A RE IN S U F F IC IE N T
The programs proposed by the administration to strengthen our
economy are insufficient to provide the quick and effective attack on
unemployment which is needed, and they are not intended to do so.
W alter H eller, the Chairman o f the Council o f Economic Advisers,
has im plicitly admitted that, even if the administration’s program is
adopted, unemployment will still increase in the first part o f this year.
H e has explicitly forecast that, even with some subsequent improve
ment, it would be no lower at the end o f 1963 than at the end o f 1962.
In a press conference called on January 21 last, D r. H eller estimated
that the unemployment rate toward the end o f 1963 would be between
5.5 and 5.8 percent, and that this would represent some improvement
over the earlier part o f the year. Since the rate for December 1962
(the latest month reported at that time) was 5.6 percent, this clearly
implies that, pending passage of the tax program, he expects unem
ployment to rise; and, even after it goes into effect, the impact of the
first stage will be no more than sufficient to bring unemployment down
to the level o f last December, and perhaps not even that far. This is
obviously not good enough.
M r. Knowles has also warned o f a possible increase in unemploy
ment this year. In the analysis previously referred to, he said: “It
would not be surprising at all if rising G N P was accompanied by
rising unemployment in coming months.”
That is to say, the rise in G N P may not be enough to absorb the
new entrants into the labor market and offset increases in productivity.
A s to the goal of a 4-percent unemployment rate, which D r. H eller
described as an “ interim target,” he admitted in his press conference
that the administration’s program will not achieve it before 1965.
ECONOMIC REPORT OF THE PRESIDENT
659
He said: “ I should think that given action on the schedule that the
President has laid before the Congress and will detail in his tax mes
sage, that fu ll employment could be reached sometime in 1965.”
This country cannot afford to accept 4 percent unemployment as
“ fu ll employment,” and it certainly cannot afford to wait until 1965
to reach even that inadequate objective. The cost in human hardship,
in economic waste, in lost national economic strength, and in interna
tional prestige is much too great.
The economic cost alone is staggering. Even by the Council’s con
servative estimate we have lost $170 billion o f potential production
since 1958. They estimate the loss at $30 to $40 billion in 1962, and
as much or more this year even if the administration’s program is
adopted. W e believe all these figures are substantially understated.
In any case, we must end this intolerable condition o f continued slack
and waste o f human and material resources.
I. A P R O G R A M T O R E S T O R E F U L L E M P L O Y M E N T
W e need a quick and effective attack on unemployment today. W e
need to restore momentum to the economy— not by 1964 or 1965, but in
1963. W e need more buyers in the stores, more new orders coming
into the plants. Then, the silent machines can be put again in motion,
and unemployed men and women called back to work. Then, busi
nessmen will be given the one sure and lasting incentive for expanding
investment— a buoyant market for all that they can produce. And
while we are moving, however rapidly, toward that goal, we need to
show more compassionate concern for those who are still the victims
o f involuntary unemployment.
TAX
R E D U C T IO N
The speediest route to fu ll employment is via tax reduction. W ithin
weeks after tax reduction legislation is enacted it can be made effec
tive in reduced withholding from wages and salaries. The resulting
increases in take-home pay will immediately be reflected in increased
purchases in stores and service establishments across the Nation. The
effects o f these purchases w ill radiate back through wholesalers and
distributors to factories, mines, and farms in the form o f increased
orders, increased employment and resulting further increases in pur
chasing power.
Thus, tax reduction in adequate magnitude, properly distributed to
assure that the bulk of tax savings will be quickly spent, could reduce
unemployment sharply below present levels this year— in 1963.
The administration’s program admittedly will not do that. Its
immediate effect is too small. A nd a large part o f the tax savings
provided by that program will go to increase liquid reserves of cor
porations and high-income families rather than to increase spending.
The administration's tax program
The A F L -C IO will spell out its detailed position on the adminis
tration’s tax program to the appropriate committees o f the Congress
at a later date. W e are concerned here with its immediate impact on
the economy.
660
ECONOMIC REPORT OF THE PRESIDENT
That impact, in the year 1963, is far short of the magnitude of the
Nation’s need. A s proposed by the administration, the first stage tax
reduction would not take effect until the second half o f this year. On
an annual rate basis, it would yield tax savings of $6 billion, which
means $3 billion in calendar year 1963. Meanwhile, however, auto
matic increases in social security taxes effective at the beginning of
this year will be draining $2 billion more out of the economy than last
year. Thus the net gain from the administration’s program in 1963
is only $1 billion.
Taking account o f the social security tax increases, the net gain on
an annual rate basis during the second half of this year is still only
$4 billion, as M r. H eller conceded at the press conference previously
mentioned. This is hardly enough, even with multiplier effects taken
into account, to make any substantial inroads on the fu ll employment
gap which, by the overly conservative measurement o f the Council of
Economic Advisers, amounts to $30 to $40 billion.
The combined effects of social security tax increases and proposed
income tax reductions in 1963 on typial low-income families illustrate
clearly the gross inadequacies of the administration’s tax program as
compared to the economy’s needs.
A fam ily o f four with income of $3,000 now pays $60 in income taxes
if it takes the standard deduction. Under the administration’s tax
program, its income tax would be reduced to $55.50 in 1963, a saving of
$4.50 for the entire year. But assuming the income comes from wages,
this fam ily’s social security tax will be increased by $15 for the year.
Thus it would have, not an increase in purchasing power, but an actual
decrease o f $10.50.
A similar fam ily with $5,000 income would fare only slightly better.
Its net savings, after offsetting $24 in social security tax increases
against proposed income tax decreases of $31, would amount to $7
for the entire year. This is equivalent to 13% cents per week.
Net 1963 tax savings will be considerably more substantial at higher
income levels, both because social security tax increases affect only
the first $4,800 o f income and because the proposed income tax rate re
ductions are much greater, and applied to much larger income bases,
in the upper as compared to the lower income brackets. But upperbracket income tax reductions are largely wasted insofar as their eco
nomic impact is concerned. Families in the top brackets are unlikely
to increase their consumer spending at all as a result o f tax reduction,
and will not be able to find profitable investment outlets for their extra
take-home incomes so long as so much slack remains in the economy.
To the extent that the proposed 1963 reduction in the basic cor
porate tax rate yields savings to smaller corporations in need o f funds
to expand, it may bring some small economic benefit. But much of
these tax savings, also, will go into liquid reserves held by the corpora
tions or their stockholders for lack of investment opportunities.
Even the inadequate and badly distributed tax reductions proposed
for 1963 are in jeopardy because they are combined with complicated
proposals for tax reform. The likely result is that the entire program
w ill be bogged down in the legislative mill with neither reductions
nor reforms enacted in time to have any effect this year.
ECONOMIC REPORT OF THE PRESIDENT
661
Massive tax reduction needed now
I f we are to get America back to work quickly, we need a much more
massive tax reduction, concentrated to the maximum extent in the low
est income brackets, where high-velocity purchasing power w ill result.
To facilitate speedy enactment, such a tax cut should be kept wholly
separated from controversial tax reform proposals.
The A F L -C IO , from time to time, has advanced a number o f pro
posals along those lines. I would like to express my personal prefer
ence for a proposal that seems to me to best meet the specifications
shaped by our current needs.
This proposal would avoid entirely the thorny controversies sur
rounding tax reform by leaving the present tax structure intact. The
taxpayer would continue to compute his tax liability exactly as he
does today. But that liability would be reduced by a credit o f $1.50
per week per person. This credit could be made immediately effective
for withholding purposes so that a taxpayer with a fam ily o f four
persons, for example, would gain an immediate increase of $6 per week
in his take-home pay if he now pays that much or more in income tax.
Thus, every fam ily o f four persons now paying $312 or less per year
in income taxes would have the fu ll amount of its present tax liability
added to its purchasing power. Every such fam ily paying more than
$312 per year would increase its purchasing power— its ability to meet
current needs or to assume larger installment payment liabilities—
by $6 per week, $26 per month, $312 per year. A fam ily of four with
$5,000 income would have its 1963 taxes reduced from the present $420
to $108 as contrasted with $389 under the administration proposal.
Total tax savings on this basis would amount to $10 billion per year.
Practically all of it would be translated immediately into high-velocity
purchasing power dollars because most o f it would go to low- and
middle-income families. The fam ily with a $5,000 income would gain
just as much in tax savings as a fam ily o f the same size with $500,000
in income.
Allow ing for the multiplier effect as these tax savings are spent, cir
culated, and respent throughout the economy, the gain in total demand
and in G N P would be on the order of $25 billion annually. A sub
stantial beginning would be made toward closing the full-employment
gap between capacity and demand.
A bill providing for such a tax credit could be very simply written
and, if there is the will in Congress to carry out the mandate of the
Employment A ct, very quickly enacted.
A s such tax credit legislation helped to carry us up toward full
employment, Congress could afford to act with greater deliberation in
considering sound, long-range reform o f the tax structure. Enact
ment of the tax credit would not in any way prejudge that issue. I f
it were adopted as a temporary measure with an expiration date fixed
in advance, the approach of that date would create pressure to avoid
procrastination on passage o f permanent tax reduction and reform.
But immediate enactment of the tax credit would relieve the Nation
o f the price that would have to be paid in human suffering and eco
nomic loss if tax reduction were to wait while Congress debated tax
reform.
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ECONOMIC REPORT OF THE PRESIDENT
P U B L I C S P E N D IN G
The insufficiencies o f the administration’s tax program would not
have been so serious if they had been offset by an expanded program
o f spending to meet our public needs. But, unfortunately, the con
servatives, to whom a balanced budget is the be-all and the end-all
o f Government activity, have exerted a negative and restrictive influ
ence on the proposed budget. Apart from national defense and space
programs, and the interest on the national debt, we are told in the
budget message that “ total expenditures for all other programs in the
administrative budget, taken together, have been held to this year’s
level, and even reduced somewhat.”
The combined effect o f Government tax and spending programs on
the economy is shown in the national income accounts budget, which
is designed to measure the impact of these programs on the Nation’s
income and output. The small extent o f that impact is indicated by
the fact that spending for fiscal 1964 is planned to rise only $5.8
billion over fiscal 1963, and that is partly offset by an expected
increase in receipts, in spite of the tax cuts, o f $2.6 billion. Thus,
the net impact o f the proposed budget on the economy is a total
stimulus in fiscal 1964 only $3.3 billion greater than in the current
fiscal year (totals do not match exactly due to rounding).
This means that we are not only denying the economy a stimulus
that would promote employment and growth, but we are turning a
blind eye to our mounting backlog of long-neglected public needs.
Needs to be met
In such essential areas as education, health, housing, urban renewal,
and the conservation and development of natural resources, a short
sighted policy o f continuing neglect will exact a heavy and tragic
price in the future.
Education.— Our schools are overcrowded, many o f them obsolete,
and many teachers are underpaid. Y et we are still failing to build
as many new classrooms as we need, and we see a constant draining
away of teachers from the profession to better paying jobs.
Housing.— In housing, the Census Bureau reports that over 16
million homes are either dilapidated, substandard, or overcrowded.
To reduce this backlog and provide homes for a growing population,
we need to build an average o f 2.4 million new homes a year. Last
year, in spite o f some improvement, we started only i.5 m illion.
Fewer than 30,000 of these were in public housing— fewer than in
any year since 1956.
Urban renewal.— Providing good homes in decent neighborhoods
involves more than building houses. It requires a comprehensive
program o f urban redevelopment and renewal. The Rockefeller
Brothers Fund Report, “ The Challenge to Am erica: Its Economic
and Social Aspects,” states:
“The blight o f slums is spreading through our metropolitan areas,
and particularly in the centers o f our cities, at a rate far in excess of
our programs to remedy it. The problem is intensified by the fact
that many racial minorities are confined to blighted areas. * * *
“The investment required to make our cities attractive and healthy
places in which to live has been estimated as running into the hundreds
ECONOMIC REPORT OF THE PRESIDENT
663
of billions of dollars. Ten million substandard urban units would
cost an average of perhaps $10,000 each to replace or rehabilitate.
But one must add to this other necessary investments. Urban trans
portation is approaching the chaotic. Basic community facilities
such as schools and parks are inadequate. The decline or leveling
off o f the tax base, which accompanies urban blight, creates acute
financial problems for city officials; at the same time costs for health
services, welfare, and fire and police protection are rising. * * *
“ The Federal Government has assumed important leadership; but
far more needs to be done.”
A n effective, overall program of urban redevelopment must include
plans to expand and improve educational and health facilities, water
and sewage systems, roads and streets, recreational facilities, neigh
borhood renewal efforts, air pollution programs, and mass transpor
tation systems, as well as slum clearance and housing.
W hile much o f the cost o f such a program would come from private
investment and part from State and local authorities, to be effective
it requires bold Federal leadership and financial assistance.
Health.— T o meet our health needs, the U .S . Public Health Service
estimates that we must make up a shortage of well over a million
hospital and nursing home beds. In addition, the Service estimates,
we need:
Nearly 2,000 public health centers to provide such services as
immunization, maternal and child health clinics, nursing services,
and communicable disease controls.
Alm ost 2,500 diagnostic or treatment centers for nonhospital
ized patients to provide such services as orthopedic, cancer,
mental hygiene, tubercular, and dental care.
Over 200 comprehensive rehabilitation centers to assist handi
capped people.
W e need also a program o f Federal financial assistance to profes
sional schools and students if we are to graduate the increasing num
ber of doctors, dentists, and nurses we w ill need to care for a growing
population.
W e need President Kennedy’s program for an all-out attack on
mental illness, which, directly and indirectly, is now costing us billions
o f dollars a year.
Highways.— In the field of transportation, we are already making
good progress in the construction of major interstate highways, but
there is a need for either Federal grants or long-term, low-interest
loans for the construction and repair of local roads.
Airports.— The 1961 national airport plan o f the Federal Aviation
Agency shows 1,361 projects planned for the improvement o f airport
facilities through June 1965, but the program cannot be completed in
that time without Federal assistance to the extent o f over $500 million.
Resowoe conservation and development.— Programs to conserve our
natural resources are an investment in America that w ill pay solid
dividends in cheaper power, better water supplies, protection of
valuable farm and forest lands, and provision o f needed recreational
facilities. Y et we have been shamefully neglecting them. W e should
proceed with multipurpose power projects that will also prevent the
tragic waste o f floods and provide irrigation for farmlands. Close to
h alf the 16,000 community water supply systems lack sewage disposal
664
ECONOMIC REPORT OF THE PRESIDENT
or purification facilities to prevent water pollution. Our forests are
also neglected. In the past 9 years we have reforested only a little
larger area than was reseeded in 1 year during the 1930’s. In one
State alone, Montana, the U .S . Forest Service has estimated that full
forest development would create over 100,000 additional jobs, 31,000
in the forests, and another 72,000 jobs in service industries.
These are but some of the many public needs which can be met only
by a national effort, with Federal Government leadership and finan
cial assistance. To meet them w ill cost money— more than we have
been spending in the past. But that money is an investment in the
future of our country, an investment that w ill pay off in greater
earning power and higher living standards for us and our children,
just as surely as any private investment in plants or machinery.
Spent now and in the years immediately ahead, it will also provide
part of the increase in demand needed to get our economy rolling
forward at the pace it should.
Increased public spending long overdue
Increased spending to meet, our public needs is long overdue, for
in fact we have been starving this sector of our economy. Excluding
the costs o f Government attributable to past wars, space activities,
and the need for national defense, real Federal expenditures per
capita have been declining sharply since W orld W a r I I . Am ong the
exclusions is space, and interest on the public debt, nearly all o f which
was incurred in paying the costs of two world wars.
The remaining Federal expenditures, expressed in constant dollars
of 1962 buying power, have decreased from $227 per capita in fiscal
1947 to only $150 per capita in fiscal 1963.
In this same period, the real value of our national production has
been rising faster than our population. In consequence, while such
Federal expenditures absorbed 8.9 percent of gross national product
in 1947, they w ill take only 4.9 percent of G N P (as estimated by the
Council) in 1963. In short, the share of our total national wealth
devoted to meeting our peacetime public needs has been almost cut
in half. W e can well afford to do more. W e must do more.
The same situation emerges from an examination o f our Federal
public debt, through which Government deficits are financed. The
debt grew tremendously between 1941 and 1946 to pay the costs of
W orld W a r I I . In conditions of rapid economic growth, it declined
from 1946 to 1949. Then, under the impact of, first the Korean war,
and, later, the budget deficits resulting from a slack economy, the
debt in dollar terms again increased— but not nearly as fast as even
the slow growth of a lagging economy. A t mid-1949, the Federal
debt held by the public represented 84.4 percent of 1 year’s total out
put o f the economy. B y 1962, it represented only 44.9 percent o f 1
year’s output. In other words, it would have taken the fu ll value of
all the goods and services produced in the country for a period of 308
days in 1949 to have paid off the national debt. Today, it would require
only 164 days’ production.
Thus, in comparison with the total size o f our economy, the share
of our wealth devoted to public spending has been sharply reduced
and our national debt has become steadily less burdensome. Y et we
continue to deny ourselves essential services that can only be provided
ECONOMIC REPORT OF THE PRESIDENT
665
through public spending, and to deny the economy the needed in
crease in demand that would flow from that spending.
A P O S IT IV E W A G E P O L I C Y
It is time for economic policymakers in the United States to rethink
wage policy in relation to the requirements of sustained fu ll employ
ment and healthy economic growth. It is time to make the shift from
the negative wage policy that is in large part responsible for the per
sistent economic slack from which we suffer to a dynamic and positive
wage policy designed to achieve and maintain balance between con
sumer demand and expanding capacity to produce consumer goods
and services.
There is now general recognition that inadequate demand, par
ticularly consumer demand, is the source of our economic difficulties.
A major part of the deficiency is in consumer demand. But increases
in by far the largest single source of consumer demand, wages and
salaries, are either not considered or are too often rejected out of hand
as means to take up the slack. Paradoxically, in a country ideologically
committed to a preference for private over public action, encourage
ment of sound private action to increase demand through a positive
wage policy is rejected in favor of Government action in the fiscal
and monetary spheres.
Even when Government fails to meet its responsibilities for full
employment through tax reduction and public spending, unemploy
ment and resultant lost wealth are accepted as preferable to a positive
wage policy that could make a major contribution to filling the gap
between demand and capacity.
The reasons for this attitude are not difficult to understand. Econ
omists and policymakers are paralyzed by fear that a positive wage
policy would lead to inflation and worsening o f the balance-ofpayments problem. But this fear rests im plicitly upon a completely
false assumption— the assumption that the Nation is powerless in
the face of inflationary administered price abuses.
A positive wage policy admittedly must be coupled with effective
machinery to minimize such abuses. W e shall outline below a proposal
for such machinery.
W e must either abandon the goal of fu ll employment and reconcile
ourselves to stagnation and high unemployment with all their intol
erable domestic and international consequences or we must move to
increase demand through a positive wage policy coupled with the
creation of machinery to curb inflation.
W e do not urge that wage policy be substituted for fiscal and mone
tary policy; that it be required to carry the entire burden o f support
ing fu ll employment. Tax reduction can act more quickly to increase
demand when quick action is necessary. And, as we have indicated,
increased public spending is urgently needed to improve the quality
o f American life as well as to move us forward to fu ll employment.
W e do urge that a positive wage policy be included, along with
fiscal and monetary policy, as part o f the Nation’s arsenal o f weapons
in the struggle against economic stagnation and for fu ll employment.
Otherwise we carry on that struggle with one arm tied behind our
backs.
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ECONOMIC REPORT OF THE PRESIDENT
Wages and productivity
A dynamic and positive wage policy is thoroughly consistent with
the now famous wage and price “guideposts” set forth in the 1962
Report o f the Council o f Economic Advisers.
The labor movement has long recognized the basic principle of the
“g u id e p o s ts th a t, in the long run, improvements in real wages de
pend upon increases in productivity. That is one reason the labor
movement has been consistently alined with those forces that have
been urging policies that would promote stable fu ll employment and
vigorous economic grow th; the atmosphere in Which productivity ad
vances most rapidly. The labor movement has come increasingly to
recognize also that its wage and fringe benefit gains must come out of
the fruits o f our advancing technology and not out o f the pockets o f
consumers through increases in the price level.
But popularized press treatment of the “guideposts” has tended to
emphasize longrun truisms at the expense of shortrun imperatives.
W hile real wages cannot significantly outstrip productivity in the
long run, full employment w ill not be achieved, growth will be re
tarded, and the rate of productivity advance itself w ill be depressed
if consumer demand (o f which wages and salaries form by far the
largest part) together with public demand are inadequate to absorb
the potential output of our productive resources. The immediate and
urgent necessity is for a wage policy designed to correct deficiencies
in total demand. For at least the short-run future, real wages and
salaries must increase faster than productivity until a workable fu ll
employment balance has been achieved between demand and capacity.
The Council’s “ guideposts” explicitly recognize that wages shouid
not be confined to marching in lockstep with productivity at all times
and in all circumstances. I t noted th at: “ * * * there is nothing
immutable in fact or in justice aJbout the distribution o f the total prod
uct between labor and nonlabor incomes.”
The Council recognized further that: “It is desirable that labor
and management should bargain explicitly about the distribution of
the income o f particular firms or industries. I t is, however, undesir
able that they should bargain im plicitly about the general price level.”
Lending further emphasis to this point, the Council’s report said:
“F inally, it must be reiterated that collective bargaining within an
industry over the division of the proceeds between labor and nonlabor
income is not necessarily disruptive o f overall price stability. The
relative shares can change within the bounds of noninfiationary price
behavior. But when a disagreement between management and labor
is resolved by passing the bill to the rest o f the economy, the bill is
paid in depreciated currency to the ultimate advantage o f no one.”
The proposal to couple a positive wage policy with measures to curb
administered price inflation is designed specifically to avoid “ passing
the bill to the rest o f the economy”— to assure that wage increases w ill
increase demand rather than be used as an excuse for inflationary
price increases.
Unleash collective bargaining noio
I f ever there was a time when wage increases were needed to in
crease demand, and when no inflationary consequences need ensue, that
time is now. Demand in general— and consumer demand in particu
ECONOMIC REPORT OF THE PRESIDENT
667
lar— is inadequate to support full employment. The proposed tax
program will not supply the necessary increase. Slack in the econ
omy assures that wage increases would create no inflationary pressure
from the demand side. Indefensibly low breakeven points that per
mitted major corporations to earn substantial and, in some cases,
record profits in 1962 while operating far below capacity provide sub
stantial latitude to raise wages without creating any cost necessity to
increase prices. A nd, far from outstripping productivity, real wages
have been lagging behind productivity since 1956.
Wages lagging behind productivity
In manufacturing, real straight time average hourly earnings of
production workers increased by only 10 percent between 1956 and
1962— an average of 1.6 percent a year. Despite the depressing effects
of stagnation aggravated by two recessions, output per man-hour in
the private economy increased by 17.8 percent during the same period—
an average of 2.8 percent per year.
During the past 2 years, 1961 and 1962, the lag of real manfacturing
wages behind productivity was even greater. Average real straighttime hourly earnings increased by only 2.7 percent while productivity
advanced by 6 percent— more than twice as fast.
W hile the earnings figures do not include fringe benefit increases, it
is inconceivable that such increases could be sufficient to close the gap
between real earnings and productivity. For recent years, we have
it on the authority of D r. H eller (at his January 21 press conference),
that the proportions of fringe benefits to wages nave not changed
greatly “in the last 2 or 3 years.” This means that the relationship
between productivity advances and wage and fringe gains combined
cannot be much different from the relationship between productivity
and wages alone.
Data on real hourly compensation o f employees for the private
economy as a whole, which include fringe benefits, also show a lag
behind productivity since 1956, although not as great as for manu
facturing production workers. From 1960 to 1962, while productivity
increased 6 percent, real hourly compensation increased only 4.8
percent.
It is significant that the lag was greater in the stronghold of col
lective bargaining— among manufacturing production workers— than
in the private economy as a whole.
This is in part a result of the negative wage policy— the creation
of a climate o f public opinion adverse to wrage increases and to union
ism as such— under the Eisenhower administration. It is a result
also of oversimplified misinterpretation o f the Council’s “guideposts”
by the public generally and frequently by third parties— mediators or
arbitrators— taking an active part in the framing of collective bar
gaining settlements.
The lag of real wages behind productivity in recent years in itself is
sufficient to call for the unleashing of collective bargaining— for a
shift from a policy of discouragement o f wage increases to one of ac
tive encouragement. The need for active encouragement is empha
sized by the fact that consumer demand, which depends so heavily
upon wages and salaries, is far short of fu ll employment requirements.
The experience o f the 1920’s supplies a stem warning of the conse
93762—63—pt. 2------3
668
ECONOMIC REPORT OF THE PRESIDENT
quences that would flow from continuance of the present negative
national wage policy. Fortune magazine, in an article in its February
1955 issue, entitled “W hat Caused the Great Depression,” laid major
stress in its diagnosis upon the lag of real wages behind productivity.
It pointed out that this led to a distortion of the income distribution
structure in favor o f upper income groups. Fortune was sharply
critical of the trade union movement for permitting that to happen
by not vigorously carrying out its responsibility to raise wages. In
teresting enough, Fortune also put part of the blame on administered
price abuses.
Describing developments during the 1920’s, Fortune noted:
“ * * * A rising share of national income in the late 1920’s went to
upper income groups. Interest, profits, rent, (i.e., property income)
rose 14 percent between 1926 and 1929, while wages and salaries rose
only 7 percent, and proprietors’ income— that of farmers, profession
als, and unincorporated business— rose only 1 percent.”
The economic history of recent years ominously parallels the course
of events described by Fortune. From 1953 to 1962, property income
(dividends, interest, corporate cash flow excluding dividends, and
rental income of persons) increased by 81.1 percent, while wages and
salaries increased by only 49.3 percent, and proprietors’ income rose
only 22.4 percent. In these figures we have evidence of a growing
imbalance in the economy that underlines the urgency o f moving
quickly from a negative to a positive national wage policy.
Congress can help
Congress can make a significant contribution to creation of a climate
of public opinion favorable to a positive wage policy by liberalizing
present labor legislation. Although the language of the W agner A ct
calling for encouragement to collective bargaining is still retained in
present legislation, that legislation in practice represents a shift from
encouragement to, at best, grudging tolerance. The organization of
workers, particularly in some o f Am erica’s lowest wage industries, is
severely hampered by present law.
A positive wage policy also requires legislation to broaden the cover
age and raise the minimum wages provided under the Fair Labor
Standards A ct as well as legislation and adequate appropriations to
keep W alsh-H ealey A ct minimum wage determinations abreast of cur
rent movements of prevailing minimum wages (including fringe bene
fits) in industries producing under Government contract.
Other action to increase consumer demand
W age policy should be accompanied by other measures to make up
for present deficiencies in consumer demand. These should include,
for example, medical care for the aged under social security; in
creased social security benefits; the broadening of the public assistance
program and increased public assistance payments; higher payments
to workers being retrained under the Area Redevelopment, Manpower
Training, and Trade Expansion A c ts; legislation to end the exploita
tion o f migrant farmworkers; and special measures to raise the in
comes of low-income farm families.
ECONOMIC REPORT OF THE PRESIDENT
669
C U R B A D M IN IS T E R E D P R IC E I N F L A T I O N
A s noted, fear of inflation is the main reason for rejection of a posi
tive wage policy. For the last 10 years, at least, that fear has been
directed primarily to the wrong source. W hat inflation there has
been was not produced by excessive wages, much less by excess con
sumer demand. It was the result of misuse of administered price
power by the large corporations which hold that power. A s D r.
Gardiner Means told the Senate Antitrust and Monopoly Subcommit
tee concerning the inflation of the 1953-58 period:
“The administered price groups * * * account for 85 percent of
the gross increase in the wholesale price index. I f these groups had
not gone up in price, the wholesale price index would have risen less
than 1 percent and, so far as the wholesale price index is concerned,
there would have been no inflation. Anyone who thinks the recent
inflation is not an administrative inflation had better study the
record.”
In order effectively to apply a positive wage policy, we must see to
it that corporations with power to administer prices are restrained
from misusing that power to force up prices once again, as would
happen if they were to translate every wage increase into an auto
matic price increase, regardless of the size of their profits or the level
o f their break-even points.
The A F L -C IO has long recognized the danger o f abuse o f priceadministering power. A t its most recent convention, in 1961, it urged
that the spotlight of public attention be directed toward the pricing
policies of dominant corporations in key industries.
A s a means to this end, my own union, the U A W , has urged that we
invoke the force o f an informed public opinion against unjustifiable
price increases as a substitute for the forces of price competition which
is, for all practical purposes, absent from the industries in question.
This can be done if the public has fu ll access to all the pertinent facts
relating to a proposed price increase. To get those facts and make
them public, we propose the appointment o f an administered price
board. Whenever any corporation controlling, say, 25 percent or
more of the sales of an important product wished to raise its price, it
would first have to notify the board, and appear at a public hearing
if the board thought necessary.
The board would hold public hearings, would have power to dig out
all the pertinent facts, and would issue a report. The corporation
would then be at liberty to raise prices, up to the lim it o f its proposal,
if it saw fit. But if the facts were such as to persuade any reasonable
man that a price increase was not justifiable, and if the public had
access to those facts, we do not think any increase would take place.
In most such cases, the mere existence of a hearings procedure would
probably mean that the price increase would never be proposed.
There are probably no more than 100 corporations that would be
subject to this procedure, but their leverage on the economy is ex
tremely great. A s D r. Means has shown, their price decisions rep
resent the only real threat of inflation in periods o f slack demand.
They are the price leaders in their industries; the prices they establish
are accepted by the price followers. And it has been shown that the
prices set in oligopolistic industries such as those they dominate are
670
ECONOMIC REPORT OF THE PRESIDENT
fixed at the same level as they would be under conditions of outright
monopoly.
Unions would also be subject to the hearing procedure, an important
factor in relationship to the proposed positive wage policy. Whenever
a corporation subject to the hearing procedure claimed that acceptance
of any union demand would require it to raise prices, both the corpora
tion and the union would be summoned to a hearing and required to
produce the facts relevant to their claims. A s the Council pointed out
in its report last year, there are situations where a wage increase is
justified even though it may require a price increase; the Council
referred explicitly to situations where wage rates are exceptionally
low, for example, and im plicitly to industries in which the rate of
productivity advance is less than the overall rate for the economy.
W here that was the fact, a price hearing would reveal it. On the
other hand, if a union’s demand would require an unjustifiable price
increase, the facts would show it. Or if the company’s position were
such that it could well afford to meet the union’s demand without a
price increase, the facts would show that. The parties would resume
negotiations with the knowledge that an informed public was prepared
to pass judgment on the outcome.
Break-even paints are noio too lo w
There is another price problem that requires attention— the fact that
some prices have already been raised to levels where they will inhibit
recovery.
The Council has pointed out that in periods of economic slack “the
weakness o f markets leads to attempts to raise prices to cover high
average overhead costs.” These attempts have been so successful that
major companies in the auto and steel industries, for example, have
break-even points well below 50 percent— they are able to make profits
while operating at substantially less than half of capacity, and while
larger numbers o f their workers are unemployed.
A s the economy grows under the impetus of a recovery program,
profits will grow even faster due to more efficient use of manpower
and equipment, and the spreading of overhead costs over a larger
volume of production. I f corporations are unable to find enough
attractive investment outlets for those higher profits, they will be
draining off essential buying power from the economy.
M r. Knowles has warned that this danger exists at present price
levels. In the economic analysis previously referred to, he said there
has been u* * * a strong move on the part of management to lower
break-even points to protect rates o f return on capital and to provide
insurance against cyclical swings in demand. The result, o f course,
is that in some industries, at least, if the economy should rise to rela
tively high levels o f employment; that is, to potential output levels,
the total cash flow to capital, including both profits after taxes and
depreciation funds, would reach higher levels than would be needed
to finance the level o f investment that business could maintain year
after year without developing excess capacity.”
In short, even though an increase in demand would provide incentives
for new investment, it would also, at present price levels, cause profits
to rise so fast that business would still be unable to find profitable in
vestment opportunities for all its funds. Failure to invest savings
ECONOMIC REPORT OF THE PRESIDENT
671
fu lly would mean withdrawal o f uninvested savings from the spending
stream, with a resulting return to conditions of inadequate buying
power and a slowing down of the economy once again.
A positive wage policy would help to counter this tendency. It
would restore excessive profits to the mainstream o f purchasing power
and so provide a continuing impetus to the recovery process and
support for fu ll employment.
II. M E E T I N G T H E I M M E D I A T E N E E D S O F T H E U N E M P L O Y E D
Some time lag is inevitable before any full-employment program
can make its effects fully felt. Even if the program outlined above
were to be speedily set in motion, there would be need to apply interim
measures to relieve the plight o f the unemployed. That need is even
more urgent if unemployment is to remain at present levels toward
the end o f this year, and as high as 4 percent as late as 1965. The
less adequate the program to bring about rapid restoration of fu ll
employment, the stronger is the moral obligation to aj>ply other
measures to aid those condemned to prolongation o f their joblessness
by the inadequacies o f the program.
D O U B L E T I M E F O R O V E R T IM E
Even if no steps were taken to increase demand, unemployment
could be sharply reduced by simply increasing the penalty costs of
overtime work.
Mandatory overtime premium pay was originally provided by law
at a time o f high unemployment for the specific purpose of deterring
overtime work and thereby providing additional employment oppor
tunities for the jobless. W hen first adopted, the statutory time-andone-half premium for overtime adequately served that purpose. But
it is no longer adequate today.
Through both legislation and collective bargaining, various fringe
benefit costs have been added to the wage package which vary with
the numbers o f people employed rather than with the numbers of
man-hours worked, and to which the overtime premium does not
apply. Training, paperwork, and other costs related to the hiring
and employment o f additional workers act as a further offset to
overtime premium pay. A s a result, the cost o f overtime premium
pay is often less than the cost o f adding more workers to the payroll.
There has been a strong tendency, therefore, for industry to work
its present workers overtime rather than to increase the number of
workers employed. This had tended to aggravate the unemploy
ment problem. The existence of intolerably high levels of unem
ployment side by side with extensive overtime urgently requires
corrective action.
The overtime deterrent must be drastically increased if it is to
serve its intended purpose. W e propose that it be increased from
50 percent o f the regular wage rate to 100 percent— from time-anda-half pay for overtime to double time.
The urgency and magnitude o f the problem is apparent from B L S
data on overtime hours worked by manufacturing production work
ers— the only group for whom statistics on average overtime hours
worked are available.
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ECONOMIC REPORT OF THE PRESIDENT
During 1962, the average manufacturing production worker worked
2.8 overtime hours per week. This was equivalent to 6.9 percent of
the total hours worked by all such workers. It was equivalent to
the hours that would have been worked by 870,000 workers, each
employed 40 hours per week.
But this is only a small part o f the story. The above figures do
not include overtime hours worked by white-collar and technical
employees in manufacturing. Nor do they include large amounts of
overtime worked in nonmanufacturing. Other B L S data show that,
during the first 11 months of 1962, the average proportion o f workers
employed 41 hours per week or more amounted to 26.4 in construction,
27.7 in transportation and in public utilities, 39 in trade, 24.2 in
finance, and 27.8 in the service industries.
There are no data available which would permit precise calculation
o f the number o f additional jobs that would be created by substituting
double-time premium pay for the present time and one-half. Aside
from the absence o f data on overtime worked in nonmanufacturing,
it must be recognized that some overtime work is unavoidable and
would continue to be worked even with higher overtime penalty
pay. This is true, for example, of overtime work arising out of
machine breakdowns or relatively short periods o f overtime to fill
rash orders.
I t is most unlikely, however, that such unavoidable overtime ac
counts for more than a very small proportion o f all overtime hours
worked. Twenty-five percent o f the total would seem to be a most
liberal allowance for the proportion of all overtime that is, in fact,
unavoidable and that would continue to be worked in the face of a
double-time premium.
Assum ing that as much as 25 percent o f the overtime hours worked
by manufacturing production workers during 1962 would have been
worked even at double time, the hiring or recall o f additional workers
to perform the remaining 75 percent o f the work involved would
nevertheless have created the equivalent o f 650,000 40-hour-per-week
jobs.
That much additional employment would have been sufficient to
reduce the 1962 average unemployment rate by 0.9 percentage points—
from 5.6 percent to 4.7 percent.
Elimination o f avoidable overtime for nonproduction workers in
manufacturing and for the large numbers o f workers doing overtime
work in industries other than manufacturing would have brought
the 1962 unemployment rate down even further.
Some of the many workers not now looking for work because they
are hopeless about finding jobs would probably be attracted back into
the labor market by the greater number o f employment opportunities
that reduction o f overtime would create. In addition, reduction of
overtime would not necessarily yield an employment increase fully
commensurate with the overtime hours eliminated, but, even taking
those factors into account, a double-time penalty would nevertheless
have significant impact in reducing the unemployment rate.
Surely with such great possibilities o f sharply reducing unemploy
ment available from the simple expedient o f increasing overtime
premium pay, we cannot in good conscience neglect this device to pro
vide jobs for many hundreds o f thousands of unemployed workers
while we wait for fu ll employment policies to take effect.
ECONOMIC REPORT OF THE PRESIDENT
F L E X IB L E
ADJU STM EN T
OF
THE
673
W ORKW EEK
The intolerable burden of unemployment has led the labor move
ment to demand some form o f reduction in weekly hours worked with
no reduction in weekly pay. This would not only create more jobs
as employers hired additional workers to make up for the cut in hours,
but it would add to purchasing power by increasing the total sum of
weekly wages.
A t its most recent convention, the A F L -C IO approved two possible
methods o f reducing the statutory standard workweek. One would
be an amendment to the Fair Labor Standards A ct simply reducing
the standard workweek to 35 hours. The other would be an amend
ment to the act providing for automatic adjustment of the workweek
based upon the level o f unemployment— the flexible workweek. W e
believe that the length of the workweek is not a matter which should
be determined arbitrarily by labor, management, or government. I t
should be consistent with the needs o f the Nation and the national
objective o f a fu ll employment economy. The proposal for flexible
adjustment o f the workweek is designed to be consistent with both.
It would bridge the gap between those who rightly insist that every
possible tool be used to attack the hardships and suffering caused by
high unemployment, and those who equally rightly maintain that
when we have restored fu ll employment we will require 40 hours of
work a week to help reduce our backlog o f unmet needs. W ith a
flexible workweek, when demand is high and unemployment cor
respondingly low, the standard workweek would be 40 hours. But
when demand is low and unemployment high, as now, the length of
the workweek would be cut accordingly to make more jobs.
W hen unemployment is less than a specified percentage of the labor
force, the statutory standard workweek would remain at 40 hours. I f
unemployment should rise above that percentage for a specified period
of time, the workweek would be automatically reduced on a graduated
basis related to the level o f unemployment. A s increased demand pro
vides the basis for increasing production, the workweek would be
automatically lengthened toward 40 hours again.
Maintenance o f weekly pay when hours are reduced is essential.
Otherwise we would merely be spreading the hardships of unemploy
ment a little thinner, and adding nothing to total purchasing power.
However, to avoid hardships on the individual employer, the pro
posal envisions that compensation for the hours cut out of the regular
weekly schedule be financed through a national workweek adjustment
fund to be accumulated out o f revenues o f a small payroll tax on all
employers.
This method of financing would help to stabilize the economy. In
good times, when demand is high, money would be drawn into the
fund. In bad times, when demand needs to be increased, withdrawals
from the fund would add to buying power.
A ny employer who reduced hours of work in accordance with a tem
porary reduction in the statutory standard workweek would be reim
bursed from the fund for the added cost of continuing to pay his
workers for 40 hours a week. A n employer who did not reduce hours
worked would not be reimbursed, and would be required to pay the
fu ll normal rate plus the overtime premium for all hours worked in
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ECONOMIC REPORT OF THE PRESIDENT
excess o f the reduced standard. This would provide a strong stimulus
to reduce scheduled hours and to hire additional workers.
I f the proposal for a flexible workweek were made immediately
effective, as it should be to give immediate relief to current intolerable
levels o f unemployment, it would have to be financed in the beginning
through an advance to the national workweek adjustment fund from
the Treasury, to be repaid later out of the revenues from the proposed
payroll tax.
The cost of this proposal, spread as it would be over the entire
business cycle, would be small. Even that small cost would probably
be at least substantially offset by savings in unemployment compensa
tion and supplemental unemployment benefit costs to employers, and
savings in welfare costs to the public.
Such a measure would help to stablize the economy. It would help
to reduce the hardships o f unemployment. B y creating more jobs
it would protect workers from the loss of human dignity and selfrespect and the destruction of fam ily morale, which often represent
the most disastrous even though immeasurable costs of unemploy
ment.
U N E M P L O Y M E N T COMPENSATION
W hen we enacted unemployment legislation, we rejected the callous
doctrine that the unemployed were to blame for unemployment. W e
accepted the philosophy that unemployment reflects a failure o f public
policy and that meeting the needs of the unemployed and their fam
ilies is therefore a public responsibility.
The persistent nigh unemployment o f recent years, and forecasts
that present and proposed policies will leave unemployment at intol
erably high levels through 1965 and beyond, make it imperative that
we take steps to meet that public responsibility by improving our
unemployment compensation system.
Besides some residue of fnctional and structural unemployment
w ill always be with us, no matter how effective our fu ll employment
policies. Moreover, although we know the means available to mod
erate and quickly end cyclical fluctuations, we are not likely to avoid
cyclical unemployment entirely in the near future. For the long run
as well as for today, therefore, we must have a sound unemployment
compensation system that adequately meets the needs of the unem
ployed and functions effectively as a first line of defense against
recession.
Our present unemployment compensation system falls far short of
our needs because employer pressure for experience rating savings has
resulted in reduction of the average level of benefits as a proportion
of the average wage loss suffered by the unemployed, has restrained
the extension of duration and has made eligibility requirements in
creasingly restrictive and disqualification penalties increasingly
severe. State legislatures have responded to such pressures out of
fear of competition from other States offering employers lower unem
ployment compensation costs at the expense of the welfare of the
unemployed.
In a nationally integrated economy with a national labor market,
we should have a uniform national system of unemployment compen
sation. U ntil that goal can be achieved, we must strengthen the
ECONOMIC REPORT OF THE PRESIDENT
675
present Federal-State system by the introduction of minimum Federal
standards for benefits, duration and eligibility; by broadening coverage; by improving financing; and by establishing a system of cost
equalization or reinsurance to help States whose economies are subject
to wide fluctuations resulting in abnormally high benefit costs.
President Kennedy last year proposed legislation embodying signifi
cant steps toward most of these ends. H e has indicated that similar
legislation will be proposed this year.
W e urged last year that the President’s proposals be strengthened.
W e hope that the bill to be offered this year will go further than last
year’s.
In this connection, we would direct the attention o f the administra
tion and of Congress to the fact that, through collective bargaining,
employers in such major industries as autos and steel now provide
unemployment compensation benefits (State and private supplemental
benefits combined) equal to roughly 65 percent o f the unemployed
worker’s regular gross weekly pay for a duration of up to 52 weeks.
W e see no reason why Federal standards legislation should provide
less.
Temporary Federal supplementation
Whatever the Federal standards adopted, the States will require
time to amend their laws to conform to them. It also may be neces
sary, as proposed in the administration’s bill last year, to provide for
a phased approach to higher benefit standards to allow the States time
to strengthen their funds in order to be able to meet increased benefit
costs.
Unemployed workers and their families, however, need the protec
tion o f more adequate benefits and duration now. Sim ilarly, the econ
omy has equally urgent need— now— for the added consumer purchas
ing power that more adequate unemployment compensation would
provide.
W e therefore urge that Federal standards legislation includes, pro
vision for immediate Federal supplementation of benefit amounts and
duration provides under the State laws to the levels to be provided
after the final stage of effectuation of the Federal standards. Offsets
against such a tax increase could be provided to employers in States
which put into effect, in advance o f the schedule set forth in the Fed
eral standards bill, the benefit and duration improvements provided
for in that bill. Such offsets would provide an incentive for those
States that are financially able to do so to meet minimum standards
without unnecessary delay.
W hile provision of more adequate unemployment compensation will
not relieve us o f our obligation as a nation to provide jobs for the un
employed, it will at least help to tide them over until we meet that
obligation.
III. O T H E R P R O G R A M S N E E D E D
Implementation of the programs outlined above will go far to re
store and maintain fu ll employment, while helping to meet more
adequately the private and public needs o f all our people. But the
list is by no means complete. In almost every sphere o f governmental
activity and public responsibility we need to be doing more than we
are.
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W e need to make more adequate provision to maintain the health
of the people, especially in providing health care for the aged through
social security.
W e need to step up and expand existing programs to deal with
pockets of poverty and areas of special trouble in the economy, to re
vitalize distressed areas and to provide training or retraining for those
who require it.
W e need special programs to provide work opportunities to unem
ployed young people, where they can learn skills that will help them
find permanent employment.
W e need programs to restore prosperity to farm fam ilies, and to see
that our wealth of food and fiber is more adequately and effectively
distributed to meet human need, both here and in less fortunate
countries.
W e need to make much faster progress in the battle against racial
discrimination— in voting rights, in employment, in education, in
housing, in public facilities, and elsewhere. Through legislation and
education we must strive to put an end to second-class citizenship in
this country once and for all.
W e must take all measures necessary to insure a strong and ade
quate national defense, neither crippled by lack of needed funds nor
impaired by waste or needless duplication of effort.
W e must encourage the development of both basic scientific re
search and technological application of scientific discoveries for civil
ian as well as for defense purposes. W e must also insure, through
creation of a technological clearing house, that those responsible for
public policy have a fuller knowledge of the progress of technological
advance in industry and the probable impact of such advances on
employment and economic activity.
W e must continue efforts to expand our trade with other countries
and to lower the trade barriers among all free countries. A t the same
time, we must make sure that provisions to minimize possible hardship
and to facilitate readjustment for individuals, businesses and com
munities adversely affected by increased imports are adequate. W e
must also work for the establishment of international fair labor
standards to insure that workers in this or other countries are not
made the victims of trade competition based on wages and working
conditions which are inferior in relation to productivity.
W e must stop starving the programs of economic and technical
assistance to underdeveloped countries, and we must strive for in
creased participation on the part of other countries which can afford
to share in the task. W e must use our best efforts to encourage the
social and economic reforms which are necessary in some parts of
the world before our aid can be effectively used. W e must persuade
the uncommitted peoples, both by our example and through our assist
ance in developing their own economies, that peace and prosperity
and freedom can be had together, that in fact they are indivisible.
A ll of the programs which are suggested here have their role to play
in solving the problem of unemployment and restoring the rate of
growth in the economy. Some of them have a special importance
because they can most quickly and powerfully give the economy the
stimulus it needs to achieve our most immediate goal, that of attacking
unemployment. Others will add to the long-term strength of the
ECONOMIC REPORT OF THE PRESIDENT
677
economy. Still others, such as programs in health, education, housing,
and other fields of public spending, are important not only to increase
levels of demand but to help meet human needs which have been too
long neglected.
D E M O C R A T IC N A T I O N A L E C O N O M IC P L A N N I N G
A s the various programs are put into effect and recovery advances, it
will be necessary from time to time to reexamine the programs, change
priorities, and shift the emphasis from one to another. A ll o f this
should be done, not on any hit-and-miss basis, but as part of a demo
cratic national plan for economic growth and fu ll employment.
It is time we conquered our fear of the word “planning” in national
affairs. I t is one of the myths of the past which hobble our response to
economic challenges and warnings. Surely the experience of the past
decade has taught us that an economy as massive, as complex, and yet
as easily thrown off balance as ours cannot be left to drift. Mor is
there any great virtue in efforts to steer it by a series o f last-minute
maneuvers, adopted only when it seems about to crash upon the rocks.
U ntil the last 2 years, those responsible for the economic decisions
of government have not only been adverse to planning, they have
been unable to plan because they have not been equipped with a suffi
ciently clear and comprehensive analysis of what was happening in
the economy. W e congratulate the Council of Economic Advisers
on having made a good start toward remedying that deficiency. W e
differ with many of the specifics of the Council’s analysis. W e believe
it has been far too conservative in its appreciation of the urgency of
the situation we face, and of the potentialities for growth in the
economy if the forces of growth are freed from the restraints which
have so long inhibited them. In consequence, the goals it has set have
been far too low, and the programs it has proposed have been too
limited even to achieve those inadequate goals.
But we believe that in basing its analysis of our situation upon such
concepts as potential output, and the gap between the potential and
the actual, the Council has taken the first step essential to the develop
ment of plans for the achievement of our fu ll potential.
In a free, democratic society, economic planning of course cannot
and must not be done by government agencies alone. It must be a
far broader process, in which industry, labor, farm groups, govern
ment, the universities, and representatives of all sectors o f the economy
function together to work out, year by year, the goals which we will
agree to set for ourselves and the blueprints for action to achieve
those goals.
Democratic planning does not mean more centralized control. On
the contrary, it can and must mean the enlargement of areas of indi
vidual decision and voluntary cooperation. Just as the motorist on
the highway is free to choose and reach his destination only if he can
be reasonably sure that those he meets will obey the traffic rules, so
the individual person or the individual enterprise in a free society can
feel able to plan his own future more securely if he knows that the
economic decisions of his neighbors are being made in accordance with
an orderly purpose— the achievement of optimum growth for the
economy as a whole.
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ECONOMIC REPORT OF THE PRESIDENT
Democratic national economic planning is already in effect in some
of the countries o f W estern Europe whose record o f fu ll production,
fu ll employment, and rapid economic growth puts to shame our rec
ord o f the past 9 years. They include countries as divergent in cul
tural background and political orientation as France and Sweden.
Belgium , with a Conservative government, established a planning
program 3 years ago. The Conservative government o f Britain has
created the National Economic Development Council to plan its econ
omy. Italy recently has established planning machinery. Moreover,
the new action program for the Common Market envisions an overall
plan for the combined economies o f the six member nations.
There is a serious question whether a planless and stagnating U .S .
economy w ill be aMe to hold its own in competition with the economies
o f Europe aided by democratic planning to achieve fu ll and efficient
utilization o f resources and rapid growth.
It is perhaps for this reason that the more farsighted members of
the American business community are beginning to look objectively
at the merits o f planning. For example, in A p ril 1962, a Business
W eek editorial, discussing the European planning experience, made
these comments:
“ Preponderant opinion among European businessmen, economists,
and government officials is that economic planning has in fact had
much to do with the long and remarkably stable European boom.”
*
*
♦
♦
*
♦
♦
“ In Britain and on the Continent the majority o f business leaders
appear to have overcome their traditional horror o f the word ‘plan
ning.’ A s one British manufacturer put it : ‘Since all o f us plan in
our own businesses, I see no reason why we should be afraid o f the
word.’ In the United States, however, ‘planning’ is still a dirty word
for most businessmen (except in their own businesses).”
Business W eek concluded:
“The deep involvejnent o f U .S . business in both trade and invest
ment— and competition— with Western Europe makes it essential for
U .S . businessmen and Government officials to take a serious and un
biased look at new European ways o f coping with the economic prob
lems o f free societies.”
W ith our vast potential here in the United States, we should be
able to reach heights o f economic achievement beyond our capacity to
visualize today if we plan and order our affairs for maximum growth
and utilization o f our productive potential.
But before we can achieve the pace o f advance which is within our
capability, we must deal with the immediate problems which burden
and harass us. W e must undertake a massive frontal assault on the
mountain of unemployment. W e dare not harden our hearts to the
need o f the unemployed, who have been denied man’s basic right to
stand upon his own two feet and work to support him self and his
fam ily. W e dare not close our minds to the staggering economic
waste of idle men and idle machines, a waste which is stunting our
growth, sapping our strength, and depriving us annually o f tens of
billions o f dollars worth o f goods and services that we badly need.
These problems can be solved. W e must have the courage, the
foresight, and the determination to solve them. I am confident that
our system o f freedom is equal to the challenge we face if we will
but commit ourselves and our resources to the task ahead.
C H A M B E R O F C O M M E R C E O F T H E U N IT E D S T A T E S
W a s h i n g t o n , D .C .,
February 1 ^ 1963.
Senator P a u l H . D ougl 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 : In accordance with your letter of January
2 3 ,1 am enclosing a copy of my statement on the economic reports.
A s you requested we have forwarded 20 copies of this statement to
the committee.
Needless to say, we look forward to the committee’s report on
March 1.
Yours sincerely,
E m e r s o n P. S c hm i dt ,
Director, Economic Research Department.
S t a t e m e n t of E m e r s o n P. S c h m i d t , D ir e c t o r of E c o n o m i c R e
s ea r c h of t h e C h a m b e r of C o m m e r c e of t h e U n i t e d States of
A m e r i c a o n t h e E c o n o m i c R e p o r t of t h e P re s ident a n d t h e
A n n u a l R e p o r t of t h e C o u n c i l of E c o n o m i c Advisers for t h e
J o i n t E c o n o m i c C o m m i t t e e , F e b r u a r y 15, 1963
The opportunity to evaluate the President’s Economic Report and
that of the Council of Economic Advisers is welcomed even though the
Chairman of the Joint Economic Committee requested only a written
statement rather than a personal appearance.
A s in previous years, the economic reports (the separate author
ship of which was not indicated from 1954 to 1961) contain much use
fu l data, information, and analysis. The aura o f confidence of last
year’s report is not reflected this year. Considering the all-pervasive
emphasis on the 1963 tax cut, one may assume that the authors o f the
reports believe that if it is not adopted, the economy is likely to fall
into a recession, although they do not quite say this. Even with the
proposed tax cut it is assumed that the relative economic growth this
year will be less than that o f 1962. A nd on February 10, 1963, the
Chairman o f the Council stated that in the absence o f a tax cut the
probability of a recession would be substantially increased.
economic
outlook
The President and his economic advisers foresee a more moderate
economic gain for this year than a year ago. Failure to attain the
G N P and other targets set in January 1962 is acknowledged.
The goals o f 5 percent annual economic growth rates promoted in
1960 by administration spokesmen are now regarded as illusory. Last
year’s quarterly rise in G N P was only about half that o f 1961. ($6
billion versus $12.5 billion ). In setting the goal for 1963, last year’s
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ECONOMIC REPORT OF THE PRESIDENT
growth goal was again lowered, relatively. Since, over time, this
means a lowering of the base, year after year, on which the percentage
growth rates are quoted, it seems that the deceleration o f the expected
growth rate is being accelerated. A s the sights on growth are being
lowered, the sights on deficits are rising. Estimated corporate pretax
profits for this year (1963) are $3.5 billion below the January 1962
estimate o f the Council for last year (1962)— a substantial short fall
and downward revision. The question has been raised whether the
administration is returning to some of the prevalent ideas o f the
1930’s— a neostagnation syndrome. (See, for example, the Morgan
Guaranty Survey, May and August 1961, New Y ork.)
The President based his growth forecast for 1963 on four factors
( p .x n ) :
.
.
“The outlook for continued moderate expansion in 1963 is now
favorable:
“ 1. Business investment, responding in part to the stimulus o f last
year’s depreciation reform and investment tax credit and to the pros
pect o f early tax reduction and reform, is expected to rise at least
modestly for 1963 as a whole.
“2. Home construction should continue at about its 1962 level.
“ 3. Government purchases— Federal, State, and local combined—
are expected to rise at a rate o f $2 billion a quarter.
“4. Consumer purchases should rise in line with gains in business
and Government activity.
“ These prospects, taking into account the proposed tax reduction,
lead to the projection of a gross national product for 1963 o f $578 bil
lion, understood as the midpoint of a $10 billion range.”
Thus the 1963 expansion rests on rather tender reeds. A tax cut
this year will come late if at all, although some benefits should accrue
from the 1962 improved depreciation guidelines and the investment
credit for enterprises which are able to use one or the other or both.
But, evn if home construction should continue at its 1962 level, this
would not be an expansionary factor. W e can, however, be reason
ably certain that the President is on safe ground when he states that
Government spending will rise. But the assumption made here and
throughout the Economic Report that consumer expenditures will rise
because o f the foregoing three factors rests more on hope than on solid
analysis. A rise in the legal minimum wage this year will have ad
verse impact on employment. Social security taxes are rising by $2
billion this year and postal costs, mostly business costs, are expected
to rise by about one-half of a billion dollars. Should a tax cut fail
this year, the economy may well be retarded. I f the tax program
goes through in its proposed form , corporation tax collections will be
greatly accelerated and, to some extent, this will impair the working
capital and interest earnings of corporate enterprises. The suggested
cuts and collection acceleration w ill mean that, in the above sense, the
corporate tax rate will not fa ll below 52 percent until 1966 and will
not reach the proposed figure of 47 percent until 1969. The Presi
dent’s proposed tax reforms and reductions will accentuate divisive
forces in our society and the proposed cuts may achieve less than opti
mum results for reasons which are discussed below.
In an hour-long television appearance in December, the President
acknowledged that he is finding it much more difficult to evolve solu
ECONOMIC REPORT OF THE PRESIDENT
681
tions to domestic and international problems than he had assumed
before he took office. In spite of the bold promises o f 2 or 3 years
ago, we still have a series of unsolved social, economic, fiscal, and
international problem s: agriculture, transportation, war veterans, wel
fare, Government debt management, persistent stubborn unemploy
ment, continued international payments imbalances and defensive
maneuvers to preserve the dollar, the unsatisfactory progress under
the Alliance for Progress, the Cuba debacle, a fractured N A T O ,
France and De Gaulle, the frustrations in the implementation of the
1962 Trade Expansion Act because of the failure o f Britain to enter
E E C , deterioration in relations with Canada, a failure to improve our
image abroad. The administration seems unable or unwilling to come
to grips with the problems raised by labor leaders and strikes. Nor
does this inventory of problems exhaust the issues facing the country
and our Government. But the more courageous recognition of the
gravity of some of these problems is commendable.
Fortunately, a highly decentralized economic system has a strength
of its own so that even when the Government is either weak or for
other reasons is unable or fails to cope with significant and crucial
problems, freedom can be preserved and the damage is not completely
exhausting. I f for no other reason, this is a good reason why every
effort should be made to strengthen the private sector of our society
instead of assuming that every minor defect or deficiency calls for new
laws and piling Government bureau on Government bureau.
I S T H E PR O PO SE D T A X C U T W E L L B A L A N C E D ?
The report’s emphasis on tax cuts is most commendable in the light
of the slow growth and abortive recoveries from recessions. T o the
extent, however, that individuals anticipate benefits from a tax reduc
tion and in the face of the widespread consensus for some fairly prompt
tax reduction, the effects of such a reduction may be somewhat dis
counted by those who think that a reduction is certain or reasonably
certain.
The Economic Report is concerned more predominantly with slow
growth, and tax reductions as the remedy, than with any other issue.
Section after section, regardless of the major topic treated or the
chapter under consideration, reveals a treatment of the slow growthtax cut issue. The phrase or idea of a “ deficiency in demand” per
meates the discussion. The tax cut proposal is heavily weighted in
favor of short-run consumption, indicating that demand deficiency is
viewed primarily as being in final consumer expenditures. This con
clusion seems to be taken for granted more than it is proven or thor
oughly reasoned out in the report.
This may be a wrong diagnosis and prescription. Economists have
noted, for example, that throughout our history when consumer pur
chasing power had reached new peaks, this was, nevertheless, followed
by recession or depression; likewise, after extended periods of unem
ployment and reduced consumer income and consumer spending, re
covery, nevertheless, took place. A nd this sequence took place long
before we had any consciously contrived built-in economic snubbers or
any closely reasoned contracyclical policy, say, prior to W orld W ar I I .
A ll this raises a doubt about the nature o f the assumed deficiency of
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demand as found in the report. The analogy between government
and private deficits may be overdrawn (pp. 7 4 -7 7 ). In fact, the re
port seems to vacillate; it notes that, ‘‘The national wealth grows
rapidly in prosperous years when investment is high and slowly in
years of recession and slack” (p. 8 1 ). Needless to say, perhaps, in
vestment and production without markets are futile. (O n this con
troversy see U .S . News & W orld Report, W ashington, Feb. 18,1963,
p. 40 ff.)
A ll this is relevant in the appraisal of the particular tax cut now
proposed, although the depreciation reform and tax credit of 1962 did
improve the situation, but did not go to the heart o f the problem.
For this reason it may be worth while to state the case for greater
attention to the corporation income tax as a roadblock to more growth,
particularly since the proposed cut is so small and greatly delayed.
The corporation income tax has virtually no defenders except those
who view it through the eyes of the revenue collectors and those who
see it as something o f a recession snubber. Its incidence is capricious
and uncertain. It raises the general price level. It is largely a dis
guised sales tax. It has put the corporate form o f doing business at
a disadvantage in contrast to some other forms o f enterprise such as
cooperatives. It retards new investment. It reduces investment per
worker. It raises the average age of plant and equipment o f our
capital stock. It distorts investment decisions because o f its severe
bite. It consumes an enormous amount o f time of high-priced talent
in problems o f compliance and efforts to avoid its burden. Virtually
all m ajor business decisions are tax oriented.
In the face of these points, it is hard to understand the tardiness
with which any cut was proposed, the smallness o f the cut proposed
in January 1963, and the spread o f the cut over 3 years.
The foregoing is a substantial indictment. Objective scholars gen
erally have nothing good to say for the corporation income tax. Its
survival can be explained chiefly in terms o f its fiscal prowess as a '
revenue raiser, the misconceptions about its incidence and about its
economic impact. Part of our indictment is based upon the assump
tion that the tax on corporation income is largely passed on to the
consumer, and is not substantially absorbed dv the shareholders.
W hat follows is not a plea for shareholders— they do not bear its
burden or at least its major burden; our analysis is designed to en
courage more rapid economic growth. First we must note the d if
ferences between those who think that the corporate tax is absorbed
by the shareholders and those who think it is largely passed on to the
consumer.
For those who think the tax is absorbed (a declining num ber), the
present tax would im ply a reduction of corporate or shareholder in
come by 52 percent. The optimistic analysis in the Economic Report
is based primarily on this type o f assumption (see, for example, pp.
45 and 4 7 ). Clearly this tax take o f 52 percent would involve a strik
ing reduction in the volume o f retained earnings available for financ
ing new investment; it would, likewise, greatly reduce the potential
savings of shareholders. Since under the assumption o f absorption
the prospective return from new corporate investment would be greatly
reduced, this impairs not only the supply o f investment funds, but
also the incentive to use them. I t would slow economic growth.
ECONOMIC REPORT OF THE PRESIDENT
683
Now what of those who believe that this tax does not greatly reduce
corporate or shareholder income? Unlike those who believe that the
corporation income tax is absorbed by the shareholder, those who
believe it is predominantly shifted generally tend to view (but wrong
ly ) this tax as relatively harmless— just a hidden sales tax and a
meritorious gatherer of revenue for Uncle Sam, with no adverse
effect on corporate saving, investment, risk taking, or innovation.
Those who believe the tax is shifted tend to be largely complacent
about the size o f its bite, just so long as their competitors are equally
taxed. But this is a dubious conclusion and a wrong inference.
B y what process is the tax shifted to the consumer? Certainly
not by merely adding the tax to the price. W hen business costs rise,
this does not mean that higher costs can automatically be passed on
to the consumer. Steel and aluminum companies, for example, have
shown this in the past 6 months of declining earnings, red ink, and
dividend cuts. In the case of a regulated public utility, insulated
from competition, new costs may be added on. I f all competitors
could and would simultaneously raise prices by the amount of the
corporate tax, this might stick. But such is not the means by which
the corporate tax is shifted to the consumer in a competitive economy.
Rather, the shift occurs slowly and gradually by the curtailment
o f the supply of goods and services offered. Basically, the tax reduces
supply by imposing a new barrier to added investment, which barrier
would not exist if there were no such tax.
Initially when adopted or raised, the corporate tax may tend to
fall on equity investment, on shareholders. For this reason the divi
dend credit is justified. But since the investor has alternative oppor
tunities and weighs the risks and earnings prospects, a new investment
to be justified must promise to yield a pretax return which will leave a
satisfactory return after the payment of the tax. In short, new
investment must promise not only a satisfactory net return, but also
the tax itself. A cut to 50 percent in 1964 and 47 percent in 1965 will
help, but will still prove to be an undue handicap, particularly in
the face of the proposed accelerated tax collections.
Here is the essence of the situation: Assuming 10 percent to be the
needed incentive, new investment and new ventures tend to be deferred
until they hold out the prospect of earning 10 percent net after tax
(although some investment may be undertaken not to earn a return,
but to protect the return from previous investments). The tax, never
theless, defers new capacity and innovations. Older equipment tends
to be used longer; this induces a rise in the average age and obsolescence
of our plant and equipment. It reduces the investment in tools per
worker.
This protection of existing investment against new competitive in
vestment reduces the output and permits the sale of the output at prices
which are higher than could otherwise be obtained. This is the process
by which the corporation income tax tends to be shifted to the market—
to the consumer.
To induce new investment, moreover, the pretax anticipated yield
must be progressively higher (not just proportionately higher) as the
tax rate rises.1 Under a 50-percent corporate income tax, for example,
1 See: George Terborgh, “Effect of Corporate Income Tax on Investment,” Machinery
and Allied Products Institute, Washington, D.C.
93762—63—pt. 2------1
684
ECONOMIC REPORT OF THE PRESIDENT
if the investor is to keep $1, the company must earn $2— 1 for the U .S .
Treasury and 1 for the investor; if the corporate income tax were 75
percent and the investor wanted to keep $1, the corporation would have
to earn $4 pretax— $3 would go to the U .S . Treasury and the $1 would
go to the investor (the latter to be taxed also, of course, as individual in
come). The tax rate above 52 percent would not only exact heavy
penalties, but substantial reductions in tax from this level would offer
large advantages; a reduction of 12 percentage points from 52 percent,
for example, would yield more than 40 percent of the benefit to be
obtained by abolishing the corporate tax entirely. The above contrast
of a 50-percent and a 75-percent tax rate shows why this is so.
In short, the indictment against the corporation income tax is severe.
Thus it should be clear why economists, generally, can find nothing
good to say for it in terms of the optimum operation o f our economy.
More investment in plant and particularly equipment is important
also in the short run to counter recession or slow growth, because we
have a large quantity of production facilities, including labor, com
mitted exclusively to the production of producers goods. Any slack
in this sector means substantial unemployment of men and machines
and therefore lower and foregone earnings. W e seldom have maxi
mum employment unless we have a high rate of capital formation.
For this additional reason a tax reduction, in terms of short-run
objectives, needs heavy emphasis on sparking and stimulating saving
and investment by business as well as by individuals.
Many argue that we have excess capacity and therefore little need
for new investment. “ Excess capacity,” however, may be illusory.
Some industries and many enterprises have none now. Investment
in many service enterprises is inadequate. Recovery to fu ll employ
ment would quickly expose shortage of capacity in company after
company and even industry after industry, just as labor shortages
would show up quickly. In fact, much of our unused capacity is
high cost and in the wrong place, just as many of the unemployed are
not in the right place nor qualified for existing job openings. W hile
the steel industry was operating at 50 percent o f capacity in 1962, the
United States Steel Corp., for example, announced plans for a new
specialized and completely modern m ill at Gary, Ind., facilities to
cost an estimated $55 million. The same is true o f Bethlehem Steel
Co. Many similar cases could be cited. Shortage of “ capacity” is by
no means the sole determinant of the need for new investment.
Badly needed economic growth, furthermore, does not necessarily
mean exclusively more output o f the existing types o f goods and
services. Progress embodies new frontiers, new goods, and new
services as well as new ideas, technological innovations, and the culti
vation o f unmet latent wants— physical, educational, cultural, etc.
Human wants are insatiable. Talk o f an “ affluent society” has little
meaning to 80 to 90 percent of our households. To them such talk
is a bad joke. Unused existing capacity has small relevance to the
opportunities which may lie ahead if we reduced the tax impediments
on savings, investing and particularly risk taking.
In short, the Joint Economic Committee might well make a thorough
analysis o f whether or not the administration’s tax cut program is
really capable of “getting us moving again.” The reduction by only
5 percentage points in the corporate tax should be critically reviewed.
ECONOMIC REPORT OF THE PRESIDENT
685
Furthermore, all of what has been said under this topic is based on the
general assumption that the corporation income tax is not absorbed
by shareholders in the long run. W hile some of them might benefit
under this proposal, the benefits accruing to others (the economy as
a whole) would be much more substantial. The tax is a penalty on
enterprise, on innovation, on the worker, and on the household. Sub
stantial reductions in the upper personal income brackets will release
funds for investment and stimulate investment incentives.
G O V E R N M E N T S P E N D IN G , D E F IC IT S A N D
GROW TH
The President states that if we tried to bring a balance in the budget
by cutting Government expenditures “ we would not only endanger the
security o f the country but we would so depress demand, production,
and employment that tax revenues would fall and leave the Govern
ment budget still in deficit.”
This conclusion is by no means self-evident. A considerable body
o f evidence throws it in doubt. W hether this is a valid conclusion
depends on time and circumstance. A tax cut as a contracyclical
weapon is preferable to a spending increase and the Economic Eeport
is to be commended for its relatively minor reliance on further spend
ing. (This is not to say, however, that many new programs are not
proposed and existing ones are augmented as shown most clearly in the
Budget of the United States for 1964.)
Spending has been or is proposed to rise $5 to $6 or more billion
per year as shown by figures beginning with 1960 (consolidated cash
statement) :
[Inmillions]
Total
I960......................
1961................ ......
1962......................
$94,301
99,528
107,709
Rise from
previous year
$5,227
8,181
Total
1963......................
1964............. ........
$116,774
122,477
Rise from
previousyear
$9,065
5,703
In spite o f these large increases, plus $4 billion or more at the
State and local level, the economy has been sluggish since 1957. Cash
payments by the U .S . Treasury to the public have jumped from $70.5
billion in 1955 to $122.5 billion (estimate) in fiscal 1964, a rise of
over $50 billion. In the postwar period, prior to 1957 when we had
relatively fu ll employment with short recessions from which fu ll re
covery occurred, the rise in Government expenditures was smaller
absolutely and relatively in most years; this was particularly true
o f the administrative budget. There is little evidence that deficits
or greater Government spending will restore prosperity. W artim e
spending and deficits with massive monetary injections and Govern
ment purchases o f goods and services regardless o f costs, are not a
relevant guide for more normal periods.
The view so widely held that an increase in Government expendi
tures relative to tax receipts is necessarily expansionary and a decrease
is contractionary, is not substantiated either by economic logic nor by
empirical evidence. (F or a brief discussion o f this matter see, M il
ton Friedman, “ Capitalism and Freedom,” University o f Chicago
Press, 1962, pp. 79-84.)
686
ECONOMIC REPORT OF THE PRESIDENT
The Subcommittee on Fiscal Policy of the Joint Economic Com
mittee reported: “The subcommittee has found no necessary rela
tionship between the amount o f Federal expenditures and the rate
o f economic growth over the long run” (Jan. 23,1958, p. 6 ).
Even the short-run relationships between deficits or Government
spending and growth in G N P are inconclusive. A comparison of
G N P changes with the quarterly Federal cash surplus or deficit shows
that the relationship has been highly variable. For example, the
G N P was rising in 47 o f the 60 quarters of the period 1947-61; in
22 of these rising quarters there was a Federal cash budget surplus
and in 25 quarters there was a deficit. Relative to the 13 quarters
in which G N P declined, 8 showed a surplus and 5 showed a deficit.
I f the G N P figures are lagged one-quarter to allow more time for
surpluses and deficits to operate, the picture is not far different; 20
o f the 47 rising quarters showed a Federal cash surplus in the pre
ceding quarter and 27 showed a deficit, while the 13 declining quarters
showed 7 surpluses and 6 deficits.2 Use of the national income ac
counts for the Federal sector for purposes o f analysis reveals similar
inconclusive results.
The deficits o f the 1930’s did not restore prosperity; to equal those
deficits in relative size, the $11.9 billion deficit now projected for 1964
would have to be raised by nearly 50 percent. Even then there is no
reason to believe that it would bring us prosperity.
That there is much fat and waste in the Federal budget cannot be
denied. Even the defense and space programs should be critically
reviewed with the object of substantial paring of less essential ex
penditures. Defense expenditures from 1953 to 1964 will run over
$600 billion— larger than our G N P in any year. How much defense
have we bought? Need? Do we have adequate machinery to make
an objective appraisal of demands for defense spending?
The budget is loaded with fast-growth expenditures and programs,
going far beyond the normal legitimate rate of growth which should
be expected in those Government areas that reflect our population and
economic expansion. This year’s budget urges many new programs,
most of which begin on a modest basis in the first year but which w ill,
if adopted, grow and grow.
The Economic Report, and particularly the budget supplemented
by a flood o f special messages from the President, enumerated many
existing but growing needs as well as new needs. Argument is often
advanced that the public makes these demands. This is almost en
tirely false. The average citizen is too sensible, modest, or self-reliant
to make demands on the public treasury. The biggest single pres
sure for spending comes from within the Government itself. Perhaps
the most massive recent evidence is to be found in the book by Ezra
T aft Benson, “ Cross F ire : The E ight Years W ith Eisenhower,” 1962.
Even so-called farm pressure groups called repeatedly for more mod
erate subsidies and price supports than the Congress insisted upon.
In a bitter address before the American Council on Education on
Federal subsidy to education, Secretary of Health, Education, and
W elfare, Abraham Ribicoff, let the cat out of the b a g : “M ail urging
p See testimony of George Terborgh, Hearings, House Ways and Means Committee,
Aug. 3, 1962.
ECONOMIC REPORT OF THE PRESIDENT
687
the Congress to do something for education was infinitesimal. There
was a great void, a great silence.”— The W ashington Post, October 6,
196L
There it came straight from a source who should know. The Con
gress in 1961 lowered the retirement age for males to 62 under old-age
and disability insurance, at a time when many were lamenting our
slow economic growth. Inquiries to key members o f both the House
and Senate to find out if the public demanded age lowering for
eligibility did not produce even one scintilla of evidence to support
the popular view that “the public demanded” this relaxation for
eligibility.
Indeed, it is literally true that the general public never initiates
any demands on Government, with the single exception of the situation
where its position is abruptly reversed and worsened, like the midwest
farmers in the early 1930’s. True, once aid or a giveaway program
has been launched and a public clientele has developed, the public
through spokesmen, often self-selected, will press to keep the pablum
flowing.
W hen a problem is no longer large and massive, that seems to be
the very time when Government takes action. A lexis de Tocqueville
more than 100 years ago noted that when the least fuel is behind a
problem, then it becomes subject to broadened discussion and public
action. Medicare may be a good example; there is more private in
surance available than ever. Elderly people are better off than ever.
The m ajority have O A S D I. They have preferred income tax treat
ment. The K err-M ills A ct provides help. Nevertheless, Government
programs for the aged m ultiply. In spite of an all-out campaign in
1962, including Madison Square Garden type of sessions, the admin
istration could not muster enough votes to pass this measure in 1962.
Another trial is to be made in 1963.
In short, there are hundreds of millions of dollars of expenditures
which have a low priority and could be eliminated entirely. Many
activities could be left to lower levels of government or private indi
vidual or group effort. The idea that the Government must subsidize
housing construction rests on false assumptions. A s reported a year
ago in our testimony, housing starts were relatively higher in the mid1920’s than in the mid-1950’s as shown by the accompanying table. In
several years in the m id-1920’s, say 1925 and 1926, new nonfarm resi
dential private construction outlays were 6.98 percent and 6.75 percent,
respectively, of total personal consumption expenditures; in 1955 and
1956 the figures were 7.28 percent and 6.54 percent, respectively— no
major change. (Both pairs o f years followed a war and were periods
o f prosperity.)
Housing starts— Federal aid
Year
1925.................................................... ..........................
1926...............................................................................
1955...............................................................................
1956...............................................................................
Housing
Housing
Nonfarm starts per
starts per
million
housing
starts dollars GNP thousand
(thousands) (1964prices) population
937
849
1,329
1,118
5.79
4.97
3.38
2.78
8.09
7.23
8.04
6.65
ECONOMIC REPORT OF THE PRESIDENT
688
In the years 1955 and 1956 housing starts were only about 3 per $1
million of G N P as against over 5 in 1925-26 (1954 prices) ; this shows
a 60 percent better performance in the earlier Government unassisted
period, relative to the m id-1950’s, as shown by the table. In terms of
population, housing starts were actually higher in 1925-26 than in
1955-56 (right colum n).
Possibly these few figures do not prove anything conclusively; but
they do suggest that the enormous amount of costly Government effort
and allied private effort (congressional hearings, survey, reports, leg
islation and appropriations and the establishment o f housing agencies
and programs— dozens of programs— and the large number o f private
meetings, trips to W ashington by builders, contractors, mortgage fund
suppliers, etc.) may have been largely wasted; at least, this question
may be worth looking into.
Since then two objective scholars published their findings as shown
by the accompanying table.
Share of residential construction expenditures in gross national product
1910
1915
1920
1925
1930
1935
_
.
.
..
_
5-year moving
averages
in percent
3.9
2.8
2.3
5.6
_ 3.0
_ __ 1. 6
5-year moving
averages
in percent
1940
1945
1950
1955
1958
____________2. 6
____________1.6
___________ 4.0
___________ 4. 2
___________4. 2
It will be noted that the share of residential construction expendi
tures in G N P have not reached the 5-year moving average centered
on the year 1925.3
In short, it is time that both the Congress and the administration
recognize the capacity and willingness of the people to solve their
own problems without a prop from Uncle Sam, a prop which is over
priced and undereffective. Spending loopholes are numerous. Their
identification and effective exposure would reveal many potential sav
ings. The idea that “the public demands” would be greatly deflated.
The budget is not expected to be in balance before 1966 or 1967 and
perhaps not then. Meantime the dangers of inflation are consciously
downgraded because we have slack in the economy. But conditions
can change. A great rise in public debt will add to liquidity in the
economy. Debt financed for the time being by mopping up money
savings, may, nevertheless, later be transferred into bank credit and
thereby be inflationary. Here’s a further reason for effective spending
control.
ANTIGROWTH FACTORS IGNORED
Even though the Economic Reports are gravely concerned with
slowed economic growth, surprisingly little attention is paid to the
job-m aking climate, to the wastes inherent in the Government’s agri
culture program, the survival of obsolete subsidies, the wastes of sub
sidies, uneconomic import quotas, uneconomic artificial substandard
interest rates. In case of a strike or threat, reform of featherbedding
3Land Economics, February 1962, University of Wisconsin, Madison, Wis.—“Housing in
a Growth Economy,” by Donald A. Fergusson and Raymond F. Valenti.
ECONOMIC REPORT OF THE PRESIDENT
689
and uneconomic work rules are deferred repeatedly and delayed,
merely to help end or prevent a strike.
Space does not permit any detailed analysis of these policies as antigrowth factors. W e have optimum allocation of resources if the
national income cannot be lifted by any reassignment or different uses
of resources. Conversely, when G N P or national income can be in
creased by restructuring the use of our resources, this means that we
have not attained their optimum use and, therefore, our optimum
growth.
Individuals who serve on Government payrolls as economists should
be expected to be in constant search of misuse of resources and should
be relentless in pressing for policy and budget changes, including con
gressional policies, which will steadily work toward the optimum
use of our manpower and other resources within a context of limited
Government and human freedom. These omissions are major defects
in the Council’s Economic Eeport. These antigrowth policies and
practices are not only wasteful but also tend to raise our costs at home
and abroad.
THE UNION AND WAGE PROBLEM
The Economic Reports pay little attention to the labor field other
than unemployment. There is no real concern with the numerous
strikes which have paralyzed the economy in recent years— a paralysis,
the cost of which is difficult to measure because the adverse impact
reaches far beyond the immediate companies or industry affected.
Much of the cost involves loss of freedom and other human values on
which no price tag can be put. The dock workers strike of 1962-63
caused worker layoffs in major countries throughout the world and
seriously threatened the foreign exchange earnings of distant coun
tries, many of them poor countries relying heavily on one or two major
exports, whose products (often perishable) could not be unloaded at
our ports. Sim ilarly our own exports were thwarted. Even though
some o f these losses are not irretrievable, the damage to human beings
is substantial both here and abroad. Y et the Economic Report fails
to engage this matter.
The President’s intervention in the steel price increase of A p ril 1962
is commended by the report, but wage settlements which breach the
wage guidelines of the 1962 and of the 1963 report are not even identi
fied or mentioned.
The so-called wage and price guidelines are again repeated in this
year’s Economic Report (pp. 8 3 -8 8 ). A widely read weekly magazine
commented, “ The W hite House offers two kinds of wage guidelines for
1963; the word and the deed” (Business W eek, Jan. 26, 1963).
The acceptance of the longshore strike settlement, even though it
exceeded the “general” productivity guidelines for wage settlements
by 100 percent, is in notable contrast with the reaction to a steel price
increase announcement last A p ril, although there had been no price
increases since 1958. This will not go unnoticed as other union offi
cials make their “ demands.”
The “general” guidelines announced in the Economic Report last
year (and again confirmed this year) suggested wage increases, in
cluding fringes, be limited in each industry to the increase in produc
tivity in the economy as a whole (about. 3 percent annually in the
last decade; from 1957 to 1962, annual rise was 2.7 percent on labor
690
ECONOMIC REPORT OF THE PRESIDENT
force b a sis); this, it was argued, would prevent inflation. But this
is not the whole of the announced guidelines; in those industries in
which there was unemployment or in which the current wage rates
were high compared with those earned elsewhere by similar labor, this
“ general” guideline was declared by the Economic Report to be too
high.
By these tests the longshoremen should not have had even a 3 per
cent increase. The industry had offered 22 cents per hour over 2
years. The union demanded 50 cents. Senator Morse’s panel ap
pointed by the President “ordered” (on a take it or leave it basis—
with a threat o f compulsory legislation) 37% cents per hour plus an
extra paid holiday. The basic wage had been about $3 per hour,
high considering the skills involved. There was unemployment in
the industry. This settlement, therefore, represents twice the normal
productivity gain in our economy and represents a serious breach of
the so-called guidelines announced by the administration. But no
Government official raised his voice in opposition; instead the settle
ment has been commended.
The Economic Reports, both this year as in previous years, virtually
ignore the devastation of prolonged strikes and the inventory traps
created by industrywide and pattern bargaining which keep upsetting
forecasts, budgets and expectations.
The reports propose all sorts of solutions for innumerable prob
lems, but seem to be utterly devoid of a solution for the strike paralysis
problem and strike threats, suggestions for which were advanced in
our report, Inflation, Unions, and W age Policy. Since the National
Government- itself is heavily responsible for the buildup o f the power
o f union officials, this oversight is inexcusable.
The Economic Report lauds Presidential intervention in the steel
price situation of A pril 1962 and states that the wage-fringe settle
ment in steel in 1962 was “generally regarded as noninflationarv” (p.
8 7 ) ; it is interesting to note that the Council attributes this conclusion
not to itself but to unnamed others.
Furthermore, it is quite improper from an analytical point of view
to regard any particular wage change as inflationary or deflationary.
Inflation is primarily a monetary phenomenon and particular wage
changes may have cost-raising or unemployment effects, but should not
be viewed as inflationary or otherwise; this is too narrow a view. This
settlement has raised steel costs higher than they otherwise would
have been. This the Council could have said. It has helped to price
our steel a little more out of the market both here and abroad, by m iti
gating tendencies toward price reduction. It has reduced the market
for domestic steel. It has played a part in the shift o f income from
investors (including retained "corporate earnings) to employees, as
shown by the widespread decline of steel company earnings in 1962
and the cuts in dividends, cuts which affected more people than are
employed in the steel business.
Nowhere does the report point out that the fundamental demand
theorem of economic states that the demand for any goods or service is
a negative function of its price. On the contrary, more workers are to
be priced out o f the labor market by extending minimum wage cover
age and the minimum wage is to rise to $1.25 per hour this year— not
a welcome prospect for the young and unskilled disemployed.
ECONOMIC REPORT OF THE PRESIDENT
691
THE BALANCE-OF-PAYMENTS PROBLEM
The President and the Council now seem to despair of the prompt
elimination o f the imbalance in our international payments. In spite
of substantial new efforts, our exports have increased very little in the
last year or two— up from $19.5 billion in 1960 to only $20.8 billion in
1962. The goal of closing the payments gap is now deferred from
some time in 1963 to some unspecified future time.
There is a major discrepancy between the posture taken by the
President in the Economic Report and that taken by the Council of
Economic Advisers on a matter that may be more than passing interest.
A t issue is the relationship between economic growth and balance-ofpayments equilibrium.
On page xx o f the report the President says, “ * * * indeed, in the
long run, a healthy balance-of-payments position depends on a healthy
economy.”
In contrast the Council’s report is essentially uncertain. W here
it is not uncertain, it is unconvincing on the impact of economic de
velopment on the balance o f payments, although on page 59 it endorses
the President’s view.
The report o f the Council (p. 103) states that “ no one can be cer
tain whether the positive or negative effects o f domestic economic
expansion on the balance of payments will predominate in the long
run.” The Council’s uncertainty is understandable because the effect
o f growth on the balance o f payments is complicated. Some difficult
problems must be wrestled with in the future; serious thought must
go into devising real defenses for the dollar to replace the ad hoc
measures taken to date.
The Council makes an attempt to support the President’s position
as follow s: “ * * * recent experience here and abroad suggests strongly
that, ultimately, the key to a sustained balance in international pay
ments is a dynamic, growing, fu ll operating economy. That kind o f
economy has produced payments surpluses in Europe, while 5 years
o f economic slack have not eliminated the U .S . payments deficit.”
Unfortunately the evidence offered leaves the question of causation
unanswered. lia s Europe’s economic vitality caused her balance of
payments surpluses by the mechanisms which the Report discusses
or has her surplus stimulated economic growth and has our deficit
been caused by slow growth or has the U .S . balance of payments
deficit, through its deflationary impact on the economy, caused the
domestic slack ? The Council does not answer these difficult questions.
MONEY
SUPPLY AND
GROW TH
Slow growth may also stem from inadequate domestic liquidity.
The sluggish recoveries from recession and the slowed rates o f eco
nomic growth coincide roughly with the accentuation o f our balance
of payments difficulties which became marked first in 1958. The
disequilibrium in our international payments position may be playing
a more adverse role than is commonly realized.
The growth in our money supply (currency and demand deposits)
has been very small since 1957; from 1958 to December 1962 the growth
has been only $7 billion. In part this is explained by our international
payments bind. Most economists who regard a sufficiency in mone
692
ECONOMIC REPORT OF THE PRESIDENT
tary growth as the key to sustained economic expansion and freedom
from all but mild dips, generally believe that our money supply should
grow by 3 percent per year, about four times the rate since 1958.
Growth in time deposits may supplement the money supply, but is gen
erally not adequate substitute for currency and demand deposits.
The money supply was stagnant until late 1962. Total reserves
o f member banks (less reserves behind Treasury deposits) have not
risen much.4 The studies by Clark W arburton and, more recently,
by M ilton Friedman and his associates, as well as others, strongly
support the view that a steady growth in the money supply is the
indispensable prerequisite for a sustained upward economic trend.5
C O N C L U D IN G C O M M E N T
In spite of the foregoing criticisms, the Economic Reports of
1963 contain much useful information and analysis. The more
restrained diagnosis and prescription (with some exceptions) is
commendable.
The Nation faces some serious problems, economic and other. It
may be at a critical point in history with regard to international
questions, and the behavior o f the economy in terms o f stability
and growth. The economy is rather evenly poised— some factors
pointing down and others up. There is no evidence of a strong
upswing at this time. The wrong policy or policy mix could mean
not only a downturn but also slowed growth for some time to come.
A Treasury deficit seems inescapable. Deliberately enlarging that
deficit should be accompanied by a firm policy of no-nonsense
expenditure control and the elimination o f low priority expenditures
and government activities. Tax reductions for individuals and busi
ness should be geared to incentives to deepen capital and open up new
productive job-making in the private sector.
W hen governments make mistakes they may be large and catas
trophic. Individuals and individual business, too, make mistakes; but
under a private competitive enterprise system with a multitude of
separate enterprises, and preferably an increasing number o f such
enterprises, the mistakes may be relatively small and to some extent
they may be offsetting one another.
For these reasons as well as the benefits of human freedom we
should test every Government program and proposal by its impact
on the strength, vigor and growth of private effort and private enter
prises.
*For significant outlines and data see “Bank Reserves and Money,” Federal Reserve
Bank of St. Louis, Oct. 9, 1£62.
s “Capitalism and Freedom,” University of Chicago Press. See also, “Can We Depres
sion-Proof Our Economy?” Chamber of Commerce of the United States, Washington, D.C.
C O M M IT T E E F O R E C O N O M IC D E V E L O P M E N T
W ash in gton , D .C ., February 14, 1963.
Hon. P aul H . D ouglas,
Chairman, Joint Economic Committee,
Congress of the United States,
Washington, D.C.
D ear S enator D ouglas : In response to your letter of January 23,
asking for comments on the 1963 Economic Report o f the President,
I submit herewith a statement by M r. T . O. Yntem a, Chairman of the
Research and Policy Committee o f the Committee for Economic
Development. M r. Yntema’s statement is accompanied by a copy of a
policy statement, “Reducing Tax Rates for Production and Growth,”
issued by C E D ’s Research and Policy Committee in December 1962.1
I am sending 25 sets o f these materials to M r. Knowles for the use
of the members and staff o f the Joint Economic Committee.
Sincerely yours,
H erbert S tein ,
Director of Research.
S tatement of T . O. Y ntem a , C h airm an , R esearch and P olicy
C ommittee, C ommittee for E conomic D evelopment 2
I am pleased to respond, on behalf of the Research and Policy Com
mittee of C E D , to your invitation to comment on the 1963 Economic
Report of the President.
The President’s report concentrates on tax revision, and I shall
follow this lead in my comments. M y remarks are largely based on a
policy statement “Reducing Tax Rates for Production and Growth,”
issued by our committee in December 1962. Copies o f this statement
are supplied herewith for members of the Joint Economic Committee.
W e believe that prompt, substantial, permanent reduction o f Fed
eral tax rates on individual and corporate incomes would increase pro
duction, employment, investment, and growth in the American
economy. A t the same time we recognize a danger that tax rate re
vision may become elevated in public thinking to the status o f a
sovereign remedy for all ills. In our statement we said:
“ Neither the lag o f production nor the lag o f private investment
is due to taxes alone. The behavior o f the economy in any specific
respect is always due to a combination o f factors, no one o f which
can be singled out as the cause. W e concentrate on tax policy in this
statement not because it is the only cause o f our present difficulties
but because it is an important cause and one o f the most readily
remediable.”
1Copies of policy statement were distributed to members of Joint Economic Commit
tee ; they can, be obtained from the CED.
2The Committee for Economic Development is composed of 200 businessmen and educa
tors. Its purpose is to conduct objective economic research, to support and promote
economic education, and to formulate and publish recommendations on major economic
problems that will contribute to growth and stability in the American economy, higher
living standards, and increasing opportunities for all Americans, and to strengthening the
institutions and concepts essential to progress in a free society.
693
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ECONOMIC REPORT OF THE PRESIDENT
In brief, our tax recommendations are as follows:
1. A cut of tax rates should be enacted early in 1963, to take effect
on January 1, 1963. The rate cuts we recommend would reduce
revenue by about $6 billion a year, before offset for the additional
revenue that would be collected on the resulting increase of national
income. About $4 billion of this cut would be m taxes on individual
income and about $2 billion in taxes on corporate income.
2. Federal expenditures in fiscal 1964 should be held to the level
of fiscal 1963. As it turns out, this would require expenditures in
fiscal 1964 to be held $5.8 billion below the budget estimate for that
year. I f that is done, and as soon as it is clear that it will be done,
there should be an additional tax cut of about $5 billion, divided
between individual and corporate rates.
3. Tax rate reduction now, in 1963, should not be obstructed or
delayed by consideration of complicated and controversial problems
of the tax structure.
Although the tax program we recommend is substantially different
in composition from that proposed by the President, the size of the cut
we recommend if fiscal 1964 expenditures are not held down to the
1963 level is about the same as the first step of the President’s pro
gram; namely, $6 billion. I f our proposal were followed, however,
the tax reduction would go into effect earlier, and the reduction
for the calendar year 1963 would therefore be larger. We think this
question of timing is important. The loss of production, investment,
and employment that the tax reduction is intended to correct is going
on now. The time to make the correction is now, or at least as soon
as possible. The months that are lost by delaying can never be re
captured.
We do not propose any deferred tax cuts to be enacted now and
take effect in 1964 or 1965. We see no reason to defer tax cuts from
the present, when we need them, to 1965 when we may or may not
need them. It is imprudent to commit ourselves now to make certain
tax reductions in 1965. We should make now the cuts that are de
sirable now, and wait before committing ourselves to making cuts in
1965.
Because we believe that prompt rate reduction is important, we
think it is unwise to hinge reduction of the rates upon enactment of
a long list of complex and hotly disputed structural revisions of the
tax system. We say this without reference to the merits of the
particular package of tax revisions proposed by the administration.
(Personally, I have serious doubts that the package will contribute
to prosperity and economic growth.) Our point is that if tax rate
reduction is going to wait upon final resolution of the issues raised
by the President’s package then tax rate reduction is going to wait
too long. No one, even if enthusiastic for the proposed revisions,
can reasonably maintain that their adoption in 1963 or 1964 is so im
portant. as to justify delay in rate reduction. Surely there is no
economic or budgetary reason for making all of a $13.5 billion tax
rate reduction dependent on a $3.5 billion of revenue raising tax re
visions. It may be argued that the tax revisions cannot be enacted
if they are not tied to so large a rate cut. But if the American people
find the $3.5 billion revision pill so bitter that they will not swal
low it without $13.5 billion of rate reduction sugar coating, perhaps
they shouldn’t swallow it at all.
ECONOMIC REPORT OF THE PRESIDENT
695
We recommend a balanced program of rate reduction, applying
both to the individual income tax and to the corporate income tax.
The administration’s proposal does provide for allowing a reduction
in the corporate tax rate from 52 to 47 percent, a reduction originally
scheduled to occur at the end of the Korean war and repeatedly
postponed. This five-point reduction would take place in two steps,
two points on Januaiy 1, 1964, and three points on January 1, 1965.
In view of the objectives stated by the administration, this reduction
is too small relative to the total cut proposed and, because deferred,
too uncertain. Our national objective is not only to get up to high
employment and high production but also, when we get there, to
grow rapidly. Growing rapidly requires a high rate of investment.
Therefore, we want to assure that when employment and production
are high the rate of investment will also be high. The rate of invest
ment will depend in part upon the rate of corporate profits taxation.
The Economic Eeport recognizes this, and the interest in growth
is the chief reason offered for reducing the corporate profits tax.
However, only one-fifth of the proposed revenue reduction from rate
cuts would be used to reduce corporate profit taxes. This is an inade
quate reflection of the importance of the corporate profits tax as an
obstacle to economic growth.
Two critical questions raised by a proposal to cut taxes at the
present time are what would be the effect on the deficit and what
would be the significance of this effect. It is sometimes suggested
that a reduction of tax rates will not reduce the revenue but will
increase it and will in fact eliminate the deficit. While this is a
theoretically possible course of events its actual occurrence would
depend upon a particular combination of conditions that may or may
not exist. We can be fairly confident that a reduction of tax rates
will cause some increase of the national income. This rise of the
national income will yield some increase of revenue. But whether
the increased revenue from this source will completely offset the
revenue lost by the cut of tax rates is uncertain, and whether it will
more than offset the revenue loss and eliminate the existing deficit
is even more uncertain.
Therefore, I think it is unwise to discuss the tax cut on the assump
tion that the stimulation of the economy engendered by the tax cut
alone will reduce or eliminate the deficit. However, I believe that
we can make this different, and more significant, statement. I f the
economy gets up to its potential rate of production and employment
the budget can be balanced with lower tax rates than we now have. We
can make some cut of tax rates and still balance the budget if the
combination of tax cuts, other policies, and the spontaneous forces of
the economy get us up to high employment and production. This
does not mean that we can balance the budget by cutting taxes enough
so that the tax cut alone would get us up to high employment. The
tax cuts that would be necessary to do this might leave us with in
sufficient revenue even at high employment to balance the budget.
We may find ourselves in a situation where we cannot balance the
budget by tax increases alone, at least without severely depressing the
economy, and cannot balance the budget by cutting taxes. I am not
saying that we are now in such a situation or are likely to be there in
the future, but the situation is a possible one and we should consider
its implications.
696
ECONOMIC REPORT OF THE PRESIDENT
I f we were in such a situation, would it be satisfactory to cut taxes
by whatever amount might be necessary to pump the economy up to
high employment and run persistently whatever deficits that might
involve? It would not be satisfactory. High employment is im
portant, but the national objective is more than that. The national
objective is high employment and rapid growth. As I have already
said, rapid growth requires high private investment. To achieve high
employment by persistent deficits means that part of the saving the
public does at high employment is absorbed in financing the Govern
ment deficit, and does not finance private investment. We would
not be growing as rapidly as we might because we would not be invest
ing the available saving. This is the basic reason for not being satis
fied to run deficits at high employment. It is, in fact, the basic reason
for not being satisfied merely to balance the budget at high employ
ment but to seek a surplus, which will retire public debt and in so
doing add to the funds available for private investment. *
How are we to get simultaneously, high employment, rapid growth,
and budget surpluses ? The only solution is a sufficiently strong in
centive to invest so tha;t private investment will absorb the savings the
public will make plus the Government surplus when employment is
high. This is the hard core we reach when we unravel the problems
of employment, growth, and the budget.
As we said in our December 1962 policy statement:
“ The vigor of the economy has been inadequate and must be
strengthened if we are to have high employment and a surplus. We
must create an economic climate that will nourish dynamic growth.
We believe that the reduction of taxes we recommend will contribute
to this condition. But much of the solution to the problem lies out
side the field of budget policy. It lies in the whole complex of social
and economic conditions, including notably labor policy, that de
termine the profitability of private investment. We must look to the
improvement of these conditions in order to reach the budgetary goal
we seek. Until a more favorable climate for investment is created
or emerges spontaneously, it is self-defeating to maintain excessively
high tax rates that stifle investment and growth.”
I want to make our position clear. We support a prompt, sub
stantial cut of individual and corporate profits tax rates as a step
that can now be taken to increase production and investment. We
support this step even though it probably means that the deficit will
be increased now and that at high employment the budget would
have no surplus. But we emphasize that while currently necessary
this is not a permanently satisfactory prescription for achieving high
employment and rapid growth. When we have made this step we
need to turn our attention to the conditions that hold back private
investment in the United States. Only by correcting these conditions
can we generate a budget surplus, high employment, and rapid growth.
C O N F E R E N C E O N E C O N O M IC P R O G R E S S
W
a s h in g t o n ,
D.C., Jammy 25, 1968.
Hon. P a u l H. D o u g l a s ,
Chairman, Joint Economic Committee,
U.S. Senate, Washington, D.C.
D e a r P a u l : In response to your kind letter of January 23, 1 shall be
glad to submit comments with respect to the 1963 Economic Report, in
sufficient number, not later than February 15.
With all good wishes,
Very sincerely yours,
L
eon
H. K
e y s e r l in g .
♦ S t a t e m e n t o p L e o n H . K e y s e r l in g 1 i n R e t h e P r e s id e n t ’ s E co
n o m ic P r o g r a m , E s p e c ia l l y H is T a x P roposals S u b m it t e d to t h e
J o i n t E c o n o m i c C o m m i t t e e a t I ts R e q u e s t
CONTENTS
Deliberate enlargement of the Federal budget deficit now is not desirable per
se, without regard for the nature of the enlargement.
Summary of shortcomings in the current tax proposals.
The proposed tax program is very small, but sent out to do a giant’s job.
Low economic growth, 1953-62.
Chronic enlargement of the economic slack.
Costs of the 10-year economic slack, and costs if it continues.
The official reports are excessively optimistic.
The reports very seriously underestimate the current production “ gap.”
Needed economic growth, 1962-65.
The two reports fail to establish targets for either employment or produc
tion, as intended by the Employment Act.
The very small size of the tax proposals.
The Council’s report does not even estimate the economic impact of the
proposed tax program.
The internal composition of the proposed tax program is highly inimical to
sustained or balanced economic growth.
A few theoretical observations.
The utility of an equilibrium “ model.”
How the investment-consumption imbalances have developed.
Significant current data in re profits and other financial factors.
Wage aspects of the investment-consumption problem.
Summary of major causes o f the chronic disequilibrium.
Public policies contributing to the disequilibrium.
We are now in danger of perpetuating the undesirable public policies.
The severely disequilibrating factors built into the proposed tax program.
The proposed tax program is socially unjust and highly inequitable.
The extremely regressive nature o f the proposed personal tax reductions.
We must find other ways to help the low income people.
Some data on current income distribution.
The tax proposals involve gross neglect of other equally or even more important
programs.
Dollar for dollar, increased public outlays are more stimulatory than tax
reduction.
1Former Chairman, Council of Economic Advisers.
president, Conference on Economic Progress.
Consulting economist and attorney,
697
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ECONOMIC REPORT OF THE PRESIDENT
Tax reduction cannot powerfully restructure the composition o f demand, and
therefore cannot powerfully meet the challenge o f the new technology and
automation.
The key importance of housing.
The key problem of mass transportation, especially the railroads.
The proposed tax program cannot help very much to meet our urgent educa
tion and health needs.
Estimate of needed increases in Federal budget outlays for domestic prior
ity purposes.
The reports commit us, for some years ahead, to further neglect of our great
domestic priorities.
The upside-down approach to the wage problem.
Productivity is advancing much more rapidly than wage rate increases.
The Council’s views about wages.
The wage guidelines.
The static position of the reports with respect to monetary policy.
My proposals for action now.
Why we are going wrong now.
CHARTS
1. Growth rates, U.S. economy, 1922-62.
2. Recessions, booms, stagnations, 1953-62: Rates of change in GNP.
3. The American economy during 10 years: Needed and actual performance, *
1953-62.
4. Chronic rise of unemployment, 1953-62.
5. The high volume of idle plant and machines: 1954r-62.
6. Chronic rise of our unused productive powers (G N P ), 1953-62.
7. Large national economic deficits during 10-year period, 1953-62.
8. The Federal budget reflects national economic deficiencies.
9. A balanced Federal budget depends upon a maximum prosperity economy.
10. Differences in results of high and low economic growth rates, 1963-66.
11. Trends in output per man-hour— or productivity—1910-62.
12. Goals for 1963 and 1964, consistent with long-range goals through 1966.
13. Deficient rate of growth in private consumer spending, 1953-62.
14. Low growth in private consumption.
15. Gross private domestic investment was deficient during 1953-62 as a whole.
16. Fluctuations in GNP and in types of investment, 1953-62.
17. Rising prices, profits, and investment before the 1957-58 recession.
18. Investment boom occurred again before the 1960-61 recession despite reduced
prices and profits.
19. Price, profits, and investment trends during current economic upturn.
20. Key profits after taxes are high despite large unused capacities.
21. Profits-sales ratios indicate still higher profits with fuller capacity use.
22. Total funds used by corporations have increased.
23. Deficient rate of growth in wages and salaries, 1953-62.
24. Before the 1957-58 recession, profits and investment outran wages basic to
consumption.
25. Before the 1960-61 recession, despite reduced profits, investment outran wages
basic to consumption.
26. Profits and investment during current economic upturn outrun wages basic to
consumption.
27. Americans living in poverty, 1960.
28. Percent of families above poverty and their share of income, 1929-60.
29. Toward a Federal budget consistent with maximum employment and with
priority needs.
30. A Federal budget geared to jobs for all and adequate public services.
31. Federal budget has shrunk relative to total output and needs, 1954-62.
32. Rates of change per employee-hour in nonfarm output and wages and sala
ries, 1947-62.
33. Rates o f change per man-hour in manufacturing output and wages and
salaries, 1947-62.
S tatem ent
of
L
eon
H. K
e y s e r l in g
I appreciate this opportunity to set forth my evaluation of the
President’s economic program, the heart of which is embodied in his
recent tax proposals. Although these proposals have been made the
subject of a special tax message, the economic basis for them and their
ECONOMIC REPORT OF THE PRESIDENT
699
main features and purposes are set forth in the January 1963 Eco
nomic Report of the President, and in the accompanying Report of
the Council of Economic Advisers. Consequently, my analysis is
pointed to these two reports.
I approach this task with mixed feelings. I have a natural re
luctance, on many grounds, to being critical of the President’s pro
gram. Along with so many others, I admire the President’s ele
vated purposes and his courage and discernment, and know from long
experience that he must take into consideration many factors which
I cannot properly weigh. And my own awareness of the imperative
need for vigorous action at this time pulls me toward attempting to
widen agreements, rather than toward expressing any note of dissent.
Nonetheless, I am convinced that the President’s tax proposals miss
the mark so widely that it will be useful to set forth my views clearly
and with candor, and that this course can be helpful to the President
as well as to others. For I reject, as basically unfair to the Presi
dent, the widespread notion that this program has been shaped largely
by considerations of political strategy; he knows full well that all our
domestic and worldwide problems require above all programs whose
substantive merit maximizes the likelihood of their success if adopted.
Indeed, I feel that the deficiencies in the President’s tax program, as
I see them, spring primarily from his sincere reliance upon economic
advice which appears to me mistaken, and that he will in due course
reappraise this advice when it is shown to work no better in the future
than it has worked to date.
Meanwhile, this Committee and the Congress, which under our
system must bear a high responsibility which is completely acknowl
edged by the President, are also entitled to utmost frankness on the
part of economists. Too many of my friends among economists out
side the Government, I fear, have tried to become political strategists,
or are too closely allied with those in the Government to exercise the
independence which alone can make them valuable.
My entire analysis will concentrate predominantly upon the tax
proposals of the President. I will set my critical evaluation of these
proposals in the context of the American economy and its problems
as I view them.
DELIBERATE ENLARGEMENT OF TH E FEDERAL BUDGET DEFICIT NO W IS NOT
DESIRABLE PER SE W ITH OU T REGARD FOR TH E NATURE OF TH E ENLARGE
MENT
It would be superfluous for me to labor the point that I favor a de
liberate enlargement of the Federal budget deficit, when our unused
productive resources are as large as they are now, and have been so
large for so many years. The condition of the national economy is
categorically more important than the condition of the Federal budget.
Moreover, only by restoration of the national economy to levels of
performance much closer to its full potentials, can there be any rea
listic prospect of balancing the Federal budget.
But just because the foregoing position represents the so-called
modern or progressive viewpoint, too many are assuming that it is
modem and progressive deliberately to enlarge greatly the size of the
Federal deficit, without very much examination of the nature of the
program—in this instance, the tax program—designed toward this
end. This, in my judgment is a dangerously superficial approach.
93762— 63— pt. 2-------5
700
ECONOMIC REPORT OF THE PRESIDENT
When the Government decides to achieve a very much larger Federal
deficit by conscious and affirmative policies—as distinguished from
the deficits which arise automatically from unexpectedly poor economic
performance—the Government is deciding deliberately to collect from
the taxpayer much less than the cost of the services rendered to the
taxpayer—that is, to the people and the country—by the Government.
In terms of realistic analysis, since ordinarily the people are supposed
to pay in taxes the cost of services received, deliberate increases in
deficit financing are tantamount to subsidies paid by the Government
to the taxpayer.
To put this in another way, the tax reductions proposed by the Presi
dent, in their economic and social impacts, are really the same thing
as if tax rates were to remain just where they are now, and if the
Government then mailed checks to various taxpayers identical in
amount with the tax reductions which they would receive under the
President’s tax proposals. I f this were the case, no one would argue
that it really would not make very much difference to whom the
checks were mailed and in what amounts, in terms of judging whether
these subsidy payments would accomplish the overall economic pur
poses intended, while at the same time being consistent with our funda
mental American standards of equity and social justice.
SU M M ARY OF SHORTCOMINGS IN TH E CURRENT TAX PROPOSALS
Applying this line o f reasoning, which appears to me sound, I am
reluctantly forced to these summary conclusions:
(1) The President’s tax proposals, if adopted in their current form,
would fall so far short of providing the needed stimuli to the economy,
both as to timing and size, that they would be substantially wasted,
and therefore would tend to discredit the sound use of deliberate
deficit financing on proper occasions. The proposed tax program is
like a pygmy sent out to do a giant’s job;
(2) Aside from these quantitative deficiencies as to timing and size,
and still speaking in terms of their impact upon the overall economy,
the internal composition of the President’s tax proposals is based upon
so erroneous an analysis of our economic troubles and the means of
overcoming them, that these proposals, if enacted in their current form,
would entail serious risks of increasing and intensifying rather than
reducing and mitigating the imbalances or disequilibriums in the econ
omy which have persisted for a decade and still exist;
(3) Aside from the foregoing overall considerations, the Presi
dent’s tax proposals, if enacted in their current form, would be seri
ously inimical to those considerations of equity and social justice which
no great and rich nation can in good conscience afford to neglect, when
undertaking fundamental and enduring changes in the tax structure.
Further, for reasons which I shall disclose fully, I believe that tax
changes running counter to these considerations of equity and social
justice would, because of the very nature of our economic problems, be
undesirable also from the viewpoint of overall economic restoration
on a sound and enduring basis;
(4) An economic program concentrated so largely on tax reduc
tions, even if these reductions were not in themselves subject to the
defects just mentioned, is an economic program which grossly neglects
other measures at least as important as tax reduction, whether we are
ECONOMIC REPORT OF TH E PRESIDENT
701
thinking in terms of overall economic restoration or in terms of our
social and human needs. More specifically, we can neither achieve
the overall economic restoration nor meet our social and human needs,
without a combination of large and wisely designed tax reductions and
large and wisely designed increases in Federal outlays directed toward
the urgent priorities of our domestic public needs. To restore maxi
mum employment and production, in the face of the new technology
and automation, we must create a vast restructuring of the whole pat
tern o f effective demand, and this requires programs entirely different
from tax reduction, including but not limited to large increases in
Federal outlays for domestic public purposes;
(5) It is a grave error to combine, for purposes of simultaneous
action, the proposed tax reductions and the proposed “reforms.” In
one important sense, the very distinction between tax reduction and
tax “ reform,” when pushed as hard as it is being pushed, represents a
serious confusion both in analysis and in objectives. Every tax
change, no matter what we call it, should be fashioned to implement
the basic purposes of our economic life, which include growth and
stability, the meeting of the priority of our private and public needs,
and economic justice. No “ reform” which does not contribute to
these purposes is desirable, and any tax change which contributes to
these purposes may be called a “ reform.” I see no particular reason
for saying that a reduction of the tax burden on a low-income family
which cannot now maintain a decent American standard of living is not
a “ reform,” but that closing a loophole is a “ reform.” However, the
important thing is not the terminology; it is what tax changes are
most urgently needed first. And some o f the “ reform” proposals,
being designed to recoup revenues surrendered by means of the pro
posed tax reduction, are certainly not stimulatory to the economy? in
that they impose somewhere additional burdens and unsettling
changes. Thus, while the originators of the proposed tax program
properly identify its core objective of getting the American economy
moving again, and toward tnis end are properly putting the restora
tion of the economy ahead of budgetary consideration, they are simul
taneously moving in the opposite direction by injecting the “ reforms”
in order to make the deliberately contrived deficit smaller and less
effective. This seems in substance poor judgment as to relative pri
orities, and doubly so when the thorny and controversial issues in
volved in these “reforms”—even if ultimately desirable—threaten to
retard or jeopardize or even jettison the whole tax program.
When I come to my own specific proposals with respect to tax
policy, I shall suggest what types of tax reductions should come first,
and what types of other tax reductions, later on, might be combined
with and conditioned upon the proposed “ reforms.” I think that the
cumbersome and complex tax program, as now offered, is a lawyer’s
skylark, rather than a sound portrayal of relative priorities.
TH E PROPOSED TAX PROGRAM IS VERY SMALL, BUT SENT OUT TO DO A GIANT’ S
JOB
Turning now to a more comprehensive examination of my first
main point—that the proposed tax program is very small, but sent
out to do a giant’s job—I must first of all offer for consideration the
data and analysis which are most relevant to this first point.
702
ECONOMIC REPORT OF THE PRESIDENT
Low economic growth, 1953-62
My chart 1 depicts the growth rates of the U.S. economy, over vari
ous periods during the past four decades. Its main purpose is to
show that, during the 10-year period 1953-62, inclusive, the average
annual growth rate in real terms was only 2.7 percent. This was
about 23 percent lower than the 3.5 percent annual average during the
four decades as a whole, and about 27 percent lower than the 3.7 per
cent annual average, excluding the great depression era and the war
eras; about 41 percent lower than the 4.6 percent annual average dur
ing the peacetime period 1922-29; and more than 43 percent lower
than the 4.8 percent annual average during the period of peace and
limited war 1947-53, which in many respects on the whole is analogous
to the cold war period in which we have found ourselves during the
past decade, and are likely to be in for some time to come. This chart,
I submit, supports my conclusion that, under the conditions of the
accelerating technology and automation, and the high growth in the
labor force during the years ahead, we need an average annual growth
rate of about 5 percent to maintain the maximum use of our resources
contemplated under the Employment Act of 1946. And, obviously,
we need a much higher growth rate than this until maximum employ
ment and production are restored.
My chart 2 traces the quite consistent pattern of recessions, short
lived and inadequate booms, and periods of stagnation, which have
plagued us during the past decade to date. Particularly significant
has been the shorter intervals between recessions to date, and the in
creasingly unsatisfactory character of the recovery movements. For
example, the chart shows that, measured in terms of the percentage
rise in GNP, the upturn from 1961 to 1962 was considerably smaller
than the upturn from 1958 to 1959, and even more below the upturn
from 1954 to 1955. The chart also shows the progressive slowdown
in the rate of the upturn which commenced early in 1961—a slowdown
which is not negated by the fact that the trena from third to fourth
quarter 1962 was better than the trend from second to third quarter
1962. My insistence now, as I had forecast earlier, that this latest
upturn is the least satisfactory since World War II, does not seem
open to serious challenge, and in fact is implicit in the President’s tax
proposals.
My chart 3 indicates how the performance of the American economy,
during the past decade, has at best swung us back periodically to a
2.7 percent growth rate line, but has never swung us back above this
line toward the needed growth rate line, which I estimate at slightly
above 4 percent a year for the past decade. (This contrasts with the
about 5 percent rate which I think will be needed in the years ahead,
after full economic restoration, allowing for the new technology and
automation, and the more rapid prospective growth in the labor force.)
Chronic enlargement of the economic slack
My chart 4 reinforces the proposition that the economic slack repre
sented by idle manpower and plant has been growing chronically
larger. In fourth quarter 1962, the true level of unemployment (sea
sonally adjusted), measured as a percentage of the civilian labor force,
was almost 12 percent higher than in 1959 after the recession of 195758; more than 37 percent higher than in 1955 after the recession of
ECONOMIC REPORT OF THE PRESIDENT
703
1953-54; and 88 percent higher than 1953, even though a recession
commenced well within that year.
My chart 5 depicts the high volume of idle plant and machines dur
ing the whole period from 1954 through 1962, with comprehensive
data through 1961, and, insofar as available, on into 1962.
Combining the idle manpower with the other unused productive
resources, and allowing properly for the larger growth in the labor
force and in productivity which optimum use of our resources would
have called forth, my chart 6 shows that, in 1962, our gross national
product was running almost $75 billion below maximum production,
and that, by fourth quarter 1962, this so-called gap was at an annual
rate of almost $80 billion or more than 12% percent of our potential
at maximum production. It is highly significant that this gap in
fourth quarter 1962, measured as a percentage of maximum produc
tion, was almost 33 percent higher than in 1959, more than four times
as large as in 1955, and compared with only a nominal gap in 1953.
Costs of the 10-year economic slack, and costs if it continues
My chart 7 estimates the losses occasioned by these 10 years of
chronically poor economic performance, and my charts 8 and 9 depict
the impact of these losses upon the Federal budget, assuming actual
outlays and actual tax rates. The eighth and ninth charts also depict
how, under conditions of sustained optimum prosperity, we could have
achieved (even with higher expenditures and lower tax rates) a net
budgetary position for the decade as a whole about $54 billion better
than was actually achieved.
On the basis of this analysis of the past 10 years—an analysis
which I shall refine further as I proceed—chart 10 depicts the enor
mous if not disastrous losses which we will suffer, during the 4-year
period 1963 to 1966, inclusive, if, instead of activating the needed
growth rate, we repeat in rough approximation the performance of the
past decade. These estimated losses include more than $290 billion of
total national production, and almost 17 million man-years of job
opportunity. And as I have said frequently, there is every indication
that we will not average better in the years ahead than during the
past decade, without drastic changes in private and public economic
policies. Indeed, the progressive worsening of each recovery move
ment which I have already traced, the progressive enlargement of
our idle plant and manpower, and the fact that we do not have in
reserve some of the plus factors which had accumulated by 1953 for
a variety of reasons, lead me to believe that we are in grave danger
of averaging worse in the years ahead than in the decade just past,
without drastic changes in private and public economic policies.
The official reports are excessively optimistic
Contrasting sharply with the foregoing analysis—which I believe
to be sound for reasons shortly to be stated—the President’s report
(pp. ix-x) refers to a “ gratifying recovery” which has raised our gross
national product from $501 billion at the start of 1961 to $562 billion
at the end of 1962, and also states (p. xi) that the economic upturn
of 1961-62 has carried us above any previous peaks of production.
The report also points out (p. ix) that this most recent upturn has
reduced unemployment from 6.7 percent of the civilian labor force
at the start of 1961 to 5.6 percent at the end of 1962, and that “ 22
704
ECONOMIC REPORT OF THE PRESIDENT
months of steady recovery have already broken this melancholy se
quence,” referring to the sequence of recessions which followed pre
vious upturns.
I can see little justification for this claim of a “ gratifying recovery,”
nor for the choice of data to support this claim. As the President
himseilf cites (p. ix), there was an upturn o f 45 months before the
1953-54 recession, 34 months before the 1957-58 recession, and 25
months before the 1960-61 recession. Thus, “ 22 months of steady
recovery is certainly no substantial evidence that we have overcome”
the “ melancholy sequence” o f increasingly frequent recessions. In
fact, as my chart 2 shows, we have not even had “ 22 months of steady
recovery.” Broadly speaking, the recovery has slowed down greatly,
and we have been in virtual economic stagnation for more than a
year. Correspondingly, the growth rate in GNP from the start of
1961 to the end of 1962, cited by the President as “ gratifying,” has
been very disappointingly low, and marks in many respects—as I
have already said—the least satisfactory recovery movement since
World War II.
And even the admission in the report (p. ix), to the effect that
there are still 4,000,000' unemployed, counts only full-time unemploy
ment as recorded by the Census Bureau. It overlooks that the true
level of unemployment in fourth quarter 1962, seasonally adjusted,
was very close to 7,000,000, as shown by my chart 4. This takes
properly into account both the full-time equivalent of part-time un
employment, and the abnormally low growth of the labor force due
to the shortage of job opportunity. Nor does the report acknowledge,
as I have shown, that unemployment now, while lower than at the
end of the most recent recessionary movement, is higher than at a
comparable stage of any previous upturn since World War II, and
this is the real problem.
Similarly, the report of the Council of Economic Advisers states
rather blithely (p. 9) that “ * * * we have made significant advances
toward the goals of fuller employment and faster growth,” and then
goes on in documentation of this to state (p. 10) that the GNP rose
from 519 billion to 554 billion, or 7 percent, comparing 1962 with
1961. Whether the developments from the start o f 1961 to date have
been “ significant advances,” or unsatisfactory confirmation of the
chronic pattern since 1953, I have already discussed. Moreover,
measured in uniform rather than current dollars, the growth rate
from 1961 to 1962 was only 5.3 pecent rather than 7 percent—a veiy
discouraging pace, in view of the pace required for full economic
restoration within any reasonable period of time.
The reports very seriously underestimate the current 'production “gap”
The President’s report states (p. x) that our total national pro
duction was running at an annual rate of between $30 and $40 billion
below our reasonable potentials as of the end of 1962. I maintain,
as estimated on my chart 6, that this “gap” in the fourth quarter of
1962 was running at a seasonally adjusted annual rate of about $80
billion. The difference between the size of the current production
“gap,” as estimated by the President and by the Council of Economic
Advisers, and the size of the production “ gap” as I now estimate it,
is crucial to the whole issue of economic policy.
ECONOMIC REPORT OF THE PRESIDENT
705
The method which the Council of Economic Advisers uses, in esti
mating the production “ gap,” is to project from 1953 forward “ a 3%
percent trend line through actual output in mid-1955, which is taken
as a period of approximately full use of resources” (p. 26 of Council
report), and then to contrast where we would stand now if this
growth rate had been achieved with where we actually stand now.
I find two fatal vulnerabilities in this method:
(1) The method used by the Council in estimating the size of the
current “ gap,” appears to be consistent with the Council’s persistent
statement that our unsatisfactory performance commenced with 1957
(see p. 22 of Council report), although, as my chart 2 shows, it clearly
commenced with 1953, and we were not at “ approximately full use of
resources in mid-1955.” Indeed, as early as 1954 and 1955, I was
repeatedly calling to the attention of this committee and others my
view that we were becoming frozen into a pattern of abnormally low
economic growth. In 1954, I published forecasts that the average
annual rate of growth 1953-60 might well average as low as 2.5 per
cent, which turned out to be exactly right.
(2) The utilization of the 3.5 percent figure by the Council of
Economic Advisers (see p. 41 of Council report) is based upon their
assertion that a 3.5 percent average annual growth rate would be
sufficient to absorb the increments in the labor force and in pro
ductivity each year, although the Council does favor a higher growth
rate, toward which they urge various special measures. But our
whole experience over the past four decades, as shown clearly on my
chart 1, is that a growth rate between 4 and 5 percent has been
required in recent decades to maintain optimum utilization of our
growing productive powers, and probably 5 percent is a more sensible
figure for now, after optimum utilization is restored.
The trends in productivity have a very important bearing upon
this crucial growth rate issue. The use of the 3.5 percent overall
growth rate figure by the Council of Economic Advisers is compounded
of a growth rate in the labor force somewhat in excess of 1 percent,
and a so-called normative growth rate in productivity somewhat in
excess of 2 percent. On the productivity side, the Council is fearfully
off the mark. As my chart 11 shows, the growth rate in productivity
has tended to accelerate rapidly when called forth by anything ap
proximating reasonably optimum economic performance. The chart
clearly indicates that estimates of the GNP growth rate, needed merely
to absorb the annual increments in the labor force and in productivity,
should factor in an average annual productive growth rate just about
twice as high as the one used by the Council of Economic Advisers.
The use of the 3.5 percent figure by the President and the Council,
combined with the erroneous use of 1955 as a satisfactory year, there
fore results in an estimated “gap” about half the size of the actual
“ gap” today. Moreover, this gross underestimate of the growth rate
required to absorb annual increments in the labor force and in pro
ductivity explains why, even during the rather rapid upturn during
1961, idle manpower and plant were reduced by so much less than the
Council had forecast.
While there have been some suggestions in past years to the effect
that my estimates of the needed growth rate were too high, it appears
clearly by now that this was not the case. For if my estimates of the
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ECONOMIC REPORT OF THE PRESIDENT
needed growth rate had been substantially too high, I would have
been substantially wrong in my forecasts as to the amount o f idle
plant and manpower which would result from the extent by which
actual growth rate fell below my estimates of the needed growth rate.
Instead, my needed growth rate estimates have been vindicated by
how closely the actual levels of idle plant and manpower have adhered
to my forecasts of what they would be.
Needed economic growth, 1962-65
The Employment Act of 1946 establishes maximum levels of em
ployment and production as a prime national objective. And since
we have not enjoyed these levels for a decade, it does not seem ex
cessive now to strive for their attainment not later than the beginning
of 1965—2 years from now.
As shown on chart 12, this requires that, measured from a 1962
base, man-years of employment be 3.2 million higher in 1963, and 5.7
million higher in 1964. This would absorb the net additional to the
civilian labor force, and reduce the true level of unemployment from
almost 7 million in 1962 to the neighborhood of 3 million by early
1965, which would mean full-time recorded unemployment close to
the 3 percent of the civilian labor force which would be consistent
with maximum employment. Thereafter, reflecting growth in the
labor force, and complete restoration of maximum employment, em
ployment in 1965 should rise about iy2 million above the 1964 level.
Chart 12 also sets forth the estimate that, consistent with the res
toration of maximum employment, total national production, meas
ured in 1961 dollars, needs to rise above the 1962 base by $50 billion,
or 9 percent, in 1963, and then rise another $46 billion, or close to 8
percent above the 1963 level, in 1964. This would be enough to bring
us close to maximum production by early 1965, through a rate of
economic growth sufficiently high to absorb the increments in the
labor force and in productivity, and, in addition, to close the pro
duction “ gap” existing in fourth quarter 1962. With maximum pro
duction restored by early 1965, the growth rate from 1964 to 1965
should be close to 6 percent, meaning total national production of
$680 billion in 1965, measured in 1961 dollars.
It should be pointed out, however, that these targets factor in a
much lower production “ gap,” as of fourth quarter 1962, than the
$80 billion annual rate referred to earlier. This is because that “gap”
included the cumulative damage done to the growth in our productive
capabilities by many years of economic slack, and all of this damage
cannot be erased even by optimum economic growth in future. In
other words, while this $80 billion “ gap” is a proper measurement of
how much more we would have been producing by fourth quarter
1962 if we had maintained optimum economic growth from 1953 for
ward, this does not mean that taking up all of the current economic
slack would in itself increase total national production by anywhere
near $80 billion.
The two reports fail to establish targets for either employment or
production, as intended by the Employment Act
Although the Employment Act requires, as the first essential step
toward its implementation, that needed levels of employment and pro
duction (compatible with maximum employment and production) be
defined, neither of the two reports makes any substantial attempt to
ECONOMIC REPORT OF THE PRESIDENT
707
do this. The departure from this requirement is one of the most com
plete and abrupt since the law was enacted.
The President’s report (p. xii), assuming the benefits of the tax
reduction proposals, forecasts a GNP for 1963 of $578 billion, or 4%
percent above the 1962 level. But this is in current dollars; in real
terms, the forecast is only about Sy2 percent. But this pure forecast
is not a target or “ needed level” within the context of the Employment
Act, It can hardly be a target within the meaning of the act, for the
Council of Economic Advisers admits (p. 35 of its report), as I have
already pointed out, that the actualization of this pure forecast would
leave us with as much idle productive potentials a year from now as
we have now. This represents no movement toward maximum
production.
Similarly, the Council’s report (p. 38) estimates that 3.1 million net
additional jobs would be needed to reduce unemployment to 4 percent
of the civilian labor force by the end of 1963. And while this purely
mathematical exercise follows, curiously, immediately upon a heading
“Goals for High Employment and Faster Growth,” it is not a goal at
all. The Council expects that, even if the President’s program is
adopted, unemployment at the end of 1963 will probably be just as
high as it is now.
Looking beyond 1963, although the tax proposals cover a 3-year
period, neither report sets forth any quantitative targets (or even fore
casts) beyond 1963, with respect to employment or production, much
less maximum employment or production. Yet the very core of the
Employment Act is that needed policies shall be derived from and
related to needed levels (i.e., maximum levels) of employment and
production. Indeed, without attempting to do this, how can the
Council really defend the policies it espouses ?
The very small size of the tax proposals
When, in early 1961, I used the term “ pygmy” to describe the eco
nomic programs then under consideration, I was pleasantly taken to
task by some of my best friends in the Government. But at that time,
they were forecasting that, in consequence of those programs (the
really relevant ones of which were largely adopted), unemployment
would be reduced to 4 percent of the civilian labor force by early
1963. Today, these same friends of mine are hoping that, if the new
proposals now under discussion are adopted, the 4-percent target may
be reached after 1965—though they do not say this explicitly. On the
other hand, in early 1961, viewing the proposals which I then called
“ pygmy,” I forecast that unemployment would be near 6 percent in
early 1963. So I hope that I will not be chided again for calling the
tax program very small. I intend no offense; I am merely worried
about the future of my country.
Before evaluating the impact of the tax proposals, let us appraise
the outlook if our national economic policies were to be left approx
imately in status quo. Dr. Heller and others have said publicly that
this might well result in a recession within 1963—and I agree. I f one
came within 1963 or shortly thereafter, it would confirm my view that
current policies portend no basic change in the chronic pattern of the
past 10 years. In that event, an average annual growth rate some
what below 3 percent would be in the cards for the few years following
1962. Applying such a low growth rate uniformly year by year,
708
ECONOMIC REPORT OF THE PRESIDENT
instead of trying to guess the exact timing of the recession, the result
would be a GNP of about $562 billion in 1963, about $577 billion in
1964, and about $593 billion in 1965, measured in 1961 dollars. Such
developments would be about $35 billion below the optimum target
which I have set forth above for 1963, about $65 billion below for 1964,
and about $87 billion below for 1965. And by 1966, as depicted on
my chart 10, total national production would be an estimated $104
billion below maximum production, and full-time unemployment
would be about 3.7 million above the level consistent with maximum
employment, or about 6 million. The true level of unemployment
might be about 8y2 million.
Now, how much better off than this would we be by virtue of the
tax proposals, if adopted ? With respect to 1963, the President’s re
port (p. xvi) says that the proposed tax program—assuming prompt
enactment—would increase disposable personal income at an annual
rate of about $6 billion during the second half of the year. This
would have a value of about $3 billion for 1963 as a whole. Against
this must be set off the increases in social security taxes which have
recently gone into effect, and this would probably reduce the net disposable-income value of the proposed tax reduction to somewhere
between $1 and $2 billion during 1963 as a whole. Then, the Presi
dent’s report (p. xvi) and the Council’s report (p. 51) estimate that
every dollar thus added directly to the flow of consumer income
would, through the concomitant increase in consumer spending, and
its indirect effects, result in close to twice that large an addition to
GNP. I think that this may be a serious overestimate in view of the
composition of the proposed tax reduction, which I shall discuss
shortly. But in any event, even if this estimate is accepted, the pro
posed tax reduction would add somewhere between $2 and $4 billion to
GNP in 1963. Moreover, the $1 and $2 billion increase in disposable
income (which leads to the stated GNP result) would be substantially
reduced by the upward movement of State and local taxes, and indirect
taxes of various sorts.
In any event, the most generous estimate of the GNP impact of the
proposed tax reductions in 1963 is a mere bagatelle, compared with the
$35 billion representing, as set forth above, my estimate of the dif
ference between a proper GNP target for 1963 and the GNP which
would actually result if policies were left about as they are now.
And even this estimate of the difference assumes, for reasons stated
above, close to a 3 percent growth rate in 1963, even without policy
change. It is beyond my comprehension, how the Council of Eco
nomic Advisers estimates that, without the proposed tax reduction,
there is real danger of an absolute recession in 1963, but that, with the
picayune impact which the tax reduction would have on GNP, there
is likelihood of a real 3y2 percent growth rate in 1963.
Let us now move from 1963 to 1965. The President’s report (p. xvi)
and the Council’s report (p. 51) state that the personal income tax
reductions, when fully effectuated would as of 1965 have the effect
of increasing disposable personal income by about $8 billion at an
annual rate, and that the additional consumer spending thus induced
would (including the accelerator effects) increase GNP at an annual
rate of about $16 billion.
There again, no allowance is made for the countereffects of rising
social security taxes, State and local taxes, and various indirect taxes.
ECONOMIC REPORT OF THE PRESIDENT
709
Further, the estimate ignores analysis of the effect upon consumer
spending of the composition of the proposed personal income tax
reductions.
The President’s report (p. xvi) says that “Americans as a whole
regularly spend between 92 and 94 percent of the total after-tax (dis
posable income) they receive.” But this comment neglects the vital
point that families at different income levels spend for consumption
different proportions of their incomes. At the bottom of the income
structure, millions of families actually “ dissave,” which means that
they spend more than their disposable incomes. A substantial pro
portion of our total population, beginning from the bottom of the
income structure and moving upward, spend in the aggregate at least
100 percent of their disposable incomes, and a very large proportion
spend in the aggregate nearly 100 percent. Correspondingly, fami
lies higher up in the income structure spend a smaller proportion of
their incomes and save more for purposes of investment. My analysis
of the composition of the proposed tax reduction, which I shall discuss
shortly, makes me very dubious of the proposition that 92-94 percent
of it will enter immediately into the consumer spending stream.
But even accepting the official estimate that, by 1965, the personal
income tax reductions would have an annual GNP impact of about
$16 billion, this figure needs to be contrasted with the $87 billion
difference, set forth above, between needed GNP in 1965 and the esti
mate of where GNP would then be if our national economic policies
remained about in status quo—that is, if the tax program were not put
into effect.
O f course, the President’s report (p. xvi) points out that the stimuli
to investment which would be provided by the increased consumer
demand, and by the direct concessions to investors also embodied in
his tax proposals, must also be taken into account. He indicates,
among other things, that each additional billion dollars of investment
adds at least a billion dollars to spending for consumer goods, through
“ a derived chain reaction.” But how much additional investment
would actually be induced by the proposed tax program, in view of the
overcapacity which is certain to persist if the stimulation of ultimate
demand in the form of consumer outlays remains so woefully small,
and if, as I shall indicate subsequently, the increase in ultimate demand
through the increase of public outlays remains so woefully inadequate,
is a matter which I shall discuss shortly.
And even assuming the most favorable impact of the tax program
upon the investment process, and adding this to the President’s own
estimates of the direct impact of investment upon consumer spending,
it is not surprising that so many others are so deeply concerned about
the dangerous quantitative inadequacies of the proposed tax program.
To illustrate, on page 120 of Business Week of February 9,1963, the
following statement is made in an editorial which reflects the judg
ment of very careful and competent analysts, who are not predisposed
toward wild deficit spending:
“ The facts that the tax program, as it stands, will not do what
President Kennedy himself has been talking about—remove the drag
that an outdated tax structure has put upon the economy. The tax
reductions it proposes are too small and too slow to give a substantial
lift to production and employment for several years, if at all.”
710
ECONOMIC REPORT OF THE PRESIDENT
This comment by Business Week leads me to make still another
point: The impact of the program in the first year 1963—the matter of
timing—is even more important than its estimated projected impact
when fully in effect in 1965. Obviously, if a patient needs an injec
tion of 100 units now, the same result is not obtained by giving him
33 units now, a similar amount a year from now, and another similar
amount 2 years from now. Thus, not only is the proposed tax treat
ment pitifully small as to 1963; in addition, its potentials are further
diminished by spreading it over far too long a period of time.
The Council1s report does not even estimate the economic impact of
the proposed tax program
Although the Council estimates, as indicated above, the GNP impact
of the proposed personal income tax reduction, this would be so inade
quate that the Council relies largely upon the investment stimuli which
the program would provide. But the Council does not really venture
to quantify this meaningfully, and I believe that to do so would reveal
the startling inadequacy of the tax proposals as a whole—when
measured against needed production and employment targets which
the Council does not quantify either.
Thus, the Council report says (p. 51) :
“ No one can pretend to estimate with precision the ultimate impact
of a program so far reaching. * * * Our study of the program, and
our tentative projections based iipon it do, however, convince us that
the program measures up to the challenge that the 1960’s present to
our economy; that it will surely set us on a path toward our interim
employment target; and that it will lay the foundation for more rapid
lon^run growth.”
Despite this expression of confidence, it should be noted that the
Council admits that even the full tax program dose, over 3 years, will
only set us on a path toward an interim employment target of 4 per
cent—which would not be maximum employment. So, as against the
Council’s early 1961 target of 4-percent unemployment by early 1963,
we now have an admission that this is unlikely even by 1965. And
when, under these circumstances, would maximum employment
arrive ?
THE INTERNAL COMPOSITION OF TH E PROPOSED TAX PROGRAM IS H IG H L Y
IN IM IC A L TO SUSTAINED OR BALANCED ECONOMIC GROWTH
Other things being equal, tax reduction proposals, of pygmy size
related to the need, might nonetheless be desirable as a starter, al
though I fear the long-range consequences of discrediting an appro
priate medicine through its quantitatively deficient use. But I have
an even more serious objection to the proposed tax program, on the
ground that its internal composition, when viewed in its entirety, is
based upon an entirely erroneous analysis of what our economic
troubles have been and still are, with corresponding errors in the
proposed remedy.
A few theoretical observations
On this score, I need now to make a few remarks in the area of theo
retical economics, although usually I keep away from this. Theoreti
cally, our deficient economic performance during the past decade
cannot be explained on the grounds of an inadequate totality of pur
ECONOMIC REPORT OF TH E PRESIDENT
711
chasing power, and/or the desire to use it on the part of consumers,
investors, and governments. Theoretically, any given level of produc
tion generates enough purchasing power to take the product fully.
Theoretically, a lower or higher level of total purchasing power,
measured in dollars, would result in a lower or higher level of prices,
but not much change in the physical performance of the economy.
So what we have suffered from, during the past decade, has not been
so much a deficiency in total purchasing power and/or the disposi
tion to use it, but rather a maldistribution in the purchasing power
and/or in the disposition to use it, which have thrown the economy out
of balance by destroying the economic equilibrium. I shall shortly
detail just how this has happened.
It follows that, in the contest of the current and foreseeable eco
nomic situation, changes in tax policies have very useful potentials,
not mainly because they can add to the total of purchasing power by
increasing the Federal deficit, but rather because they can help to
improve the balance or relations among the various main components
of purchasing power, and thus help to maintain a better economic
equilibrium. Conversely, if the net long-range effect of the tax
changes, based upon faulty diagnosis of the economic problem, results
in maintenance or even worsening of the disequilibriating factors,
the tax changes will tend to be in large part wasted, and in some
substantial part even pernicious.
This is another way of saying, as was most commonly recognized
some time back but which unfortunately so few are willing to affirm
now, that our American economic problems are very largely problems
of distribution, or problems of the allocation of resources at any par
ticular time. A fiscal policy, including tax policy, is a prime instru
ment in dealing with this distributive or allocations problem. We
recognized this during wartime; we need also to recognize it now,
even though the criteria which apply in determining the workable
distribution of income and the workable allocation of resources are
different now from what they were in wartime.
The utility of an equilibrium model
To get substantively into this problem, let me now proceed further
with my own economic analysis, as I have developed it over the years
and tested it pragmatically against actual developments. What I have
done is this: I have constructed a so-called equilibrium model at
the beginning of each year, representing optimum economic perform
ance. I have then compared this model with actual developments
during the year, to test whether the actual developments refuted my
model, or whether unfavorable consequences resulting from the differ
ences between my equilibrium model and the actual performance
tended to vindicate the model. Then, I have corrected the model from
year to year. That the model has been reasonably sound is indicated,
as I have already said, by the high degree of correctness of my fore
casts and other estimates in years gone by, with many of which this
committee is particularly familiar.
The methodology which I am describing is really the same thing
as proper utilization of those provisions of the Employment Act of
1946 which call for the balanced projections of estimated needed levels
of employment, production, and purchasing power, as a guide to
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ECONOMIC REPORT OF THE PRESIDENT
needed policies. Obviously, these needed levels must be broken down
into meaningful components.
The series of charts which I shall now discuss set forth my results.
How the investment-consumption imbalances have developed
Chart 13 shows that a deficit rate of growth in private consumer
spending has been quantitatively the dominant factor in our total
GNP deficiencies or gaps. For fourth quarter 1962, for example, I
estimate a consumer spending deficiency of more than $58 billion,
as part of the GNP deficiency of almost 80 billion.
My chart 14 shows, and this is very relevant to the tax problem, that
the growing deficiencies in consumer spending have resulted pri
marily from inadequacies in consumer disposable incomes, rather
than mainly from a propensity of consumers as a whole to spend
too small a share of their disposable incomes and to save too large a
share. O f course, as I have indicated, the distribution of disposable
consumer income also affects the propensity to spend as against the
tendency to save for purposes of investment. Thus, both the inade
quacies in total consumer incomes, and the unsatisfactory distribution
after taxes, have contributed to the periodic imbalances between con
sumption and investment which I shall now discuss.
It is true, as shown on chart 15, that gross private domestic invest
ment, and particularly the investment in plant and equipment which
expands our productive power, has been deficient on the average dur
ing the past decade as a whole. This is really a truism; in an economy
growing only 2.7 percent a year when it should have grown more than
4 percent, almost everything has been deficient. But the crucial ele
ment in the analysis of investment is why this has happened. It has
not happened because profits and other incentives to investments, or
other xunds available for investment, were deficient during the upturn
or boom periods. Nor has it happened because the tax structure bore
down too heavily upon investment. As the bottom half of my chart
15 shows clearly, in each of the major upturn periods^ including the
current upturn period, investment in plant and equipment rushed
forward very much more rapidly than total demand for ultimate
products in the form of private consumer outlays plus total public
outlays at all levels. Only when this process resulted in severe over
capacity was investment cut back sharply. Then, these investment
cutbacks, combined with the more enduring deficiencies in the demand
for ultimate products, led to stagnation and then recession, with the
profit squeeze associated with these conditions. It follows that it is
entirely inappropriate to look backward after the event, in analyzing
investment trends, thus reaching the oversimplified conclusion that
investment and profits have averaged too low, instead of applying a
more dynamic analysis to how these things actually happened, as a
basis for corrective action.
My chart 16 presents some additonal data with respect to the re
lative fluctuations in gross national product and in various types of
domestic investment. I have included the capital expenditures of
railroads, because later on I want to discuss the transportation prob
lem—as well as the housing problem—as these bear upon the whole
issue of appropriate economic policies.
Chart 17 shows how rising prices and profits fed the boom in invest
ment in plant and equipment prior to the 1957-58 recession—a boom
ECONOMIC REPORT OF THE PRESIDENT
713
which was inordinately out of line with the much lower growth in
ultimate demand which I have already depicted.
Chart 18 shows how an inordinate or nonsustainable investment
boom in plant and equipment occurred again before the 1960-61 re
cession, despite substantially reduced prices and profits—albeit from
levels that were too high. This reinforces my position that the main
conditioning factor bearing upon the trends in this type of investment
are not the trends in prices and profits so much as the investor ap
praisal with respect to current and prospective levels of demand for
the products which their plants turn out. In short, under any recent
or foreseeable circumstances, our investors in the main do not confront
a situation where their investments are held back by anything basic
except inadequate demand for ultimate products.
Chart 19 makes the same type of demonstration during the most
upturn period for which adequate data are available, from the first
quarter of 1961 through the third quarter of 1962. This chart teaches
the same lesson in a different way, namely, that even enoromously
rising profits after taxes—enjoyed despite stable or declining prices—
do not induce corresponding investment enthusiasm, in view of very
serious plant overcapacity and the unlikelihood of enough expansion
of ultimate demand to take up the slack.
Significant current data in re profits and other financial factors
Chart 20 indicates how high and rewarding profits after taxes now
are in most of our key industries, despite very large unused capacities.
Similarly, chart 21 indicates the very satisfactory current nature of
profit-sales ratios, indicating that the only real problem is more volume
rather than higher profit margins after taxes, or tax reduction pointed
toward this result. Chart 22, which also has an important bearing
upon funds available for investment purposes, reflects the very extra
ordinary tendency of American corporations, during the past decade,
to finance larger and larger portions of their total rand requirements
out of sources representing the combination of depreciation and
amortization and retained profits and depletion allowances.
Wage aspects of the investment-consumption problem
There are still other ways of demonstrating that the heart of our
economic problem has been the tendency of investment in the means of
production to outrun the demand for ultimate products, and thus
to bring on stagnation and recession. A very important aspect of the
tendency of consumer incomes and outlays to lag behind the growth
in our productive powers is dealt with in chart 23. Here it is shown
that the average annual growth in wages and salaries during the 10year period 1953-63 as a whole has only been 3 percent, contrasted with
a needed average growth rate of about 5 percent which would have been
consistent with my equilibrium model for sustained optimum economic
growth. The chart also shows that, by fourth quarter 1962, a defi
ciency in wages and salaries at an annual rate of about $60 billion
(seasonally adjusted) was by far the major segment in the deficiency
in total consumer incomes before taxes running at an annual rate of
more than $74 billion, and squaring with the deficiency in total con
sumer outlays running at an annual rate of more than $58 billion,
allowing for taxes and savings.
Because wages are so large a factor in the total consumption picture,
and because I attach such prime importance to the investment
714
ECONOMIC REPORT OF THE PRESIDENT
consumption relationship, it is useful also to compare the trends in
wages with the trends in profits and in investment. As shown by
chart 24, during the period leading up to the 1957-58 recession, both
profits after taxes and investment in plant and equipment far outran
wage rate increases, and the contrast between the investment trends
and the wage rate trends were very extreme. They were so extreme
as to make it very clear why this type of investment during this period
grew so much faster than aggregate wages and total consumer incomes
and spending, even after proper allowance is made for the fact that,
with some increase in employment, total wages would grow more
than the advance in wage rates alone would provide.
Chart 25, dealing with the period leading up to the 1960-61 reces
sion, shows again how investment in plant and equipment advanced
enormously more rapidly than wage rates. This happened despite
some reduction in profit levels, indicating again that no inadequacy of
profits after taxes has served as a barrier to very ebullient investment
when business judgment was optimistic with respect to the trends in
demand for ultimate products.
Chart 26, dealing with the current economic upturn, again shows
investment in plant and equipment advancing in general much more
rapidly than wage rates, although the contrast is not so vivid as in
the earlier periods just reviewed, because of the increasing awareness
of overcapacity. The chart also shows profits after taxes advancing
tremendously more rapidly than wage rates, and also advancing tre
mendously more rapidly than investment. This demonstrates once
again that even very handsome profits after taxes do not stimulate
investment much, in the face of large overcapacity which has become
more clearly chronic.
Summary of major causes of the chronic disequilibrium
The purpose of this lengthy analysis is to bring to the front the
central and dominating explanation of our poor economic perform
ance during the past decade. It has not been due to a tax system which
has borne down too heavily upon investments or profits. Despite the
actual tax burden, investments and profits have risen too rapidly, rela
tive to the other sectors of the economy, whenever the economy has been
moving substantially forward. The slowdowns or cutbacks in the
investment process have come only when large overcapacity resulted
from the inadequacies in ultimate demand, composed both of private
consumer demand and public outlays at all levels. It has been only
when this fundamental difficulty has become abundantly apparent,
that investment has been cut back, unemployment consequently in
creased, and some “profits squeezes” suffered.
The whole analysis also shows that the relationship between wage
costs and prices has never yielded too low a margin of profit per unit
of production and sales. Indeed, this margin in general has tended to
be too high, thus refuting the thesis that price increases have been
necessary in view of wage rate increases. When aggregate profits
have been “ squeezed” or unduly reduced, it is only because of the
periods of stagnation or recession, resulting from the disequilibriums
m the economy of the kind which I have indicated, and excessively
high profit margins after taxes have been a factor in this disequi
librium.
ECONOMIC REPORT OF THE PRESIDENT
715
Public policies contributing to the disequilibrium
Many public policies during the past decade, have contributed to
this disequilibrium. The tax policy has done so, not by placing
too heavy a burden upon profits and investments, but rather by being
too regressive in its impact, and thereby contributing to the maldistri
bution in income flow. Even the tax reductions of 1948 and 1954,
while providing some temporary stimuli, have contributed to the re
gressive trends. And I believe that the Council of Economic Ad
visers neglects this entirely, in its review of fiscal policy. I f the
Council, instead of looking at fiscal policy in isolation, and measuring
only its direct quantitative implications in the aggregate, had set its
review of fiscal policy in the framework of the kind of analysis of
the whole economy in operation which the Employment Act of 1946
calls for, I believe that the Council would have reached conclusions
more similar to mine.
In addition to tax policy, many other public policies contributed to
the poor economic performance during the past decade. These in
cluded the various bonanza concessions to stimulate business invest
ment by more liberal amortization or depreciation allowances; the
regressive impact of the tight money policy with rising interest rates;
the excessively tight Federal budget, especially on the outlays side;
the relative neglect of programs designed to expand private consump
tion, such as social security, minimum wage improvement, and hous
ing and welfare programs. The whole difficulty, in short, may be
summed up in the proposition that relatively too much emphasis was
placed upon helping investment and profits directly, and not nearly
enough emphasis was placed upon the expansion of private consump
tion and public demand for needed goods and services which cannot
be privately supplied.
We are now in danger of perpetuating the undesirable public policies
It might have been anticipated that, viewing this 10 years of ex
perience, the economic program now put forward by the President and
by the Council of Economic Advisers, and especially the tax program,
would have sought vigorously to correct this basic and profound
chronic disequilibrium, which is manifest in the economy even today,
as some of my charts have demonstrated. And if one were to rely
only upon what the reports of the President and of the Council say,
one would be led to believe that this desirable reconstruction of policy
is taking place. For example, the President’s report says (p. xvii)
that “ * * * the most important single thing we can do to stimulate
investment in today’s economy is to raise consumption by major re
duction of individual income tax returns.” The Council’s report
states (pp. 15-17) that the biggest error in the Council’s forecast for
1962, made at the beginning of that year, was with respect to business
investment, and that the disappointing performance of business in
vestment was due to inadequate demand. Apparently responsive
to this statement, the Council’s report states (p. 44) that “ the largest
part of the total reduction (in taxes) will be received by the lower
and middle income groups of taxpayers.” And on page 31 of the
Council’s report, it is pointed out that since 1957, in contrast with
earlier years, corporate investment has not kept pace with gross
9 3 7 6 2 — 63— p t. 2-------- 6
716
ECONOMIC REPORT OF THE PRESIDENT
returned earnings, which is an admission that investment has not
been inhibited by inadequate profits nor by excessive tax burdens.
But other parts of the two reports move in the opposite direction.
Thus the President’s report (p. 17) says this:
“ In recent years, business as a whole has not been starved for
financial accommodation. But global totals mask the fact that
thousands of small or rapidly growing businesses are handicapped by
shortages of investment funds. As the total impact of the tax pro
gram takes hold and generates pressures on existing capacity, more
and more companies will find the lower taxes a welcome source of
finance for plant expansion.”
This statement seems to me correct in pointing to the special tax
problems of small business, which I feel should receive more attention.
But this, in my view, is no justification for pouring out billions of
dollars in tax-concession bonanzas to businesses of all sizes which do
not need them. And while the President’s statement is correct in
implying that business in recent years has not been starved for finan
cial accommodation, which implies that the tax concession bonanzas
will not do much good so long as there is so much excess capacity,
the statement seems wrong in implying that these tax bonanzas will
be needed to stimulate investment when there is more pressure on
existing capacity. For almost all experience shows that, when there
is real pressure on existing capacity, profits and investments under
the now existing tax laws have moved iar ahead of ultimate demand,
and under such conditions should be relatively restrained, instead of
being encouraged to get still further out of line by wasteful tax
concessions.
Similarly, it appears to me that the Council of Economic Advisers
is in error, when it urges once again (p. 62 of its report) the desir
ability of attaining a higher ratio of private investment to GNP
than during the past 5 years, in order to attain a growth in potential
output at an annual rate of about 4 percent. In support of this
proposition, the Council Report (p. 29) points out that business fixed
investment averaged a higher ratio to GNP during 1949-57 than
during 1957-60.
In the first place, even if it is assumed that the ratio of private
investment to GNP has been too low in most recent years, this would
be expected during a period of very low economic growth. But as I
have already shown, the forces which have repressed investment un
duly during this period have not been burdensome taxes nor inade
quate profit margins after taxes, but rather the high overcapacity and
the large and dominant deficiency in demand for ultimate products.
In the second place, the idea of the Council that a higher average
annual overall growth rate than 3.5 percent requires a higher ratio of
investment to GNP than a 3.5 percent growth rate would require is
also erroneous. The appropriate (i.e., sustainable) ratio of investment
to GNP is not determined by the desired rate of GNP growth in an
economy like the United States, but is determined by the ratio which
will keep the expansion of production and the expansion of ultimate
demands in equilibrium. I f we want to accelerate the rate of overall
economic growth, or our potentials toward this end, we need to take
ECONOMIC REPORT OF THE PRESIDENT
717
measures accordingly, but these would not change the sustainable
ratio of investment to GNP. In view of the increased productivity of
capital, which means that each dollar of new investment tends to
add more to the output potential than it used to, we may well need
a lower ratio of investment to GNP than was averaged during other
periods of optimum total resource use. The Council makes no satis
factory analysis, empirical or otherwise, of this whole problem.
Third, the ratio of investment to GNP during 1949-57 was governed
by many factors, including the deliberate rapid build up of the invest
ment base during the Korean war, which cannot be accepted without
analysis for now or the foreseeable future.
Fourth, advocating a higher ratio of investment to GNP, when now
and for the foreseeable future we are confronted with the challenge
of large unused plant capacity, is manifestedly erroneous, in that it
would accentuate the disequilibriums which have existed for many
years and still exist.
The severely disequUibrating factors built into the proposed tax pro
gram
In my analysis of how further disequilibriating factors are built
into the structure of the proposed tax program as a whole, I shall
first consider this program including the “ reform” elements in it, and
then look at the tax reduction program without including these “ re
forms.” Both of these two approaches are essential.
First of all, the tax concessions granted to investors in 1962, by
legislative and administrative action, must be taken into account.
These have an annual value in excess of $2 billion per year, according
to the President’s Economic Report (p. xvii). Second, the reduction
of the corporate tax rate from 52 to 47 percent would in itself (taking
account of proposed structural changes or “reforms” ) decrease corpor
ate tax liability by about $1 billion at an annual rate. So these steps,
taken alone, would decrease corporate tax liability in the neighborhood
of $3 billion, annual rate.
It is much more difficult to evaluate the relative impact which the
proposed personal income tax reductions would have upon saving and
investment, and consumption, respectively. It is too bad that the
Council of Economic Advisers does not attempt to shed real light upon
this profoundly important question. In a table on page 46 of its
report, the Council indicates that, in recent years, consumers have
tended to spend between 92 and 94 percent of their disposable income.
This implies that only about 6 to 8 percent of the proposed personal
tax reductions would go into saving and investment. But this impli
cation may well be very misleading, by not taking account of the dis
tribution of the proposed personal income tax reductions, for (as I
have said) high income families save much more than 6 to 8 percent of
their disposable incomes, while millions of families save nothing.
I have therefore attempted to prepare table 1, which may shed some
light upon how the proposed personal income tax reductions would be
used. The top half of this table assumes enactment of the proposed
“ reforms.” On this assumption, the table indicates that, out of a total
personal income tax reduction of about $8.6 billion, more than 36
718
ECONOMIC REPORT OF TH E PRESIDENT
percent, or about $3 billion, would go to families with incomes from
$10,000 up—and these families constitute only about one-fifth of the
total multiple-person families in the United States. There is no way
of estimating with any accuracy what proportion of this $3 billion
would increase immediate consumer outlays, and what proportion
would be saved or invested. But if one credits most of this $3 billion
to consumer spending side, the appropriate question is what consider
ations of equity or social justice permit allocating a $3 billion increase
in consumer spending and living standards to the one-fifth of our
families at the top of the income structure, and only about $5^ billion
to the four-fifths of our families who are lower down in the income
structure. I shall have more to say about this, when I discuss in more
detail the separate question of equity and social justice.
Therefore, if there is any justification for allocating $3 billion of
the proposed personal income tax reduction to the one-fifth of the
families at the top, it must be on the ground that a large part of this
amount will help to activate savings and investment. Let us then say
that $2 billion of this $3 billion would move in that direction. Add
ing this $2 billion to the $3 billion representing the tax concessions
to corporations granted in 1962 and the reductions in corporate tax
rates now proposed (after offsetting “ reforms” ), one arrives at a total
of $5 billion allocated to the investment function, as against about
$6% billion allocated to the consumption function.
The second half of the same table 1 looks at the proposed personal
income tax reductions without taking account of the proposed “ re
forms.” This may indeed be the more reasonable method, because
there is very strong sentiment for enacting the proposed tax reduc
tions before the proposed “ reforms.” And there is doubt as to how
much of the “ reform” program will ever be adopted. Beyond this? it
seems that some parts of the “ reform” program are just as regressive
as many parts of the tax reduction program, but the “ reform” pro
gram is so bewilderingly complex that I have not yet had time to
analyze its significance in detail.
Putting aside the “reforms,” the second half of my table 1 shows
that more than 45 percent of the proposed $11 billion personal income
tax reduction would flow to the one-fifth of the families at the top of
the income structure (for example, incomes of $10,000 and over),
coming to about $5 billion. Let us assume, for reasons that I have
already stated, that about $3y2 billion of this would be allocated to the
investment function. Add to this figure the approximately $4^ billion
(annual value) of the tax concessions to investors granted in 1962 and
those proposed in the new tax program (before taking account of
structural changes or “reforms” ) . This results in a total of $8 billion
allocated to the investment function, as against only $7% billion to the
consumption function (for example, $1% billion to the above $10,000
families, and $6 billion to those lower down).
The President’s tax message indicates that the net effect of personal
tax reductions (in 1965) would total $8,600 million and have the fol
lowing incidence:
719
ECONOMIC REPORT OF THE PRESIDENT
Talle 1
[Dollars in millions]
(1)
Adjusted gross income level
(2)
Present
tax
(4)
(5)
Difference
Difference
(3)
Proposed
tax i
Amount
0 to $3,000.................................
$3,000 to $5,000.........................
$5,000 to $10,000........................
$10,000 to $20,000......................
$20,000 to $50,000......................
$50,000 and over.......................
Total.
Percent of
total
$1,450
4,030
18,300
12,710
6,760
4,170
$890
2,900
14,510
10,790
5,940
3,790
-$560
-1,130
-3,790
-1,920
-820
-380
6.5
13.1
44.1
22.3
9.5
4.4
47,420
38,820
-8,600
100.0
Comple
mentary
percent
Cumula
tive
percent
100.0
93.5
80.3
36.3
14.0
4.4
6.5
19.7
63.7
86.0
95.6
100.0
i A slight change in the standard deduction for low-income families, as proposed by Dillon on Feb. 6,
1963, would reduce slightly the amounts of the proposed tax for some incomes below $5,000. At higher
levels the effect would be nominal except for large families with incomes below $7,500.
Considering only the effects of the proposed cuts in rate (and not
the proposed changes in rules) the total is $11,040 million having the
following incidence:
[Dollars in millions]
(1)
Adjusted gross income level
(2)
Present
tax
(4)
(5)
Difference
Difference
(3)
Proposed
tax i
Amount
Percent of
total
Cumula
tive
percent
3.7
13.6
54.5
78.9
91.7
100.0
0 to $3,000.................................
$3,000 to $5,000.......................
$5,000 to $10,000........................
$10,000 to $20,000......................
$20,000 to $50,000......................
$50,000 and over......................
$1,450
4,030
18,300
12,710
6,760
4,170
$1,040
2,940
13,780
10,020
5,350
3,250
-$410
-1,090
-4,520
-2,690
-1,410
-920
3.7
9.9
40.9
24.4
12.8
8.3
Total...............................
47,420
36,380
-11,040
100.0
Comple
mentary
percent
100.0
96.3
86.4
45.5
21.1
8.3
i A slight change in the standard deduction for low-income families, as proposed by Dillon on Feb. 6,
1963, would reduce slightly the amounts of the proposed tax for some incomes below $5,000. At higher levels
the effect would be nominal except for large families with incomes below $7,500.
The conclusions which I draw from the foregoing analysis is that
the proposed composition of the tax changes, personal and corporate
combined, are in thorough defiance of the lesson which we should
draw from careful analysis of the past decade. Such a pattern of
tax change, in my view, might provide some temporary fanning up
of the rate of economic activity, substantive and psychological. But
in the longer run, the disequilibriums which this pattern of tax change
would maintain or even augment would offer no large prospect of
improvement in our long-term growth rate. In short, the proposed
program is regressive in its overall economic impact, and that is not
what our economy needs.
720
ECONOMIC REPORT OF THE PRESIDENT
Correspondingly, the proposed tax program involves billions of
dollars of wasteful giveaways, in the form of tax subsidies to those
who have no need for them, or whose need for them is infinitely less
than those who are being relatively starved. I pointed out at the
outset why a large and deliberate increase in the Federal deficit is a
subsidy operation; such subsidies are justified only when they com
port with a clear and defensible economic purpose.
The proposed tax program is socially unjust and highly inequitable
Having concluded my discussion of the proposed pattern of tax
changes, from the viewpoint of their impact upon the overall econ
omy, I now turn to an evaluation of these proposed tax changes in
terms of equity and social justice. Of course, there are some who
say that, in our so-called affluent society, equity and social justice have
become of secondary consideration, and that, in any event, the over
riding purpose of improving our overall economic performance should
take precedence. I agree with none of this, because too many among
us are not affluent, and because we are already rich enough as a Nation
to afford to be just. But I need not dwell upon this, because the
highly undesirable pattern of the proposed tax changes from the view
point of overall economic considerations leaves us plenty of room to
go into the question of equity and social justice.
The extremely regressive nature of the proposed personal tax reduc
tions
Unfortunately, a good deal of propaganda has created the impres
sion that the proposed personal income tax reductions would be highly
progressive in their effects. The method used in arriving at this
incorrect conclusion is to point out that, measured as a percentage
of taxes actually paid, the lower income people would receive more
tax reduction than the higher income people. For example, as shown
on my table 2, under the proposed tax reduction program, the $3,000a-year family would receive a 100-percent reduction in taxes paid,
the $5,000 family a 33.3-percent reduction, and the $200,000 family
only a 17.5-percent reduction. These computations do not take ac
count of the reform proposals, but many of the proposed reforms are
unlikely of enactment, and some of them would be regressive rather
than progressive in their impact. Further, I submit that tax reduc
tion should come before reform. In any event, my analysis indicates
the error in the ways of those who, even without taking account of
the reforms, insist that the tax reduction proposals themselves are
progressive rather than regressive.
This error resides in the fact that the ultimate matter is not the
percentage decrease in taxes paid, but the percentage of increase in
disposable income by virtue of the tax reduction. It is the increase
in disposable income which affects the family, and it is the increase in
disposable income which is available for entry into the spending
stream by way of stimulating the overall economy. And as my table
2 shows, the proposed personal income tax reductions would result
in extremely regressive increases in disposable income, measured
properly on a percentage basis. The $3,000 family would obtain only
a 2-percent increase in disposable income; the $5,000 family a 3.1percent increase; the $10,000 family a 3.5-percent increase; the $50,000 family a 6.3-percent increase, the $100,000 family a 11.2-percent
increase, and the $200,000 family a 23.8-percent increase.
721
ECONOMIC REPORT OF THE PRESIDENT
T able 2.— President’s proposed tax structure in 1965 compared with present
structure (1962), at various tax levels (for married couple with 2 children)
(2)
(1)
Taxable income
level
Present
tax i
$3,000.........................
$5,000.........................
$7,500.........................
$10,000.......................
$15,000.......................
$25,000.......................
$35,000.......................
$50,000.......................
$100,000......................
$200,000____________
$60
420
* 877
1,372
2,486
5,318
9,037
15,976
44,724
115,224
(3)
Present
income
after tax
$2,940
4,580
6,623
8,628
12,514
19,682
25,963
34,024
55,276
84,776
(4)
(5)
(6)
Proposed Proposed Percent
tax 2
income
tax re
after tax duction
0
$280
663
1,068
2,076
4,605
7,814
13,837
38,542
95,072
$3,000
4,720
6,837
8,932
12,924
20,395
27,186
36,163
61,458
104,928
100.0
33.3
24.4
22.2
16.5
13.4
13.5
13.4
13.8
17.5
(7)
(8)
Percent
increase
in
after-tax
income
Percent tax to
income
Present
Proposed
2.0
3.1
3.2
3.5
3.3
3.6
4.7
6.3
11.2
23.8
2.0
8.4
11.7
13.7
16.6
21.3
25.8
32.0
44.7
57.6
0
5.6
8.8
10.7
13.8
18.4
22.3
27.7
38.5
47.5
i Assuming 10-percent deduction for taxes, interest, contributions, medical, etc.
* Assuming President’s proposal, as revised by Dillon’s testimony, of $400 minimum deduction for married
couple and $100 for each child; 10 percent for incomes between $6,000 and $10,000; $1,000 flat deduction be
tween $10,000 and $20,000; and 5-percent deduction for $20,000 and up.
Actual slight deviations from these workable assumption would
not in the slightest change the general import of the analysis.
We must find other ways to help the low income people
O f course, I recognize that, if there is to be any across-the-board tax
reduction, the people higher up in the income scale must receive larger
dollar increases in their disposable incomes than the people lower
down. But why should they receive larger percentage increases in
disposable incomes ? What social or equitable consideration can possi
bly support the conclusion that the Government, through deliberately
enlarging the Federal deficit, should subsidize a 23.8 percent increase
in the disposable income of the $200,000 family, while the $3,000
family with an income only about half of that required to maintain
a decent standard of living receives only a 2 percent increase in dis
posable income ?
I know that some of the mathematicians and technicians will point
out that it is impossible to give the low-income family as big a per
centage increase in disposable income as the high-income family,
because the disposable income of the low-income family is not in
creased much even if its tax is wiped out entirely. I admit the mathe
matics. But what this demonstration really shows is that we need
other programs far more than we need this kind of tax reduction
program.
I f this kind of tax reduction program, by the very nature of its
mathematics, produces such huge subsidies to those who need no more
than they now have, and so utterly neglects millions who need so much
more than they now have, then the Government should turn more
largely to programs other than tax reduction which do what ought
to be done, instead of doing what is entirely indefensible.
A few billion dollars less m tax reduction for the one-fifth of the
families above $10,000, and a few billion dollars more of programs
other than tax reductions, which would improve the distribution of
income and help those at the bottom to come closer to an American
standard of living, would be infinitely more desirable, not only by the
test of equity and social justice, but also by the test of what would be
good for the overall economy. For it is manifestly clear that a tax
722
ECONOMIC REPORT OF THE PRESIDENT
reduction program which adds a larger percentage increase to the
disposable incomes of those at the top than to the disposable incomes
of those at the bottom will actually worsen and make more regressive
the distribution of disposable income now in effect. And this is not
what we need.
Many competent authorities have recently pointed out that the
distribution of income in the United States has been worsening in
recent years. Most of these studies deal with income before taxes.
Despite the so-called progressive nature of the Federal income tax
structure, there are many who believe that the distribution of dis
posable income is even more unsatisfactory than the distribution of
income before taxes. This is due to the impact, not only of State and
local direct taxes, but especially of sales taxes and other taxes which
seldom enter into the analysis of income distribution. And as these
types of regressive taxes are now trending substantially upward, this
in itself is another powerful reason why we should be very careful in
what respects we alter the Federal tax structure.
It is noteworthy that, on various occasions, the President and the
Council of Economic Advisers have indicated that the proposed tax
program will leave more room for the collection of more taxes at other
levels of government. For the reasons I have just given, the invitation
to this shift is very undesirable. Parenthetically at this point, it
seems that the invitation to this shift is inconsistent with the avowed
purpose of the proposed tax reductions to stimulate the overall econ
omy by adding to the consumer spending stream.
Some data on current income distribution
Let us look for a moment, in this connection, at the current distribu
tion of income in the United States. My chart 27 shows that, in 1960,
10.4 million American multiple-person families lived in poverty.
These families constituted almost a quarter of all U.S. multiple-person
families, but received only 7y2 percent of the total income of all U.S.
families. About 4 million unattached individuals also lived in pov
erty. These were almost 37 percent of all U.S. unattached individuals,
but received only 11.7 percent of the total income of all unattached
individuals.
On top of this, my chart 28 shows that, in 1960, in addition to those
living in poverty, almost 23 percent of all U.S. multiple-person fam
ilies lived in deprivation in varying degrees, but their income was less
than 15 percent. The chart also shows that the multiple-person fam
ilies who enjoy affluence or something still better, with incomes of
$15,000 and over, were only 7.3 percent of all U.S. multiple-person
families in 1960, but enjoyed almost 24 percent of total multiple-person
family income.
The basis of my income classifications are explained fully in a
recent publication prepared under my direction, entitled “ Poverty
and Deprivation in the United States.”
The complete unwillingness of the Council of Economic Advisers,
apparently, to relate this problem of income distribution in the United
States to overall economic analysis disturbs me greatly. Without
going deeply into this matter, it is, in my view impossible to develop
either an economically sound or a socially just economic program,
and this comment certainly applied to fiscal policy and to tax policy.
I do note that the Eeport of the Council (p. xvi) says that “ a re
duction of corporate taxes would provide a further increment to the
ECONOMIC REPORT OF THE PRESIDENT
723
flow of household incomes as dividends are enlarged.” I wish that
the Council would make a study of the prospective distribution to
families at various income levels of the increased dividends which
would flow from the proposed reduction of corporate taxes.
T H E T A X PROPOSALS IN V O LVE GROSS N EGLECT OF O TH ER E Q U A L L Y OR EVEN
M ORE IM P O R T A N T PROGRAMS
I have already implied that our economic and social needs both call
for not only a different kind of tax reduction but many other programs
besides tax reduction. I have already made it clear why these other
programs are the only practical way to improve the lot of those many
millions who are low down in the income structure. I will not
elaborate this point further, but turn instead to why programs other
than tax reduction are needed to improve our overall economic per
formance. And when these programs are properly identified, it will
also be clear that they are needed from the social perspective of
helping those who need help most.
Dollar for dollar, increased public outlays are more stimulatory than
tax reduction
First of all in this connection, the report of the Council of Eco
nomic Advisers (pp. 73-74), says this: “A cut in expenditures reduces
market demand directly by the full amount of the cut, while an equal
reduction in taxes expands market demand by a smaller amount,
because a part of the reduction will be added to personal and business
saving.”
This statement is, of course, correct. But it is then equally true
that an increase in Government expenditures expands demand directly
by the full amount of the increase, while equal reduction in taxes
does considerably less.
Tax reduction carmot powerfully restructure the composition of de
mand, and therefore cannot powerfully meet the challenge of the
new technology and automation
But there are more important reasons than this as to why other
programs besides tax reduction are needed. The Council of Economic
Advisers is indeed correct when it says (p. 25 of its Report) that
“the source of the high unemployment rates in recent years, even in
periods of cyclical expansion, lies not in labor market imbalance but
in the markets for goods and services.” This would be a good reason
for placing relatively less weight upon labor training and retraining
programs, and much more weight upon expanding market demand
than the proposed program does.
But insisting properly that the main difficulty is not in the structure
of the labor force is quite consistent with recognizing—as the Coun
cil’s Report gives no sufficient signs of doing—that a very important
problem is the structure o f ultimate demand. The trends in auto
mation and technology in most of our key mass-production industries,
and the likely consumer demand for their products even in a fully
operating economy, are such that there is relatively little opportunity
for vast expansion of employment in most of these industries. This
is well illustrated by the fact that the automobile industry has re
cently increased production very far above the 1955 level, but with
several hundred thousand fewer workers.
724
ECONOMIC REPORT OF THE PRESIDENT
Thus, the only way to absorb fully the unemployed and the new
entrants into the labor force, especially with technology and auto
mation advancing at an accelerating pace, is to restructure the nature
of private investment so that much more of it will flow, both abso
lutely and relatively, into those areas where our needs are so great
now and for the years ahead that not even the rate of technological
change will stand in the way of vast expansion of employment.
The hey importance of homing
By far the most important of these opportunities is in the field of
housing and urban renewal, which provides immense opportunity for
the expansion of private investment, and also provides an unusually
high ratio between each dollar invested in housing and urban renewal
and other dollars of private investment stimulated thereby. As shown
on my chart 12, in accord with my equilibrium “model” for economic
restoration, residential nonfarm construction alone should advance $4
billion above the 1962 level in 1963, and $8 billion above the 1962 level
in 1964. Yet the report of the Council (p. 33) says that the outlook
for home construction in 1963 is approximate maintenance of the 1962
level, and this the Council regards as favorable. The same sentiment
appears in the President’s Report (p. x ii).
The hey problem of mass transportation, especially the railroads
Next to housing, the greatest opportunity for the expansion of pri
vate investment and employment is probably in the area of the im
provement and expansion of our mass transportation facilities. I
have given a good deal of attention to this problem recently, in the
course of studies of the railroad industry. The U.S. railroads as
a whole, during the past decade, have budgeted their services, fa
cilities, and employment seriously downward. While this has been
compatible in the main with the actual requirements of an American
economy moving forward at half speed—although, even under these
general economic conditions, the railroads have increasingly deprived
many communities, shipper, and passengers, of adequate service—it is
nonetheless true that our total railroad services, facilities, and employ
ment are very far short of what we would now require if our economy
as a whole were performing adequately.
Moreover, the proposals for massive railroad mergers, such as in the
Pennsylvania-New York Central case, evince an absolute clear intent
to budget services, facilities, and employment much further down
ward, which would bring them even further short of our requirements
for overall economic growth. And, of course, there is an interacting
process here. For the very fact that industries as important as the
railroad industry discount our potentials for economic growth, and
the very decisions which flow from this discount, militate against the
growth itself.
In a more general sense, the further suppression o f genuine com
petition, embedded in these great railroad merger proposals, and their
adherence to high returns per unit of traffic, rather than any commit
ment to an expansion of volume, are in themselves a vital case study
of what is going wrong with so much of the American economy.
To be sure, the President’s Report (p. xii) refers very briefly to
“new problems requiring urgent attention in the field of transporta
tion,” and refers also to the recommendations contained in his “Trans
portation Message” to the Congress, April 1962.
ECONOMIC REPORT OF THE PRESIDENT
725
But utilization of the opportunity to expand investment and em
ployment through needed improvements in transportation, just as the
utilization of the opportunity to expand housing and urban renewal,
cannot come mainly in the form of the proposed tax changes. Insofar
as these tax changes are translated into more consumer spending, this
will be largely irrelevant to the actions needed for sufficiently vast
expansion of these two great areas. And even insofar as the proposed
tax reductions flow into more investment, this too would be in the more
conventional areas, rather than in these two great areas which require
very different kinds of investment inducements.
Approximate expansion of housing and urban renewal, and of mass
transportation, require stimulation of new types of venture capital,
which in turn requires public policies reducing the cost of money and
the rate of interest. Especially as to housing and urban renewal, these
expansions require not only Federal legislation toward this end, but
also new admixtures of private and public effort, which necessarily
involves large increases in Federal public outlays. These large in
creases in Federal public outlays are also needed to develop a high
enough rate of expansion in the construction of decent housing for
low-income families, which is an indispensible element in the adequate
expansion o f our total housing efforts.
The proposed tax program cannot help very much to meet our urgent
education and health needs
The changing structure of demand, essential to economic restora
tion, requires also that a much larger part of the labor force be drawn
into a wide variety of service occupations, especially education and
health services. These, in turn, require not only more personnel, but
also more facilities. None of this will be appreciably accelerated by
the kinds of tax reduction now under consideration. Such accelera
tion would require, on a long-range basis, an admixture of private and
public efforts, and, at the very core of this, vast and progressive in
crease in Federal public outlays.
An “Economic Report” by the President, and especially a report
by the Council of Economic Advisers, which discusses the problem of
economic growth without any penetrating analysis of these structural
problems, and with a deep silence regarding the economics of the ex
penditures as distinguished from the tax side of the fiscal picture,
leaves much to be desired.
Estimate of needed increases in Federal budget outlays for domestic
priority purposes
By way of illustration, my chart 29 attempts to depict, within the
perspective of an equilibrium model, the needed trends in the expendi
ture side of the Federal budget in the years immediately ahead. It
indicates the need for a level of Federal outlays in fiscal 1964 about
$3 billion above the level proposed in the President’s “ Budget Mes
sage,” and a level by calendar year 1966 of more than $16 billion
above the level proposed in this “ Budget Message.”
Chart 30 portrays these needs, apportioning them among the main
priorities of purpose, both on a per capita basis and measured as per
centages of total national production under conditions of optimum
performance. In the field of education, for example, the goal set
forth on the chart would involve Federal outlays of $10.15 per capita
726
ECONOMIC REPORT OF THE PRESIDENT
in fiscal 1964, contrasted with only $7.80 per capita as set forth in
the President’s fiscal 1964 budget. In the field of housing and com
munity development, the President’s proposals for fiscal 1964 come
to $1.40 per capita, while the needed goal indicated on my chart is
$5.07 per capita. These contrasts indicate how far we are falling
short, in my view, of any realization of the magnitude of the efforts
which we must commence in those fields which are most relevant to
the whole problem of economic growth and the real unmet needs of
our people.
Yet I would point out, as indicated on my chart 29, that total
Federal outlays under my proposals (allowing for my suggested
tax changes) would decline over the years as a percentage of our to
tal national production if we achieve the optimum production which
such outlays would help us to achieve, and that the national debt
as a percentage of our total national production would decline very
substantially.
The reports commit us, for some years ahead, to further neglect of our
great domestic priorities
In contrast to these clear needs as I see them, the President’s re
port (p. xviii) calls for “the careful pruning of civilian expenditures
for fiscal 1964—those other than for defense, space and debt serv
ice—to levels below fiscal 1963.” Allowing for population growth,
the cutback would be even greater. Particularly when we recog
nize realistically that the President is committed himself to this ex
penditure policy not only for fiscal 1964 but for several years ahead,
I find all of this very hard to reconcile with the stirring and valiant
cries of so many distinguished economists and other leaders on be
half of our relatively starved domestic public services. I find it hard
to reconcile it with the eloquent statements of the Council of Eco
nomic Advisers, at least on earlier occasions, bearing upon the founda
tional importance of these domestic public services in promoting eco
nomic growth.
Some of the best arguments against this expenditure policy are
contained in the very reports which embrace the policy. On pa^e
xxi of his report, the President says that “the total of State and lo
cal government expenditures has expanded 243 percent since 1948—
in contrast to 166 percent for the Federal Government; their debts by
334 percent—in contrast to 18 percent for the Federal Government.”
On pasre xviii of his report, the President states that “the gross
debt itself as a proportion of our total GNP has also fallen stead
ily—from 123 percent in 1946 to 55 percent last year. Under the
budgetary changes scheduled this year and next these ratios will con
tinue to decline.” On the same page in his report, the President
points out that, since the end of 1946, the Federal debt held by the
public has risen $12 billion, while net State-local debt has risen by
$58 billion, net corporate debt by $237 billion, and net total private
debt by $518 billion.”
I
cannot see very much value in the learned discussion by the
Council of Economic Advisers, bearing upon the relationships be
tween various types of private and public debts, when it does not
lead the Council to the conclusion that, taking into account the fore
going figures as cited by the President, the new expenditure pol
icy means most clearly that we shall not meet our national needs.
ECONOMIC REPORT OF THE PRESIDENT
727
This has been happening for much too long already, as shown by
chart 31. While the declines in national security and international
outlays per capita have been sharp, comparing 1962 with 1954, not
enough of this decline has been transferred into per capita increases in
domestic outlays. Thus, total budget outlays per capita have fallen
from about $514 in 1954 to about $472 in 1962.
T H E U P SID E -D O W N APPR O A C H TO T H E W A G E PROBLEM
All economists must certainly understand the function of wages
in our economy. As a business cost, they should not be so high as to
force up prices. And as by far the most important single factor in
consumer incomes, they must be high enough in the aggregate to make
their proper contribution to an adequately growing level of consumer
income and expenditures, without being so high as to generate demand
inflation. The general formula that wage rate increases should be
kept in line with productivity gains is merely a convenient though not
perfect measuring rod, in helping to determine whether wage trends
are neither deficient nor excessive.
Productivity is advancing much more rapidly than wage rate increases
The preoccupation of the Council of Economic Advisers, and, at
least partly in response to their advice, the preoccupation of the
President, with preventing wages from moving too fast, to the com
plete neglect of the problem of helping them not to move too slowly,
is almost inexplicable. And it is doubly so when, in view of the limited
utlization of fiscal policy, relative to the size of our economic prob
lems, we are committed fundamentally and predominantly to the ex
pansion of the private sector for the achievement of economic re
storation.
The materials which I have already presented undertake in detail
to portray what seems to me unanswerable fact—that during the past
decade, inadequate increases both in wage rates and in aggregate wages
have been a prime factor in the entire economic disequilibrium. A part
of this demonstration has devoted itself to refutation of the unfounded
but widespread claim that excessive wage rate increases have neces
sitated the price increases which have occurred. Quite to the contrary,
the periodic tendency of prices and profits and investments to outrun
consumer demand so damagingly points in the opposite direction.
The same conclusions result from any fair comparison of wage rate
trends with productivity trends. As shown on chart 32, for the period
1947-62 as a whole, viewing the whole nonfarm economy, the trends
in productivity advance and in changes in wage and salary rates per
employee hour have been practically identical. More important, dur
ing the 5 years 1957-62, the average annual increase in productivity
has been 3.1 percent, while the average annual increase in wage and
salary rates has been at the much lower average annual rate of 2.7
percent.
In manufacturing, where the hue and cry has been most vehement
about excessive wage rate increases forcing up prices, the trends are
even more significant. For the period 1947-62 as a whole, the pro
ductivity trends and wage and salary rate trends have again been
identical. But for the most recent period from 1957 through 1962,
the disparity has been truly startling. Productivity has advanced at
728
ECONOMIC REPORT OF THE PRESIDENT
an average annual rate of 3.4 percent, while wage and salary rates have
advanced at an average annual rate of only 2.2 percent.
These disconcerting trends make it almost impossible to understand
why the two reports here under review, far from being concerned about
the obvious economic implications of these growing disparities, are
asking for more of the same.
The GounciVs views about wages
The Council’s report (p. 88) points out that changes in yearly earn
ings in manufacturing industries “ have been considerably reduced in
the past 5 years.” In support of this, the Council points out an average
annual increase of only 2.9 percent per year from first quarter 1958
through fourth quarter 1962, and only 2.2 percent per year from first
quarter 1961 through fourth quarter 1962. But instead of being
worried about these trends, the Council warns us against “ overcon
fidence in their continuation.”
I f the Council were to make estimates of the needed levels of pur
chasing power as required by the Employment Act, this could not pos
sibly lead to the conclusion that a continuation of an annual rate of
wage rate increases in manufacturing in the neighborhood of 2.2 per
cent could possibly be squared with an overall economy expanding at
the required annual rate of about 5 percent a year—or at least the 4
percent a year which the Council seems to think would be sufficient.
The gap in purchasing power, which this lag in wage rate increases
would cause, would be so enormous in short order that only scores of
billions of dollars of annual increase in the Federal deficit could coun
teract their repressive effects. This is the simple mathematics of it.
For these reasons, if it were held to be desirable, on the spurious
ground that we are affluent in our private lives but starved in our
public services, to repress severely the rate of expansion of private
consumption in order to make room for the needed expansion of pub
lic services, how can this possibly be squared with the President’s
proposal to hold the line with respect to our domestic public services,
for a number of years ahead ?
Yet if one looks at the discussion of wages in the Council’s reporton pages 84-86, and at the President’s report on page xix, it would
seem that our only economic danger on the wage front is the danger
of inflation. This is really ironical, in view of the fact that the Presi
dent was gradually led by the economic advice he received into a situa
tion where he had no other course but to force back steel prices—this
final action evolving by slow degrees because of preoccupation with,
the inflationary danger rather than with the deflationary gap. And’
now, reaction to this forceback of steel prices is offered by some as an
explanation of why the administration, seeking now to “ restore the
confidence of the business community,” cannot commit itself to a more
vigorous and socially minded economic program which would be much
better for the business community—and all of us—than what is now
being proposed.
The wage guidelines
Because the problem at hand is to prevent wage deficiencies which
are real rather than wage excesses which are in the main imaginary,
the guidelines offered on page 86 of the Council’s report are highly
irrelevant or misdirected. These guidelines deal only with holding
ECONOMIC REPORT OF THE PRESIDENT
729
down wages as an aspect of business costs, and do not even recognize
the problem of wages as a factor in economic expansion.
This being the case, it is unnecessary to discuss in detail, as I have
on previous occasions, the unrealism of attempting to set a nationwide
productivity standard for wage rate increases in particular industries,
which is almost tantamount to suggesting a nationwide standard for
profits in particular industries. Equally unrealistic is the expression
of hopefulness by the Council, and by the President, that industries
will reduce their prices when their productivity rates of advance ex
ceed the nationwide average while they benefit by holding wage rate
increases down to the nationwide average.
The most important point, however, is that, if the Government
should succeed in holding down wage rate advances in the most highly
endowed industries with respect to their rates of productivity advance,
the average rate of wage rate increases throughout the economy would
obviously fall way below the nationwide productivity advance—as
indeed they have been doing in recent years. This would not be so
bad, perhaps, if the administration were proposing sufficient enlarge
ment of public programs, directed to well-being, to bring to those who
cannot obtain good wage advances the benefits of the resources made
available if other workers were enduringly to accept wage-rate in
creases far below their own productivity advances.
T H E STATIC POSITION OF T H E REPORTS W IT H RESPECT TO MONETARY POLICY
Reading pages xi and xviii of the President’s report, and page 55 of
the Council’s report, one detects a high degree of satisfaction with our
monetary policies as they have been and seem likely to remain, and
even an invitation to the Federal Reserve System to continue along its
accustomed ways.
On previous occasions, in detail which I cannot repeat here, I have
attempted to depict the enormous damage which the tight money and
high interest rate policies have done to our prospects for economic
growth and our principles of social justice. Billions of dollars have
been deliberately transferred, in the form of rising interest rates both
private and public, out of the pockets of those who would use these
dollars in accord with our economic and social needs, and into the
coffers of those who have had no need whatsoever for this income
enlargement. The annual expansion of the non-Federal held money
supply has at no time within the past decade been compatible with
support of the economic growth rates which the President and the
Council espouse.
On page 79 of the Council’s report, it is pointed out that interest
payments on the total debt, as shown in the administrative budget,
have risen from $5.6 billion in 1950 to $6.5 billion in 1955, to $9.3 bil
lion in 1960, and to $9.6 billion in 1962, and that interest payments
on the debt held by the public have for the same years risen from $4.3
billion to $4.8 billion to $6.7 billion to $6.9 billion. Commenting on
these trends, the Council says that they have occurred “ primarily
because of the necessity of refinancing, at higher current interest
rates, debt incurred during World War II.”
This has not been necessity; it has been choice, and very unwise
choice.
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ECONOMIC REPORT OF THE PRESIDENT
An increasing body of informed economists have expressed their
concern, lest further decisions in the monetary field, consistent with
the avowed policies of the Federal Eeserve System, negate in large
part the intended benefits of the deliberately large increases in the
Federal deficit now sought by the President. This being the case,
the Federal Eeserve System needs something besides increasingly
glowing accolades from the administration.
M Y PROPOSALS FOR ACTION NOW
My suggestion for revising the President’s program emerge clearly
from the foregoing analysis.
(1) I suggest that the Federal budget, for fiscal 1964, lift domestic
public outlays by about $3 billion above the fiscal 1964 level proposed
by the President, as a start towards lifting them by about $16 bil
lion by calendar 1966. The suggested apportionment of these in
creases, in accord with our great national priorities, are set forth on
my charts 29 and 30. Acceptance of my suggestion, by affirming that
the servicing of our great priorities of public needs, with appro
priate help from the Federal Government, should grow as our popu
lation and our per capita productive resources grow in consequence of
the advancing technology, would remove the most objectionable fea
ture of the President’s whole program—that these Federal domestic
outlays in the aggregate be frozen for several years ahead, which ac
tually means a cutback when measured against population growth and
a growing GNP. Moreover, in the years immediately ahead, the
increasing Federal outlays, in accord with my suggestion, would pro
vide a substantial stimulus to the economy during the interval when
we shall not yet have attained maximum employment and produc
tion, and in my view a much more effective stimulant, both as an acti
vating economic force and in terms of the ultimate product results,
than the kind of spreadout tax changes contained in the President’s
program.
(2) I suggest that first priority and immediate tax changes be
limited to the following: (a) Cutting the 20 percent flat rate, ap
plicable to the first $2,000 of taxable income, to an average rate of
less than 15 percent, with much larger reduction in the rate applicable
to the first $1,000 than to the second $1,000, and (b) acceptance of the
President’s proposal which broadens the 10 percent standard deduc
tion in a manner which is most favorable to lower income groups.
The effect of my suggestion would be to make the tax reduction very
much more progressive than it is in the President’s program, by con
centrating it very much more heavily in the low and middle-income
groups. My proposal would be a one-shot affair, and would have
an annual value of about $7 billion to $8 billion. This, combined
with my $3 billion suggested increase in public outlays above the
President’s budget, would be a deliberately contrived net increase in
the Federal Deficit of $10 billion to $11 billion, or about the amount
which the President would spread out over 3 years through his tax
program, but in an entirely different pattern. The concentration of
this stimulus to the economy within a 1-year period would be enor
mously more effective than spreading it out over 3 years, and I sub
mit also that the pattern which I suggest is much better adjusted to
ECONOMIC REPORT OF THE PRESIDENT
731
the restoration of economic equilibrium and to considerations of
social justice and equity than the pattern proposed by the President.
(3) I suggest that, after this first priority tax reduction is ac
complished as rapidly as feasible, reforms in the personal and cor
porate tax structure should thereafter be undertaken, with the re
coupments due to these reforms roughly equivalent to further re
ductions in tax rates, applicable to higher income families, and in
corporate tax rates. This would have the merit of deferring, until
what is needed most is accomplished first, that which is important but
secondary and also extremely complex, time-consuming, and fraught
with many uncertainties to ultimate enactment. However, I do
not mean to infer, by my suggestion, that all of the reforms proposed
by the President are desirable at any time. Some of these seem un
desirable in that they appear to repeat some of the imbalances and
inequities contained in the President’s proposals for tax reduction.
(4) I suggest that the administration—and the Congress if neces
sary—exert, all needed pressure upon the Federal Reserve System,
toward a much more liberal monetary policy and toward much
lower interest rates. The balance of payments and gold problem can
better be dealt with in entirely different ways from those which have
been used to date, and which have so greviously damaged the whole
U.S. economy.
(5) I suggest that the Council of Economic Advisers be directed
by the President to formulate a long-range set of quantitative targets
for economic growth, with meaningful components, with due regard
for the great priorities of our national needs, and with due emphasis
upon the central problem of the need to induce changes in the struc
ture of demand which will be responsive to the challenge of the new
technology and automation. This alone, iifaccord with the express
intent of the Employment Act of 1046, would provide proper guides
to all needed national economic policies.
W H Y W E ARE GOING W RONG N O W
What would seem to be the central reasons why people so capable,
so well-informed, and so well-intentioned as those who are helping the
President in economic matters are moving so far afield from what they
should be doing and saying? I suggest two basic reasons:
(1)
Economic policies in Government, no less than in business,
should be a means rather than an end. In order that the policies be
relevant and adequate, the ends must first be stated in terms of mean
ingful and thorough quantitative targets or end objectives, both longrange and short-range. The relevant targets, in this instance, are
the needed levels of employment, production, and purchasing power,
broken down into major components, and projected for a reasonable
number of years ahead. This the Employment Act of 1946 not only
contemplates, but indeed requires. The Council of Economic Ad
visers, in its current report, has abandoned even some tentative and
fragmentary efforts to do this, which it earlier had commenced.
The explanation of this abandonment is not available to me; the
consequences should be apparent to all. Policies not carefully ad
justed to well-developed targets, related to our potentials and our
needs, are policies flying in the dark; lacking integration one with
another; excessively responsive to the inertia of outdated thinking;
93762 O— 63—pt. 2------ 7
732
ECONOMIC REPORT OF THE PRESIDENT
and unduly responsive to the desire to do that which the most people
will agree to without being informed, instead of seeking to inform
them. Economic education, emanating in proper degree from na
tional leadership, is the hallmark of the evolution of sound national
economic policies;
(2)
The second explanation resides in the artificial dichotomy be
tween economic and social purposes, resulting in two reports so dis
appointingly devoid of adequate policies expressly related to these
social purposes. It is not enough to say that everybody will be better
off, and our social purpose thus served, if our economic performance
is improved. For the very nature of our chronic and current economic
trouble is that those social programs which add directly to human
well-being, which improve the distribution of the fruits of our produc
tion, are at the very heart of potentially successful economic efforts.
After all, the real challenge of the unused resources, resulting from
not meeting this problem, is in the form of opportunity—the oppor
tunity to eradicate the jxjverty and deprivation which still afflict twofifths of our population, and to lift all Americans to decent levels of
living compatible with our soaring power to produce; to take millions
of families out of slums; to provide them with more educational op
portunities and better health services in line with our technical com
petence to do so; to cleanse their cities and purify their waters; to
enlarge their security in their old age; to enable them to be trans
ported more conveniently; to improve the natural resources which
will be the heritage of their descendants; and even to enable a larger
proportion of them to enjoy the more conventional material comforts
of life, and to enjoy more leisure—and not in the form of involuntary
unemployment. These are not merely the byproducts of a successful
economy program; they are an essential and major portion of the
implementation of such a program. An economic program which
does not recognize this sufficiently will fall far short of economic res
toration, because it does not accurately sense the very nature of the
task. And it will not rally the American people fully to the task,
because it does not come close enough to their most profound needs
and aspirations.
733
ECONOMIC REPORT OF THE PRESIDENT
G R O W T H R A T E S , U.S. E C O N O M Y ,
Z922-/962
Average Annual Rates of Change in Gross National Product
In Uniform 196! Dollars
LONG-TERM
'HISTORIC"
DEPRESSIONERA
WARERAS
LONG-TERM
"HISTORIC"
9.5%
Exc.Depression
andWarEras
7.1%
6.0%
3.7%
3.5%
0.8%
1 1929*33
1929-39
I922J62
1945-47 I
1933*39
1939-47 1939-45
1950-52
1922-62
(Exc.1929-'47
ond1950-52)
-6.1%
- 8.6%
PERIODSOTHERTHANDEPRESSIONORWAR
PERIODOFPEACE
AND WAR
4.8%
1922-62
1922-'29
LONG-TERM
POST
"HISTORIC" WORLD WAR I
(Exc.l929-'47ond1950-52)
I947J 50
POST
WORLDWARD
I953J62
POST
KOREAN WAR
l947-'53
734
ECONOMIC REPORT OF THE PRESIDENT
RECESSIONS, BOOMS, STAGNATIONS, l 9 5 3 - ' 6 2 :
RATES OF CHANGE IN G .N .R
In 1961 Dollars
SHORT-TERM RECORD, 1st QUARTER I96.l-4th QUARTER 1962
(Seasonally Adjusted Annual Rates)
11.6%
2ndQTR1961 3rdQTR1961 4thQTR1961 1stQTR1962 2ndQTR1962 3rdQTR1962 4thQTR1962
BOOM AGAIN MOVES TOWARD STAGNATION 1961-1962
(Seasonally Adjusted Annual Rates- 12 Month Trends)
7.8%
6.1%
4.8%
1stQTR1961IstQTR1962
2ndQTR19612ndQTR1962
3rdQTR19613rdQTR1962
4thQTR19614thQTR1962
E C O N O M IC
REPORT
OF
TH E
P R E S ID E N T
735
T H E A M E R IC A N ECONOMY DURING 10 Y E A R S
NEEDED A N D A C T U A L PE RFO R M A N CE , 1 9 5 3 - 1 9 6 2
Billionsof 1961Dollars
736
E C O N O M IC
REPORT
OF
TH E
P R E S ID E N T
CHRONIC R ISE O F UNEM PLOYM ENT, 1 9 5 3 - 1 9 6 2
TRUE LEVEL OF UNEMPLOYMENT
(Millions of Workers)
Total True Level, 1953-1962:55.0 Million Man - Years is
"Boom "Recession "Boom
" "stagnation" "Stagnation "Recession "Boom "Stagnation "Recession "Stagnation" "Stagnation"
Recession Stagnation Year
Year Recession Boom Stagnation Recession Boom Year Period
Year Year
Year Year Year Year Year
TrueUnem
ploym
ent
Ceom
ncpelo
ay
lem
dent^ _c f F
im
eeE
qu
ale
ntym
ofent
Un
Pu
all-T
rt-T
im
U
niv
em
plo
1953 1954
1955
1956
1957
1958
1959
I960
1961
1962
UNEMPLOYMENT AS PERCENT OF CIVILIAN LABOR FORCE'
1953 1954
1955
1956
1957
1958
1959
I960
1961
1962 41
,h
Q
tr.
96
2
(Seasonally
Adjusted)
1/
About 28.5 million man-years of unemployment (true level) would have been consistent with maximum
employment.
2 / Estimated as the difference between the officially reported civilian labor force and its likely size under
conditions of maximum employment.
3 / in deriving these percentages, the civilian labor force is estimated as the officially reported civilian
labor force plus concealed unemployment.
E C O N O M IC
REPORT
OF
TH E
737
P R E S ID E N T
TH E HIGH V O LU M E O F IDLE P L A N T
AND M ACHINES:
1954 - 1962
PERCENT OF PLANT CAPACITY IDLE
NONELECTRICAL
MACHINERY
ELECTRICAL
MACHINERY
i7%
1954-1961
Annual Average
DEC.
1961
OTHER TRANSPORTATION
EQUIPMENT
^ 27% ^
J
M 96I
Annual Average
DEC.
1961
CHEMICALS
1954-1961
Annual Average
AUTOS, TRUCKS
and PARTS
21%
DEC.
1961
14%
14%
1954-1961
Annual Average
DEC.
1961
PAPER and PULP
RUBBER
19%
15%
8%
1954-1961
Annual Average
DEC.
1961
STONE. CLAYandGLASS
29%
1954-1961
Annual Average
DEC.
1961
PETROLEUM
REFINING
1954-1961
Annual Average
I7b
DEC.
1961
FOOD and BEVERAGES
DEC.
1961
1954-1961
Annual Average
DEC.
1961
TEXTILES
1954-1961
Annual Average
DEC.
1961
1954-1961
Annual Average
PERCENT OF CAPACITY IDLE IN BASIC SECTORS, 1962
MANUFACTURING
CAPACITY-17
M
arch1962
1/ McGraw-Hill
Annual Surveys, which
provide end of period estimates.
? / Est. based on Am. Iron and Steel Inst. data.
1961
12%
10%
1954-1961
Annual Average
Annual Average
C A P A C IT Y 27
4thQ
tr.1962
1961
738
E C O N O M IC
REPORT
OF
TH E
P R E S ID E N T
CHRONIC R ISE O F OUR UNUSED
PR O D U C TIV E PO W E R S (G.N.P.), 1 9 5 3 - 1 9 6 2
ANNUAL DEFICIENCIES
In Billions of 1961 Dollars
Total Deficiency, 1953-1962: 427 Billion Dollars
"Boom "Recession “Boom
" "Stagnation" "Stagnation "Recession "Boom "Stagnation “Recession “Stagnation" "Stagnation"
Recession" Stagnation" Year Year Recession" Boom
" Stagnation" Recession" Boom
" Year Period
Year Year
Year Year Year Year
Year
1953
1954
1955
1956
1957
1958
1959
I9 6 0
1961
1962
ANNUAL DEFICIENCIES AS PERCENT OF MAXIMUM PRODUCTION
Seasonally adjusted annual rate.
2 / Based upon sufficient annual rate of growth in G.N.P. to provide full use of growth in labor force,
plant and productivity under conditions of maximum employment and production.
E C O N O M IC
REPORT
OF
TH E
P R E S ID E N T
739
L A R G E N A T IO N A L E C O N O M IC D E F I C I T S
D U R IN G T E N -Y E A R P E R IO D 1 9 5 3 - 1 9 6 2
Dollar Items In 1961 Dollars
TOTAL
NATIO NAL
PRO DUCTION
M AN YE A R S
O F E M PLO YM E N T
Too Low
P R IV A T E
A N D P U B LIC
CONSU M PTION u
(In c I Net Foreign)
(G N P i
$427 Billion
P R IV A TE
B U S IN E S S
IN V E ST M E N T
26.5 Million
Too Low
$108 Billion
$319 Billion
Too Low
Too Low
.THESE HAVE LED TO LARGE LOSSES
TO ALL ECONOMIC GROUPS
A V E RA G E
FAM ILY INCOM E
( M u t t i p i e - P e r s o n F a m ilie s )
$ 6,700
Too Low
y
FARM
O PERATO RS'
N E T IN C O M E
W AG ES AND
S A L A R IE S
UNINCO RPORATED
B U S IN E S S AN D
P RO FE SSIO N A L
INCO M E
$64 Bill ion
$285 Billion
$30 Billion
Too Low
Too Low
Too Low
Includes personal consumption expenditures plus government (Federal, state, and
local) e x p e n d itu re s.(2 8 l and 3 8 billions, respectively ).
740
E C O N O M IC
REPORT
OF
TH E
P R E S ID E N T
TH E FEDERAL BUDGET R E F L E C T S
Billionsof
NATIONAL ECONOMIC D E FIC IE N C IE S
FEDERAL DEFICITS GROWWITHNATIONAL ECONOMIC DEFICIENCIES
(Annual Averages, Calendar Years)
NATIONAL PRODUCTION
DEFICIENCY
(Billionsof 1961Dollars)
1947-50 1954-57 I958J62
CASH BUDGET
(Billions of Current Dollars)
+3.2 +|
2WM--■
19
58-62
M
W
■■■■■■■■■■„
tfarertM--KM
1947-50 1954-57
E C O N O M IC
A
BALAN CED
UPON A
REPORT
OF
TH E
FE D E RA L
MAXIMUM
741
P R E S ID E N T
BU D G ET
P R O S P E R IT Y
D EPE N D S
ECONOM Y
Aggregate Deficit, 1953-1962: $36.9 Billion
50L
1953
1954
_L
_L_
1955
1956
50
1957
!958
1959
I9 6 0
1961
1962
B
illio
D
ollan
rssof MODEL FEDERAL BUDGET CONSISTENT WITH MAXIMUMPROSPERITY
100
Conventional Budget, Calendar Years
Expenditures
Aggregate Surplus, 1953-1962: $17,0 Billion
1953
1954
1955
1956
1957
1958
1959
I960
Expenditures are shown as actual expenditures plus estimated deficiencies in expenditures
during the period. Receipts are estimated by applying actual tax rates to maximum
prosperity levels of economic activity.
1961
1962
742
E C O N O M IC
REPORT
OF
T H E
P R E S ID E N T
D IFFER EN C ES IN RESULTS OF HIGH AND
LOW ECONOMIC GROWTH R A TE S, 1 9 6 3 -1 9 6 6
Bold face - Difference in 1966; Italics -Difference for four year period as a whole
Dollar figures in 1961 dollars
EMPLOYMENT v
( In millions of man-years)
UNEMPLOYMENT
TOTAL
PRODUCTION
CONSUMER
SPENDING
PERSONAL
INCOME
Xj
(In millions of man-years)
3.7
10.9
$104 Billion
$65 Billion
$83 Billion
$29/ Billion
$180 Billion
$231 Billion
WAGES and
SALARIES
NET FARM
INCOME
TRANSFER
PAYMENTS
tL
$1,200
$48 Billion
$3,600
$143 Billion
$ 38 Billion
$36 Billion
BUSINESS and
PROFESSIONAL
INCOME
GROSS PRIVATE
DOMESTIC 2J
INVESTMENT J
RESIDENTIAL
NONFARM
CONSTRUCTION
FEDERAL, STATE, AND
LOCAL GOV'T OUTLAYS
FOR GOODS AND
SERVICES
$15 Billion
*
6
$13 Billion
II 11
$7 Billion
$27 Billion
$10.3 Billion
$12 Billion
$18 Billion
$76 Billion
$27 Billion
$35 Billion
^ Highgrowthratewoulddrawmorepersonsintothelabormarketthanlowgrowthrate.
2j Includingnetexportsofgoodsandservices.
E C O N O M IC
TRENDS
-O R
REPORT
OF
TH E
P R E S ID E N T
IN O U T P U T P E R
M A N -H O U R
P R O D U C T IV IT Y - 1 9 1 0 -1 9 6 2
Average Annual Rate of Productivity Growth
for the Entire Private Economy
T H E R E C O R D S IN C E W O R LD W A R E A N D R E C O N V E R S IO N
INDICATING A STILL HIGHER PRODUCTIVITY
GROWTH RATE UNTIL IT WAS ADVERSELYAFFECTED
BY RISING ECONOMIC SLACK
4 .1 %
1947-1953
1953-1960
1955-1961
1961-1962
Period of
Reasonably
Full
Employment
Period of
Relatively Large
Economic
Slack
Period of
Still Larger
Economic
Slack
(est.)
Period Affected
By Economic
Upturn
Note: BasedonU.S.Department of Labor estimates, relating to man-hours worked.
743
744
E C O N O M IC
REPORT
OF
TH E
P R E S ID E N T
GOALS FOR 1 9 6 3 AND 1 9 6 4 , CONSISTENT
WITH L O N G -R A N G E GOALS THROUGH 1 9 6 6
1963 and 1964 Goals Compared with Estimated 1962
Dollar Figures in 1961 Dollars
EMPLOYMENT
(inmillionsofman-years)
UNEMPLOYMENT
TOTAL PRODUCTION
(inmillionsofman-years)
UP $ 9 6 Billion
UP 5.7
FAMILY INCOME
(Average!
NET FARM INCOME
WAGES and SALARIES
UP
$ 4 Billion
1963
1964
BUSINESS and
PROFESSIONAL
INCOME
1963
!963
1964
GROSS PRIVATE
DOMESTIC
INVESTMENT
UP
$ 8 Billion
1964
RESIDENTIAL
NONFARM
CONSTRUCTION
CllClRca
UP
$ 3 Billion
^
$6Billion
UP
$10 Billion
CONSUMER
SPENDING
TRANSFER
PAYMENTS
UP
$ 6 Billion
juuuuuuc
1964
1963
PUBLIC OUTLAYS FOR
GOODS ond SERVICES
(Calendar Years)
"<V\FEDERAL
uP
$ 5 Billion
UP
$ 2 0 Billion
UP
$11 Billion
UP
$ 9 Billion
STATEondLOCAL
. UP
$4Biliion
UP
$ 8 Bil lion
UP
$ 4 Billion
1963
I
*
UP
“ 6?
1964
E C O N O M IC
REPORT
OF
TH E
745
P R E S ID E N T
D E F IC IE N T R A T E O F GROWTH IN
PR IV A T E C O N SU M E R S P E N D IN G , 1 9 5 3 - 1 9 6 2
Rates of Change in 1961 Dollars
Needed Rate of Growth BSS Actual Rate of Growth
1953 - 1862
ArtnualAverage
!953-'54I954J55 !955J56I956J57I957J58 I958J59 I959J601960**61l96l-'62 3rdQtr'624thQtr'62
(Seas. Adj.
AnnuolRate)
T H E PRIVATE C O N S U M P T IO N D E F IC IT S
DOM INATE TH E D E F IC IT S
IN T H E T O T A L EC O N O M Y
Billions of !96i Dollars
4 th Q tr'62
1953- S962
AnnuaiAverage 1956
1958
S959
!960
*96f
(Seas.Adj.
1962 AnnualRate)
M’7.5: J
22.4
"Stagnation"
Year
DeficiencyinPrivate^
Consum
er Expenditures!
-
Boom ifissssssg
Stagnation- 63.0
.<Recession- Year .Stagnation
Boom"Year
Recession"
Year
75.0 _
'79 "Stagnation' 79.2'"
'Recession ^ecr Stagnation
Boom"
Period
Year
Deficiencyin
PublicOutlaysfor
.GoodsandServices
DeficiencyinOross
PrivateInvestm
ent£
,.(lnc.NetForeign) 'c
DeficiencyinTotal
National Productionj
(ONP)
746
E C O N O M IC
REPORT
LOW GROW TH
OF
TH E
P R E S ID E N T
IN PRIVATE CO N SU M PTIO N
R E F L E C T S LOW GROW TH IN IN C O M E S
Rotes of Change in 1961 Dollars
1
Total Private Consumer Spending B85S Total Personal Income After Taxes
5.7%
1953-1962
Annual Average
1958-1959
1959-1960
1960-1961
1961-1962
3rdQtr.19624thQtr. 1962
(Seas.Adjusted
Annual Rate)
TH E PRIVATE CONSUM PTION D E F IC IE N C Y
O F $ 2 8 1 BILLION, 1 9 5 3 - 1 9 6 2 R E F L E C T E D
A $ 3 7 3 B ILLIO N INCOM E D E F IC IE N C Y
Billions of 1961 Oollars
Deficiencyin
Deficiencyin
Deficiencyin
Deficiencyin
Deficiencyin
PrivateConsumption + ConsumerSavings = ConsumerIncome + TaxesPaidby = ConsumerIncome
AfterTaxes
Consumers
BeforeTaxes
373
E C O N O M IC
REPORT
OF
TH E
747
P R E S ID E N T
GROSS PRIVATE DOMESTIC INVESTMENT WAS
D EFICIEN T DURING 1 9 5 3 - 1 9 6 2 A S A W H O LE
H i Gross Private Domestic Investment HH Investment in Plant and Equipment
AVERAGE ANNUAL GROWTH RATE
AVERAGE ANNUAL
DEFICIENCY
1953-1962
1 95 3-19 6 2
Billions of 1961 Dollars
In 1961 Dollars
4.4%
mmm
■
3 .5 %
H g H
I I
■ I
w a
NEEDED
2 4%
M
- a
.
ACTUAL
■
B
lilllllil
H & 3S
liillll
$55
IJjljl
$10.8
BUT INVESTMENT IN MEANS OF PRODUCTION
AT TIM ES OUTRAN ULTIMATE DEM AND;
HENCE INVESTMENT CUTS AND RECESSIONS
■
Gross Private Domestic Investment H Investment in Plant and Equipment
Ultimate Demand: Total Private Consumption Expenditures Plus
Total Public Outlays (Federal, State and Local) for Goods and Services
1st Half '612nd Half '62
1st. 3Q trs.'55 Ist. 3Qtrs.'57
Average Annual Rates of Change, 1961 Dollars
748
E C O N O M IC
REPORT
OF
TH E
FLUCTUATIONS I N
IN
W E S
O F
P R E S ID E N T
G N P
A N P
INVESTMENT, I9S3-I962
Annual Data in 1961 Dollars
Billions of 1961 dollars
1000
800 z(Rate scale)i
600
400
: GROSS NATIONAL PRODUCT:
4 ------^ ---------------------
200
GROSS PRIVATE
DOMESTIC INVESTMENT____
100
80
60
40
_______
-------------- !L— INVESTMENT IN PRODUCERS'
___ _________ DURABLE EQUIPMENT
/...................... «......—
20
(Millions of 1961 dollars)
10000
8000 -(Ratescale)6000
4000
-CAPITAL EXPENDITURES OF
CLASS I RAILROADS^
2000
1000
800
600
400
-CAPITAL EXPENDITURES OF
PENNSYLVANIANS NY. CENTRAL^RAILROADS1'
--------------------- __________
200
100
80
60
5|953
s
\
1954
1955
1956
"^1962estimatedbyICCfromCompanyreports,Sept.1962.
■^Includesleasedlines
1962datanotavailable.
Note:ConversionofcapifalexpendituresofClassIR.R.’
sfromcurrentto
19#dollarsbymeansofimplicitdeflatorforgrossprivatedomestic
investment;conversionofPenn,andNY.Centraldatabymeansof
implicitdeflatorsusedinSymesExhibitforEasternDistrictR.R.'s.
1957
1958
1959
I960
V
1961
1962
Economicdata:U.S.Dept,ofCommerce
R.R.data:Currentdollarinvestment
figures,MergerExhibits(WardandGrant)
(SeenoteforconversionstoI96idollars)
.
ECONOMIC REPORT OF T HI-
PREBID
RISING PRICES, PR O FITS, ANO INVESTMENT
BEFORE TH E 1 9 5 7 - 1 9 5 8 RECESSION
The investment Boom Before the 1957-1958 Recession
First Three Quarters
jj Prices
lj
1955 -
1957
First Three Quarters
£p|||Profits after Taxes; ^
Investment in Plant and Equipmept ^
up
UP
. %
18.2%
UP
144
UP
21.7%
28.2%
2.6% 5.9%
mm™
Processed Foods and
Kindred Products
Iron and SfeeJ
Petroleum and
Coal Products
UP
16.9%
Chemicals and
Allied Products
Electrical
Machinery
Non-Electrical
Machinery
BureauofLaborStatistics, (U.S.Dept,ofLabor), CommodityW
holesalePriceIndexes.
SecuritiesandExchangeCommission, Profit Estimates
SecuritiesandExchangeCommissionestimatesofexpendituresforpiantandequipment.
L.
750
E C O N O M IC
REPORT
OF
TH E
P R E S ID E N T
INVESTMENT BOOM OCCURRED AGAIN
BEFORE THE 1960-1961 RECESSION
DESPITE REDUCED PRICES AND PROFITS
Prices^
First Half 1959-First Half I960
IProfits afterTaxesf
Investment inPlantandEquipment-"
UP
563%
2.1%
0-9%
DOW
N
0.3%
|.6%
PROCESSED FOODS AND
KINDRED PRODUCTS
IRON AND STEEL
DOW
N
3.0%
PETROLEUM AND
COAL PRODUCTS
UP
48.1%
UP
30.4%
4.5%
CHEMICALS AND
ALLIED PRODUCTS
ELEC TR IC A L
MACHINERY
U.S. Dept, of Labor, Bureau of Labor Statistics, commodity wholesale price indexes.
^ Securities andExchange Commission, profit estimates
Securities andExchange Commission, estimatesof expenditures for plant andequipment.
MOTOR VEHICLES
AND EQUIPMENT
E C O N O M IC
REPORT
OF
TH E
751
P R E S ID E N T
P R IC E , PR O FIT AND IN VESTM EN T TR E N D S
DURING C U R R E N T ECONOM IC UPTURN
1st Quarter I9 6 l-3 rd Quarter 1962
H M Prices;-^
IH II Profits after Taxes;Zj B888S Investment in Plant and Equipment ^
UP
14.8%
UP
7.8%
DOWN
1.5%
DOWN
11.1%
IRON and STEEL
DOWN
3 .0%
^
DOWN
1.0%
-- 29%
DOWN
PETROLEUM
and COAL PRODUCTS
CHEMICALS
and ALLIED PRODUCTS
NON-ELECTRICAL
MACHINERY
MOTOR VEHICLES
and EQUIPMENT
Data: U.S. Dept, of Labor, wholesale commodity price indexes.
Data: Federal Trade Commission-Securities and Exchange Commission.
^ Data: U.S. Dept, of Commerce and Securities and Exchange Commission; seasonally adjusted.
1' 0--NO
CHANGE
DOWN
7.1%
ELECTRICAL
MACHINERY
b
DOWN
4.5%
752
E C O N O M IC
KEY
REPORT
OF
PRO FITS A F T E R
D E SPITE
LA R G E
TH E
P R E S ID E N T
TAXES
U NUSED
AR E
HIGH
C A P A C IT IE S
1953=100
IRON AND STEEL
1953 '5 4
'5 5
'5 6
'57
'57
'58
'6 0
'61 '6 2
1953 '5 4
'55
OrOi'
First three quarters of 1962 shown at annual rate, not seasonally adjusted.
Data: Federal Trade Commission-Securities and Exchange Commission.
'5 6
'57
'58
'5 9
'6 0
'61 '62
Qr Qi
E C O N O M IC
REPORT
PROFITS - S A L E S
S T IL L
OF
TH E
RATIOS
HIGHER PROFITS
WHEN CAPACITIES
ARE
753
P R E S ID E N T
INDICATE
W ILL RESULT
MORE
FULLY
USED
Manufacturing Corporations' Profits after Taxes, as Percent of Net Sales
MOTOR VEHICLES AND EQUIPMENT
IRON AND STEEL
5.3%
4.6%
wm
WMMM
■
M
1953
1961
5.5%
6.5%
3.9%
3.8%
QI-Q3
1953
1962
1961
QI-Q3
3.5%
3.7%
1961
QI-Q3
1962
BB-
4.1%
1953
1961
1953
CHEMICALS AND ALLIED PRODUCTS
6.1%
73%
1962
TOTAL MANUFACTURING
7.4%
4.3%
4.3%
45%
1953
1961
QI-Q3
Bis
1953
1961
QI-Q3
1962
Data: Federal Trade Commission, Securities and Exchange Commission.
1962
754
E C O N O M IC
REPORT
OF
TH E
P R E S ID E N T
TOTAL FUNDS USED BY CORPORATIONS
HAVE INCREASED
Billions of Current Dollars
36.9
28.7
1947-1953
Annual Average
1953-1961
Annual Average
PORTION OF THESE FUNDS USED FOR
PLANT AND EQUIPMENT HAS GROWN
71.3%
1947-1953
Annual Average
76.7%
1953-1961
Annual Average
PORTION OF CORPORATE FUNDS DRAWN
FROM INTERNAL SOURCES HAS RISEN
|DepreciationandAmortization
65.8%
1 947-1953
Annual Average
Data: DepartmentofCommerce.
IRetainedProfitsandDepletionAllowances
70.1%
1953-1961
Annual Average
E C O N O M IC
REPORT
OF
TH E
755
P R E S ID E N T
D E F IC IE N T RA TE OF GROW TH IN
W A G E S AND S A L A R IE S , 1 9 5 3 - 1 9 6 2
D EFICIEN CIES IN W AGES AND S A L A R IE S
A R E L A R G E S H A R E OF D E FIC IE N C IE S IN
T O T A L CONSUM ER INCOMES B E FO R E T A X E S
Billions of 1961 Dollars
Deficiencyin
W
agesand
Salaries.
Deficiencyin
OtherConsum
er
Incomes.
Deficiencyin
Total Consumer
IncomesBefore
Taxes.
756
ECONOMIC REPORT OF THE PRESIDENT
BEFORE THE 1 9 5 7 -1 9 5 8 RECESSION,
PROFITS AND INVESTMENT
OUTRAN WAGES-BASIC TO CONSUMPTION
First ThreeQuarters1955-First ThreeQuarters1957
^
Profits after Taxes j-17 SB Investment in Plant and Equipment;^ □
Wage Rates1''
U
P
U
P 28.2%
21.7%
PROCESSED FOODS
and KINDRED PRODUCTS
IRON and STEEL
U
P
11.9%
PETROLEUM
and COAL PRODUCTS
UP
45.6%
U
P
31.1%
UP
10.7%
CHEMICALS
and ALLIED PRODUCTS
ELECTRICAL
MACHINERY
^ Data: Securities and Exchange Commission.
?/ Data: U.S. Dept, of Commerce and Securities and Exchange Commission.
^ Average hourly earnings of production workers. Data: U.S. Dept, of Labor.
NON-ELECTRICAL
MACHINERY
757
ECONOMIC REPORT OF THE PRESIDENT
BE FO R E THE 1 9 6 0 - 1 9 6 1 R EC ESSIO N ,
D ESP IT E REDUCED PRO FITS, IN VE STM EN T
OUTRAN W A G E S -B A S IC TO CONSUMPTION
FirstH
alf 1959-FirstH
alfI960
8328 Profits after Taxes17
888 Investment in Plant and Equipment^
ED Wage Rates17
U
P 7.0% U
P
21% BBB5B 1.4%
DO
W
N
1.6%
PROCESSED FOODS
and KINDRED PRODUCTS
IRON and STEEL
PETROLEUM
and COAL PRODUCTS
U
P
4.1%
DOW
N
4.5%
CHEMICALS
and ALLIES PRODUCTS
ELECTRICAL
MACHINERY
i y Data: Securities and Exchange Commission
2 / Data: U. S. Dept, of Commerce and Securities and Exchange Commission
3 / Average hourly earnings of production workers Data: Dept, of Labor
MOTOR VEHICLES
and EQUIPMENT
758
ECONOMIC REPORT OF THE PRESIDENT
PROFITS AND INVESTMENT
DURING CURRENT ECONOMIC UPTURN
OUTRUN W A G E S-B A SIC TO CONSUMPTION
IstQuarter1961-3rdQuarter1962
j | | | § Profits after Taxes^ B rag Investment in Plant and Equipmentlj 11118111 Wage Rates
up
UP
14.8%
UP
5.2%
7.8%
DOW
N
11.1%
L
M
JU
U
U
U
U
T
DOW
N
1.0%
U
P
1.7%
IRON and STEEL
PETROLEUM
and COAL PRODUCTS
ELECTRICAL
MACHINERY
NON-ELECTRICAL
MACHINERY
CHEMICALS
and ALLIED PRODUCTS
MOTOR VEHICLES
and EQUIPMENT
Data: Federal Trade Commission-Securities and Exchange Commission.
^
Data: U.S. Dept, of Commerce and Securities and Exchange Commission; seasonally adjusted.
Average hourly earnings of production workers. Data: U.S. Dept, of Labor.
759
ECONOMIC REPORT OF THE PRESIDENT
AMERICANS LIVING IN POVERTY, I9 6 0
Annual Incomes, Before Taxes, In I960 Dollars
NUMBER OF CONSUMER UNITS
( In Millions)
MULTIPLE-PERSON FAMILIES
UNATTACHED INDIVIDUALS
10.4
3.9
2.1
U
nder
$1,000
$1,000$1,999
$2,000- U
nder
$3,999 $4,000
U
nder
$1,000
$1,000$1,999
U
nder
$2,000
PERCENTAGE DISTRIBUTION
MULTIPLE-PERSON FAMILIES
U
nder
$1,000
$1,000$1,999
$2,000$3,999
UNATTACHED INDIVIDUALS
PercentofA
llIndividuals
ShareofTotalIncom
eofA
llIndividuals
PercentofAllFam
ilies
ShareofTotalIncom
eofAllFam
ilies
U
nder
$4,000
U
nder
$1,000
$1,000$1,999
11Includes, inadditiontocashincom
e,them
onetaryvalueoffoodand
fuel producedbyfarmfam
iliesfortheirow
nuse, andothernonm
oneyincom
e.
Data: Departm
entof Com
m
erce, exceptthatnum
bersofconsum
erunitsin"under$1,000" and
"$1,000-$1,999" groupingsareestim
atedbyCEPonbasisof Com
m
erceDepartm
ent
dataforfam
iliesandindividualsw
ithincom
es"under$2,000"
CEPhasalsoestim
atedsharesofincom
efor"under$1,000" and"$1,000-$1,999" groupings.
760
ECONOMIC REPORT OF THE PRESIDENT
PERCENT OF FAMILIES ABOVE POVERTY
AND THEIR SHARE OF INCOME,1929-1960
Percent of Multiple Person Families with Annual Incomes^
of $4,000 andOver, Before Taxes, andTheir Shareof Total Family Income,
In I960 Dollars
igggggg Percent of All Families
Their Share of Total Income
DEPRIVA TION - COM FORT
1%
6.1% 10.0%
1929
l935-'36
12.4%
1f.110
13.9%
11
11
1947
10.c7o142%
1953
I960
$15,000 AND OVER
AFFLUENCE
22.0%
2.4%
1929
18.1%
2.0%
1935-36
3.8%
1947
4.7%
1953
Includes inaddition to cash income the monetary value of food and fuel produced
and consumed on the farm, and other nonmoney income.
Data; 1929 and 1947- '60, Dept, of Commerce. l935-'36, Nat*I Bureau Economic Research.
I960 distribution partly CEP estimated. Conversions to I960 dollars, CEP.
23.7%
18.5%
17.5%
7.3%
I960
ECONOMIC REPORT OF THE PRESIDENT
761
TOWARD A FEDERAL BUDGET CONSISTENT
WITH MAXIMUM EMPLOYMENT AND THE
PRIORITIES OF NATIONAL PUBLIC NEEDS
Billions of Dollars
115.0 ^Interest
^ - General Government-^
~— Commerce
Natural Resources
iculture
Labor and Welfare^
Veterans
International Affairs
and Finance
Housing
|— -National Defense
and Space Technology
1FiscalYears
(Current Dollars)
BURDEN OF FEDERAL OUTLAYS IN A
FULLY GROWING ECONOMY WOULD BE
LOWER THAN IN RECENT YEARS
TOTAL FEDERAL OUTLAYS AS PERCENT OF
TOTAL NATIONAL PRODUCTION (GNP)
(1964, Fiscal; All OtherYears,
CalendarYears)
NATIONAL DEBT AS PERCENT OF
TOTAL NATIONAL PRODUCTION (GNP)
62.8%
(1964,Fiscal; All OtherYears,
CalendarYears)
(CONVENTIONAL BUDGET)
16.7%
16.6% 16.3% 16.1%
1953-1962
1962
1964
1966
Av.Annuol
Actual
Actual
Goal
Gaol
1/Based upon Budget Messageof Jan. 17, 1963
2/Including education and health services
^1Includingcontingencies andless interfund transactions
Av. Annual
Actual
Actual
Goal
Goal
762
ECONOMIC REPORT OF THE PRESIDENT
A FEDERAL BUDGET GEARED TO
JOBS FOR ALL
AND ADEQUATE PUBLIC SERVICES
1964, Fiscal Year; 1966, Calendar Year
Per Capita Outlay in 1961 Dollars
TOTALFEDERAL
OUTLAYS
NATIONAL DEFENSE,
SPACETECHNOLOGY
ANDALL
INTERNATIONAL
EDUCATION
HEALTH
SERVICES
ANDRESEARCH
- < SC
H
O
O
L
3
Year
%ofTotal Per
%ofTotal Per
%.ofTotal Per
%ofTotal Per
Output Capita Year O
utput Capita Year Output Capita Year Output Capito
1964 Adm.j/I6.60 501.24 1964 Adm.J'l0.47 316.12 1964 Adm^ .26 7.80 1964 Adm. .28
1964 Goal 16.29 516.45 1964 Goal 10.18 32265 1964 Goal .32 10.15 1964 Goal .32
1966 Goal 16.10 575.00 1966 Goal 9.94 355.00 1966 Goal .63 22.50 1966 Goal .45
PUBLIC
ASSISTANCE
LABORAND
MANPOWER, AND
OTHER WELFARE
SERVICES
HOUSINGAND
COMMUNITY
DEVELOPMENT
8.33
10.15
16.00
ALL DOMESTIC
PROGRAMSAND
SERVICES
(Includesalso
Agriculture;
Natural Resources;
Veterans;Com
m
erce;
Interest;General
Governm
ent,etc.)
Year
%ofTotal Per
%ofTotal Per
%ofTotal Per
Output Capita Year Output Capita Year Output Capita Year
1964 Adm.J' .51 15.34 1964 Admr7 .16
1964 Goal .51 16.23 1964 Goal .16
1966 Goal .52 18.50 1966 Goal .15
-^A
dm
inistration'sproposedbudgetasofJan.17,1963.
%ofTotal Per
Output Capita
4.81 1964 Adm^ .05 1.40 1964 Adm:76.13 185.12
5.07 1964 Goal .16 5.07 1964 Goal 6.11 193.80
5.50 1966 Goal .32 11.50 1966 Goal 6.16 220.00
ECONOMIC REPORT OP THE PRESIDENT
FEDERAL BUDGET HAS SHRUNK RELATIVE
TO TOTAL OUTPUT AND NEEDS, 19 54 -1 9 6 2
Fiscol Years
BUD 6ET OUTLAYS AS PER C EN T OF TOTAL NATIONAL PRODUCTION
Percent
25 |-------------------------------------------------------------------------------------------------------------------
B U D 6E T OUTLAYS PE R CAPITA
In 1961 Dollars
$514.24
$471.67
$371.59
$296.14
LS S
Total
$142.65
1
Not'! Security All Domestic
and Internet1! Programs
1954
93762 ) - 63 ( P a r t 2) - 9
ill
_ _
Total
Nat'l Security All Domestic
and lnternat'
1 Programs
1962
763
764
ECONOMIC REPORT OF THE PRESIDENT
RATES OF CHANGE PER EMPLOYEE-HOUR
IN NONFARM OUTPUT AND
WAGES AND SALARIES, 1 9 4 7 - 1 9 6 2 ^
Annual Average Rates of Change, Measured in Uniform Dollars
1947-1962
1947-1950
(Pre-KoreanW
ar)
3.8%
2.9%
2.8%
Output
Wages £> Salaries
P
erEm
ployee-hour
Output
1950-1953
1953-1962
(Post-KoreanW
ar)
(K
oreanW
ar)
Output
2.9%
2.8%
2.9%
Wages & Salaries
Output
Wages & Salaries
P
erEm
ployee-hour
1947-1962
(Excl. K
oreanW
brYears1950-1953)
3.0%
2.9%
Output
Wages £> Salaries
P
erEm
ployee-hour
Xj1962
estimated
Wages & Salaries
P
erEm
ployee-hour
P
erEm
ployee-hour
1957-1962
(M
ostR
ecent5YearPeriod)
3.1%
2.7%
Output
Wages & Salaries
PwEm
pk»yttt-how
765
ECONOMIC REPORT OF THE PRESIDENT
RATES OF CHANGE PER MAN-HOUR
IN MANUFACTURING OUTPUT AND
WAGES AND SALARIES, 1 9 4 7 -1 9 6 2
Average Annual Rates of Change, Measured in Uniform Dollars
1947-1962
1947-1950
(Pre-KoreanW
ar)
3.9%
2.9%
Output
3.2%
2.9%
Wages & Salaries
PerM
an-hour
Output
1950-1953
Wages & Salaries
PerM
an-hour
1953-1962
(Post-KoreanW
ar)
(K
oreanW
ar)
3.3%
2.7%
Output
Wages & Salaries
P
erM
an-hour
Wages & Salaries
P
erM
an-hour
1947-1962
(Excl. K
oreanW
arYears1950-1953)
1957-1962
(M
ostR
ecent5YearPeriod)
3.4%
3.0%
Output
Output
2.7%
2.8%
Wages & Salaries
PerM
an-hour
^ 1962 estimated
Output
Wages & Salaries
PerM
an-hour
F E D E R A L S T A T IS T IC S
U SERS’ CONFEREN CE
W a s h i n g t o n , D.C., February 15,1963.
Senator P a u l H . D o u g l a s ,
Chairman, Joint Economic Committee,
New Senate Office Building,
Washington, D.C.
D e a r S e n a t o r D o u g l a s : The Federal Statistics Users’ Conference
appreciates your kindness in extending an invitation to comment on
the Economic Report of the President.
Members of the Federal Statistics Users’ Conference have joined
together because of their common interest in the development of a
Federal statistics program of optimum usefulness at minimum cost.
The Conference’s statement is limited to comments on the Federal
statistical program which provides the informational background
for the Economic Report.
Sincerely yours,
M a r v i n F r i e d m a n , Chairman.
S t a t e m e n t b y t h e F e d e r a l S tatistics U sers’ C o n f e r e n c e
J o i n t E c o n o m i c C o m m i t t e e , F e b r u a r y 15, 1963
for t h e
The Federal Statistics Users’ Conference is composed of 150 organi
zations which use Federal statistics and are interested in their im
provement. Members of the conference are drawn from all sectors
of the economy: from business, labor, farm, and nonprofit research
groups. Because of the diversity of their interests, members of
FSUO have diverse views about the substance of any given Economic
Report and can offer the committee little help in evaluating these
aspects of the report.
The conference would like to take this opportunity to present some
views on the statistical materials which make up the factual back
ground of the report. Despite a diversity of interests and views on
economic policy, we have a common interest in the development of
adequate statistical materials from Federal sources. This is the
storehouse of information from which we all draw in the conduct
of our various activities. It is the same storehouse from which the
President and his Council of Economic Advisers draw in developing
the Economic Report. It is the same storehouse from which you
draw in evaluating that report, in performing your legislative func
tions as members of this committee and in dealing with substantive
policy issues.
Basically, the President’s Economic Report uses the national eco
nomic accounts framework for its analysis. GNP and national in
come have become household words. There is a danger that these
important concepts may become empty shibboleths instead of useful
tools of analysis. There is a tendency on the part of some users both
in and out of the Government to find easy mechanistic relationships
among the components of the gross national product and to make easy
767
768
E C O N O M IC
REPORT
OF
THE
P R E S ID E N T
assumptions about the effect of this or that possible public or private
policy on the overall total GNP.
Nothing could be more dangerous. There is 110 substitute for pene
trating analysis of GNP in detail. The very popularity of GNP
should cause us all to be concerned about changes taking place within
the economy which are reflected in the components of GNP but which
are slow to make an impact in the overall GNP figure.
The Office of Business Economics has been working at this job.
Over the last few years it has received some additional funds for this
purpose. The President’s budget proposes another modest infusion
of dollars.
Money is necessary, and even more will be needed in the future if
OBE is to play its proper role. The basic problem, however, is to
obtain the necessary increase in economic talent which is more than a
matter of financial resources.
OBE has still to receive proper recognition of its importance, or
its potential, either within the Government or the Department of *
Commerce. It has had a talented staff, and it is not surprising that
it has been subject to drains on that talent. It must be helped to
minimize those losses and aided in recruiting new talent.
To look on OBE as merely the compiler of the national economic
accounts and the balance of payments and the publisher of the Survey
of Current Business is the road to nowhere. It will become more
and more difficult to recruit talented people to replace those who retire
or drift away to other agencies or to nongovernmental positions. A
bigger burden will be placed on those whose stubborn, professional
pride and sense of dedication will compel them to try to do the im
possible.
Instead, OBE must be given a iob to do. It must be told that it is
responsible for improving the national economic accounts, not merelv
for maintaining them, for making deeper and more meaningful anal
yses of the data it turns out and for organizing more useful data
structures. It can be told to delve into its figures on consumer expend
itures, to look at the factors affecting business investment, to make a
sharper appraisal of the impact of Government expenditures on the
economy. In short, it can be told to keep users aware of the boobytraps hidden in an uncritical reliance on the global totals of GNP
and national income. OBE has been doing this job in part, It can
do more.
At best it would take several years to build an adequate staff to do
this, and it would take additional appropriations maybe up to twice
those OBE has been spending in the recent past.
We can ill afford an OBE that is only routinely doing what it has
done in the past, that finds it most difficult to recruit and retain high
caliber personnel, that turns out a product which is important, yet
only moderately satisfactory. The country can afford more money to
do a job that needs to be done, which OBE can do, and which it should
be equipped to do. This is a matter deserving of the Joint Economic
Committee’s most careful attention.
E C O N O M IC
REPORT
OF
THE
P R E S ID E N T
769
EM PLO YM ENT A ND U N E M PL O Y M EN T STATISTICS
During the past year and a half, Federal statistics on employment
and unemployment have been subjected to a degree of criticism and
investigation of unparalleled intensity. The Economic Statistics
Subcommittee of the Joint Economic Committee devoted 3 days of
hearings to this subject in December 1961. This review was followed
by a detailed examination of the data by the President’s Committee
To Appraise Employment and Unemployment Statistics.
Both of these reviews came to the same basic conclusion that exist
ing data are founded on sound concepts and are prepared by com
petent objective personnel. Both reviews concluded, however, that
present-day problems and present-day uses of the data require more
penetrating inquiries than have been made in the past.
The President’s budget proposes to embark on a number of pro
grams designed to achieve some of the objectives recommended both
by the subcommittee and by the President's Committee. The bill
for doing the job is large in comparison with past expenditures. It
looks even bigger because it comes in a year in which substantial
increases in Federal pay rates are making themselves felt for the
first, time. But the job won’t become any cheaper in the future. It
costs money to improve State and local area employment figures, to
press the man who says he is unemployed to tell what he has really
done to look for a job, and to work up some reasonably reliable and
detailed figures on employment by occupation, to find out something
about what causes people to enter or leave the labor force, or to find
out whether it is practical to develop some regular repetitive infor
mation on job vacancies.
One aspect of the proposed program is worth particular attention.
A substantial part of the increase would be used to develop a house
hold survey sample about half as large as the Current Population
Survey which is the vehicle for the Monthly Report on the Labor
Force. This sample would be used for experimentation necessary
to the achievement of some of the objectives sought in the recom
mendations which both you and the President’s Committee made.
This is a useful purpose, but the Bureau of Labor Statistics needs
to make clear how it intends to use this sample in the future. Ex
perimentation for a reasonable period of time followed by the use
of this sample as a regular source of data is understandable because
experimentation is necessary and because the present sample has be
come so loaded with questions that it is being pressed to its practical
limits. A permanent experimental sample or one carried for several
years would be more difficult to justify as a sound proposition since
the experimental sample would cost about, one-third of the total
amount being spent to get monthly data from household surveys.
770
ECONOMIC REPORT OF THE PRESIDENT
LOCAL AREA IN F O R M A T IO N
As is customary, the statistical information included in the Presi
dent’s Economic Report is of a summary character, limited to na
tional aggregates. This is as it must be for purposes of the Eco
nomic Report. As members of this committee know, the country’s
problems are not evenly distributed geographically. On numerous
occasions members of the committee, and staff reports from the com
mittee, have noted the lack of adequate local area information on a
current basis.
The President’s budget has recognized this need, and contains sev
eral proposals to develop significant current economic indicators for
a number of metropolitan areas. Population, retail trade, personal
income, housing vacancies, and employment data are some of the im
portant kinds of information which would be supplied either for the
first time or in greater quantity or of better quality than heretofore.
Since both public and private policy must take account of the dif
ferential impact of economic phenomena in various parts of the
country, we hope that this committee will offer continuing encourage
ment to the efforts proposed in the President’s budget.
A G R IC U LTU R A L
STATISTICS
This year’s Economic Report does not linger very long on the prob
lems of agriculture. Consequently, the only statistical information is
that which is regularly included in the appendix.
Problems associated with agriculture give rise to some of the most
controversial issues of the day. There seems little likelihood that
controversy will be stilled in the foreseeable future. It is time to take
a searching look at agricultural statistics to make sure that the in
formation being produced corresponds to that which is needed or will
be needed within a few years.
BETTER USE OF E X IS T IN G SOURCES
It often seems that new needs for information mean just more sta
tistics instead of more meaningful statistics. This is frustrating to
those who are asked to fill out new reports and to those who can’t
understand why informational needs can’t be met out by revising exist
ing programs.
In many cases new reports are required, but considerations of cost
and respondent reaction should impel statistics producers to utilize
existing data sources to the utmost.
The use of tax returns as a source for basic economic information
has been expanded substantially in quantity and has improved sub
stantially in timeliness over the last few years. Much more in the way
of valuable and useful information can still be mined from this source
at minimum cost and efforts to use it even more effectively should
continue.
ECONOMIC REPORT OF THE PRESIDENT
771
We deeply appreciate the efforts which this committee has made to
obtain more effective use of these data. Statistics of Income is a far
more valuable series today than it was a few short years ago and
County Business Patterns looks as though it may finally get out of
the rut of tardiness.
'
In connection with the latter, it is worth noting that the President’s
budget proposes the production of County Business Patterns as an
annual publication. This will be a substantial step forward. It
would be even more useful if its timeliness could be improved. Since
employer reports (Form 941: Employer’s Quarterly Federal Tax Re
turn) on which County Business Patterns is based are on punch cards,
it would be worth while investigating the practicality of entering the
number of employees on the card along with total taxable wages paid.
If this were found to be practical, it should be possible for Census
to begin work on County Business Patterns some 4 or 5 months earlier
than is now the case.
MACHINERY & ALLIED PRODUCTS INSTITUTE
W a s h i n g t o n , D.C., February 13,1963.
Hon. P a u l H. D o u g l a s ,
Chairman, Joint Economic Committee,
New Senate Office Building,
Washington, D.C.
D e a r S e n a t o r D o u g l a s : In accordance with your invitation of January 23 the Machinery & Allied Products Institute is pleased to pre
sent to the Joint Economic Committee its comments on the materials
and recommendations contained in the 1963 Economic Report of the
President, including the appended Report of the Council or Economic
Advisers. Twenty copies of the MAPI statement are enclosed as
requested.
If we can be of further service please call on me.
Cordially,
C h a r l e s S t e w a r t , President.
S ta te m e n t o f t h e M a c h in e r y
&A
llie d
P ro d u c ts I n s t it u t e o n t h e
E c o n o m ic R e p o r t o f t h e P r e s id e n t, S u b m itte d t o t h e J o in t E c o
n o m ic C o m m itte e b y G e o r g e T e r b o r g h , R e s e a r c h D ir e c t o r , F e b
ru ary.
13, 1963
Mr. Chairman and gentlemen, we appreciate your invitation to com
ment on the 1963 Economic Report of the President, which we assume
to include for this purpose the Annual Report of tne Council of Eco
nomic Advisers.
Since the central issue in both reports is the administration’s tax
program, and since it promises to be a principal preoccupation of the
Congress at this session, we have chosen to limit our observations to
this issue. We want particularly to explore some of the basic economic
assumptions underlying the program.
1. OVERSIMPLIFICATION IN OFFICIAL PRESENTATIONS
%
We should like to begin with a few comments on the oversimplifica
tion of the issues in official presentations.
Federal tax reduction at this time involves a deliberate increase in
an already substantial deficit. Since this runs counter to traditional
concepts of fiscal probity, and strikes many people as dangerous and
irresponsible, it is obvious that the administration confronts a major
“selling” effort. Obviously also, the time for this effort is short if
action is to be had at this session of Congress.
Under the circumstances, it is understandable that in its effort to
expound sophisticated doctrines on matters beyond the knowledge of
the layman, the administration should present its thesis in white and
black. In the Economic Report, as in other state papers submitted
to Congress recently—the state of the Union message, the special mes
sage on tax reduction and reform, etc.—the impression is created that
773
774
E C O N O M IC
REPORT
OF
THE
P R E S ID E N T
there is more certainty than in fact exists both as to the diagnosis of
our economic ills and as to remedies. Disputed and controversial
propositions appear with the aura of established truth.
Reason for reeen t slackness
One oversimplification has to do with the reasons for the unsatis
factory performance of the economy since 1957. The administration
attributes this primarily to the repressive effect of heavy Federal taxes.
This is one theory, but there are others. Indeed there is a whole list
of factors given varying weight and emphasis by different economists.
Some have to do with developments prior to the period of slackness,
others to events occurring within it.
One of the antecedent developments was the exhaustion by 1957 of
the special stimuli to demand carried over from World War II and
the great depression. Another was the overexuberance of the 195557 capital goods boom, which left a good many industries with excess
capacity. Among the events within the period, there was the setback
to the 1958-59 recovery by a 4-month steel strike and a highly restric
tive monetary and credit policy. During the recovery now underway,
we have had the steel price episode, a stockmarket shakeout, a slug
gish growth of the money supply, a profit squeeze, etc. Individual
analysts will expand the list to suit their taste. The point is that there
are plenty of explanations around other than the weight of the Fed
eral tax load.
We should be the last to minimize the burden of Federal taxes on
the economy, which is certainly onerous, not only because of its mag
nitude, but because of its distribution. We have a tax structure that
bears heavily on enterprise, risk-taking, and productive investment.
It- exerts a continuous drag on economic progress. It does not follow,
however, that this is the principal reason for the failure of the 195859 recovery to reach completion, or for the sluggishness of the current
recovery. We may point out that the Federal tax structure and rates
in both of these recoveries were practically the same as in the recovery
of 1954-55, which was an exceptionally vigorous one. Something else
must have changed in the meantime.
Adverse swings in budget position
The administration makes much of the drag on the current recovery
and the preceding one from adverse shifts in the Federal budget posi
tion. The wide swings from deficit to surplus as the economy expands
are deemed too repressive. They are said to choke off recovery before
completion.
This theory must reckon with the rather disconcerting fact that
adverse budget swings have been relatively smaller in the two most
recent recoveries than in earlier ones that carried through to comple
tion. If we take the total swing (decrease of deficit plus increase of
surplus) during each of the postwar recoveries as a percentage of the
increase in the gross national product over the interval, we get the
picture on the following page.1
1 The swing: is measured in terms o f the so-called national-accounts budget, now favored
by the adm inistration in discussions o f this subject.
E C O N O M IC
REPORT
OF
THE
775
P R E S ID E N T
Adverse budget swing as percentage of GNP growth
[From quarterly figures]
During the
-month
period of
greatest
swing 1
12
Recovery
During the
18-month
period of
greatest
swing2
39
48
34
1949-50
1954-55
1958-59
1961-62
10
» 1949-III to 1950-III; 1954-1 to 1955-1; 1958-11 to 1959-11; 1961-1 to 1962-1.
21949-III to 1951-1; 1953-IV to 1955-11; 1958-III to 1960-1; 1961-1 to 1962-III.
Certainly the adverse budget swing is a dubious explanation for
the sluggishness of the present recovery. It has been by far the
smallest of the lot; indeed during 1962, when the recovery slowed up,
there was no adverse swing at all.
Surplus at the end of the swing
If we turn from the total swing to the size of the Federal surplus
attained at the top of the swing, we also get nowhere. The current
recovery is the only one in the postwar period that has not developed a
surplus. The budget position has remained in deficit, and promises to
do so for some time.
Peak surplus as percent of GNP1
_
Q u a r te r ly
Recovery:
fig u r e s
1940-50__________________________________________________________________ 6. 4
1954-55__________________________________________________________________ 1. 6
1058-50__________________________________________________________________ 1. 6
1061-62______________________________________________ —.1 (Minimum deficit)
i 1951-1, 1056-1, 1960-1, 1962-11.
If neither the total adverse swing in the budget position nor the
surplus reached at the end of it appear to have much explanatory
value in the present situation, it is obvious that other diagnoses are
in order.
We recite these facts, not to advance a position of our own, but to
emphasize the oversimplification of the official presentation. We sug
gest that it deserves the critical scrutiny of the Committee before the
proposed remedy is adopted.
2. POSTW AR SURPLUSES A N D DEFICITS I N
RELA TIO N TO ECON OM IC
TRENDS
There is danger that the administration’s educational campaign will
lead to a naive, even mystical, exaggeration of the potency of Federal
deficits as an economic stimulant. History does not warrant such
enthusiasm. We need only cite the fact that in the thirties the Federal
Government ran deficits for 10 years in a row, at an average rate
exceeding 3 percent of the gross national product, and that the
economy finished the period still depressed. (A comparable deficit
776
ECONOMIC REPORT OF THE PRESIDENT
today would be $17 billion a year.) To take a more recent example,
the economy has run slack since 1957 notwithstanding an accumulated
deficit of $20 billion over the interval. Whatever may be said of
deficits (and we do not prejudge the question at this point), there is
clearly no magic in them.
This conclusion is confirmed by postwar history. The chart which
follows compares the change in the gross national product from the
preceding quarter with the position of the Federal budget in the
current quarter.
Analysis
If Federal deficits are stimulative of the economy, and surpluses
repressive, we might expect to find expansion predominant during
deficit periods and contraction predominant during periods of surplus.
A glance at the chart fails to show any general pattern of this char
acter. The relation between the budget position and economic trends
has been highly variable and irregular. There have been extended
periods (a year or more) with rising GNP and budget surpluses,2
others with rising GNP and deficits.3 There have been periods with
falling GNP and deficits,4 others (a short one) with falling GNP
and surpluses.5 Of 51 quarters with a rising GNP, more than half
(28) were associated with a Federal surplus, 23 with a deficit, while
of 13 quarters with declining GNP, nearly all (12) were associated
with a deficit.
1947-48, 1950-11 to 1951-11, and 1955-1 to 1957-III.
3 1952—III to 1954—11, 1958—11 to 1959-1, and 1961-11 to 1962-IV.
* 1949, and 1953-III to 1954j-II.
6 Only two quarters in this case, 1960-111 and IV.
Compared with the Position of the Federal Budget in the Current Quarter
(seasonallyadjustedannual rates)
ECONOMIC
REPORT
BillionsofD
oll1
a2r0
s
----------
THE
B
nso------fD
ollars
2i0llio
---
OF
P R E S ID E N T
chani: Change in the Gross National Product from the Preceding Quarter,
1955
1956
1957
1958
1959
Source; DeportmentofCom
m
erce. Thebudgetpositionisreportedonthenotional-accountsbasis.
I960
778
ECONOMIC REPORT OF THE PRESIDENT
It may be objected that there is a lag between the budget position
and the response of the economy, hence that we should “lead” the for
mer by a reasonable period. If we lead it by 6 months, the picture
is not greatly altered. Of 51 quarters with rising GNP, 24 show
budget surpluses in the second quarter preceding, 27 deficits. Of 13
with falling GNP, 7 show surpluses, 6 deficits.
For those preferring a more formal analysis, the coefficient of corre
lation between the budget position in the current quarter and the
GNP change from the preceding quarter is + .390. In other words,
there is a slight positive correlation between surpluses and rising
GNP (or deficits and declining GNP). When we lead the budget
position by 6 months, the correlation is —.04. This has no statistical
significance.
Possible explanations
The absence of any significant correlation for the postwar period
between the Federal budget position and economic trends raises the
interesting question of why the alleged effect of the budget position
has failed to register. There may be two reasons: (1) Its impact may
be submerged by other factors; (2) it may not have the impact
alleged.
If we were dealing with simple one-way causation—if economic
movements were controlled exclusively by the Federal budget posi
tion—we would expect by conventional theory to find expansion asso
ciated with deficits and contraction with surpluses. But the causa
tion is not one way. The budget position is itself influenced by the
movement and level of economic activity. What we have is a com
plex interaction in which the influence of the budget may be sub
merged by more powerful forces, hence may not be separately
identifiable.
It must be recognized that even sizable surpluses or deficits are
small in relation to the GNP ($10 billion is less than 2 percent, for
example), and that even if their influence is in the theoretical direc
tion it can be submerged for extended periods of time by countertrends in the economy. It can be argued for this reason that the
absence of the expected statistical correlation for the postwar period
is due to the smothering of the budget impact by such countertrends.
We regard this contention as exceedingly dubious. In our opinion,
the key to the mystery lies elsewhere. The budget position has not
had the impact attributed to it by the administration. With your
indulgence, we should like to develop the point briefly.
3.
th eo ry
of
f is c a l
p o l ic y
It is sometimes assumed that Federal deficits are always and
inherently stimulative to the economy and that surpluses are on the
contraary always and inherently repressive. This is a gross over
simplification.
If we rightly understand the position of the administration, it
rests on the assumption that an increase in the Federal deficit through
tax reduction will yield a net addition to private spending. At first
glance, this seems to follow inevitably from the fact that the bene
ficiaries of the reduction will have more after-tax income to spend.
But there is another side of the shield. Unless the added deficit is
E C O N O M IC
REPORT
OF
THE
P R E S ID E N T
779
“monetized,” that is to say, unless it is financed by the creation of
new money, it must be financed from private savings.
If it is so financed, it places the Treasury in competition with all
other users of capital—corporations, unincorporated businesses, State
and local governments, home mortgage borrowers, etc.—for these
savings. This competition cuts down the amount of funds available
to these users. If the added Federal deficit is substantial, the drain
011 the capital market is reflected in higher bond yields, higher mort
gage loan rates, and lower credit availability than would otherwise
obtain. Marginal credit, and marginal user's of credit, are squeezed
out in favor of the Treasury. Thus the increase in spending by the
beneficiaries of the tax reduction may be partially or wholly offset
by the decrease in private (and State and local) investment financed
through the capital market.
Variable effects
Whether the offset is partial or complete depends on circumstances.
During economic recessions, when the private demand for funds is
declining and the capital market is sloppy, it is possible for the Treas
ury to increase its absorption of savings without a concurrent reduc
tion of comparable amount in non-Federal investment. If this
increased absorption stimulates the economy, it is even possible that
there may be no net reduction at all. But when the Treasury absorbs
savings in more normal markets, the offsetting curtailment of nonFederal investment is both more prompt and more complete. The
stimulative effect is correspondingly diminished.
Here, certainly, is one reason for the failure of Federal deficits of
the postwar period to show the stimulative magic assumed by the
official theory. The Treasury has run deficits, not just during re
cession, but more than half of the time (35 quarters out of 64) .6 Since
they have been financed largely out of savings, they have exerted a
drag on private (and State and local) investment that has gone far
to offset their stimulus.
Present situation
At the present time, the economy is not in recession, but has been
expanding continuously for 2 years. It is, by various estimates,
within 5 or 6 percent of its current potential and it may be closer than
that. The capital market is in equilibrium. There is no hoard or
pool of idle funds that the Treasury can absorb without detriment to
other borrowers. Under these conditions, it is by no means certain
that an added Federal deficit financed from savings would be signifi
cantly stimulative. In all probability, it would be substantially, if not
largely, offset by the displacement of non-Federal investment.
Obviously, such displacement is precisely what the economy does
not need. Thanks in part to a tax structure weighted against saving
and investment, we already have a high-consumption, low-investment
economy. For the decade of the fifties, total fixed investment in the
United States was a smaller percentage of GNP than in 8 of 12 West
ern industrial countries. In terms of investment in productive equip
ment, we were at the bottom of a list of 10 such countries. Not sur
0 National accounts basis.
0.3762O—6-V-pt. 2---- 10
780
ECONOMIC REPORT OF THE PRESIDENT
prisingly, our economic growth rate over the decade was second from
the bottom.7
4 . F IN A N C IN G DEFICITS
These observations are not intended to exclude the possibility of
an increase in the Federal deficit through tax reduction, but they do
raise the question of how such an increase (if there is one) should be
financed.
The administration has been rather vague on this question, in part,
no doubt, because it involves Federal Reserve policy over which it
has no direct control. In its 1963 report, the Council of Economic
Advisers conveys the impression that it would welcome a considerable
degree of monetization,8but recent statements of the Chairman of the
Federal Eeserve Board suggest extreme reluctance to do more than
the unavoidable minimum.9 The whole question is very much up in
the air.
The “inflation” angle
There is a widespread belief that a deficit financed from savings is
less “inflationary” than one financed by an increase of bank credit
(one that is monetized). If this is so, it is only because it is less
effective. It takes more of it to produce a given result. But if it is
carried too far (assuming it is in fact expansionary), it becomes as
inflationary as a monetized deficit carried too far. The main differ^
ence is in the appropriate dosage.
1
The notion that a monetized deficit is necessarily and inherently
inflationary apart from circumstances and the extent of its use is a
popular fallacy. Provided it does not expand the Nation’s money
supply beyond its legitimate requirements, it can be expansionary
without being inflationary. Moreover, as we have just noted, it can
achieve a given expansion with a fraction of the deficiteering required
by the other approach.
The real question at present is whether the money supply can prop
erly be enlarged by further monetization of the Federal deficit. We
should like to address this question for amoment.
Position of the money supply
The Federal Reserve System has followed for years an extremely
restrictive monetary policy.10 Over the decade 1952-62, for example,
the money supply (demand deposits and currency) has been permitted
to grow at an average rate just over 1.5 percent a year (compounded).
This compares with an average annual growth of 4.8 percent in the
gross national product. It has been possible to have this GNP growth
because of constantly rising money turnover rates, starting from the
abnormally low level obtaining at the end of the war. This process
of acceleration cannot go on forever. The ratio of money supply to
GNP has already worked its way down to a very low level by historical
standards, as can be seen from chart 2.
7 “ Capital Investm ent and Econom ic Progress in Leading Industrial Countries, 19 50-6 0,”
Capital Goods R eview No. 48 (January 1962).
8 Pp. 53 -55.
0 W illiam McChesney M artin, statement to this comm ittee, Feb. 1, 1963.
il° W e use this term to denote money-supply policy, as distinguished from credit policy.
These are not the same, and do not always m ove in harmony.
ECONOMIC REPORT OF THE PRESIDENT
781
While no one can say with assurance what the turnover potential of
the money supply is these days (so many changes having occurred
since earlier experience with current rates), we strongly suspect that
the economy has for some time encountered resistance to further accel
eration. This suspicion is strengthened by its behavior over the past
5 years. It has suffered less from specific maladjustments than from
a kind of general debility. It has lacked energy. Not once in this
interval has it achieved a level of aggregate demand sufficient for full
prosperity. These symptoms are precisely what we would expect
from an inadequate money supply. Here, in our opinion, is a more
plausible explanation of the sluggishness of the system than an insuffi
cient Federal deficit.
Billionsof Dollars
Billionsof Dollars
00
to
ECONOMIC
REPORT
OF
THE
PRESIDENT
charts. Gross National Product, Money Supply and Ratio of Money Supply to GNP
Sources: DepartmentofCommerceandFederalReserveSystem.
(est.)
ECONOMIC REPORT OF THE PRESIDENT
783
Monetary growth requirements
While we repeat that no one (including the Federal Reserve Board)
can say for sure how much additional acceleration of money turnover
is in the cards, it is interesting to see how much expansion of the
money supply would be required if the rate were to level off where it
now is. To get the GNP up to the $600 billion a year level said to
be its current potential would require an addition of $10 billion. If
the GNP were to grow thereafter only at the average rate of the fifties
(4.8 percent annually in current dollars), it would require a yearly in
crease in the money supply of $7 billion. This is more than it has
grown oyer the past 4 years.
Even if turnover acceleration continues some time longer at a re
duced rate, there will still be a need for more rapid monetary growth
than we have been having. We believe that a properly controlled
monetization of the Federal deficit is both desirable and safe.
5. OUT L I N E OF POLICY
What we have had over the past few years is a fiscal policy at least
intended to stimulate the economy, and a monetary policy calculated
to restrain it.
Until recently, it was possible to attribute this restrictive policy to
the constraints imposed by our gold and balance-of-payments posi
tion. But it is now clear, at least so far as the Chairman of the
Federal Reserve Board is concerned, that it is justified on other
grounds as well. Witness the following statement:
“My present feeling is that the domestic liquidity of our banks is
now so high that still further monetary stimulus would do little if any
good—and might do harm—even if toe did not have to consider our
payments situation at all [emphasis ours]. This means that if any
additional Government action is needed in the financial field in order
to give fresh expansive impulse to the economy, it would probably
have to come from the fiscal side.” 11
If this is the final position of our monetary authorities, it is, of
course, bootless to suggest even a modest monetization of the deficit.
We are going to assume, however, that their cooperation would be
forthcoming if Congress gave a strong lead, and our policy recoin*
mendations are pitched accordingly.
General approach
Since monetary policy has made very little contribution to economic
expansion in recent years, the stimulative efforts of the Federal Gov
ernment have been concentrated almost entirely on fiscal policy. The
result has been a bad balance between the two—monetary policy under
worked, fiscal policy overworked. It follows that the basic approcah
to our present problem should be the restoration of monetary policy
to its proper place. Primary emphasis should be placed on monetary
expansion. The object should be the monetization of enough of the
Federal deficit to build the money supply at the rate desired.
11 W illiam McChesney Martin, “ M onetary P olicy and International Payments,” an
address to the American Econom ic A ssociation and the American Finance Association,
Pittsburgh, Dec. 28, 1962. That at least one member o f the B oard takes some exception
to this view is indicated by the recent testim ony o f George W. M itchell before this com
mittee (Feb. 1 ,1 9 6 3 ).
784
ECONOMIC REPORT OF THE PRESIDENT
It is by no means certain that this will require an addition to the
deficit already in prospect with the existing tax structure (some $8
or $9 billion for fiscal 1964). Conceivably it may be practicable, with
the cooperation of the Federal Reserve System and the Treasury debt
managers, to achieve the desired rate of monetary expansion without
further enlarging this deficit. If, however, this is not considered
practicable because of the restraints imposed by our balance-of-payments position, any enlargement of the deficit should be held to the
minimum required for monetary purposes. This should be a fairly
modest amount.
Priorities in tax reduction
Assuming an increase in the deficit is needed for monetary expan
sion, the question arises as to priorities in tax reduction. We believe
first priority should be given to two long-overdue reforms, a reduction
in the corporate rate and a scaledown of high-bracket personal rates.
These reforms would not only eliminate two of the more indefensible
survivals from wartime taxation; they would be a more potent eco
nomic stimulus, dollar for dollar, than tax relief primarily for the
benefit of consumption.
Unlike tax relief for consumers, which increases their disposable
income without affecting the appeal of the objects of expenditure, a
reduction of the corporate rate has a dual effect: it increases the
supply of funds and at the same time enhances the attractiveness of
investment projects available for their use. By lowering the invest
ment threshold, it enlarges the volume of eligible projects.
This point is discussed in an institute publication, “Effect of the
Corporate Income Tax on Investment” (March 1959), from which we
should like to quote briefly:
“The process of capital investment may be described as the incurment of capital charges in order to obtain an operating advantage,
that is to say, a favorable change in the relation of revenue to oper
ating costs. The corporate income tax falls on the earnings of equity
investment. This means that to justify such investment a project
must promise to yield a pretax return that will leave an attractive
aftertax return when the tax is paid. Stated otherwise, it must promise
not only an attractive aftertax return but the tax as well.
“The present corporate levy of 52 percent on taxable income is equiv
alent to a rate of 108 percent on the after-tax return required to
justify investment. If that return is 10 percent, for example, the tax
is 10.8 percent of investment, the combined rate being therefore 20.8
percent. What the tax does, in effect, is to raise the required pretax
return to this rate. This alters the ‘terms of trade’ between capital
charges and operating advantage to the detriment of the former.
“The increase in the required pretax return automatically excludes
a whole range of investment projects that would be eligible in the ab
sence of the tax, or at a lower tax rate. It limits eligibility, in other
words, to projects of great urgency. The result is the deferment of
both new business ventures and investments in the improvement of
existing operations until their expected pretax return rises to the
higher requirement.
“The main effect of such a high corporate investment threshold is
to hold an umbrella over existing productive facilities. For it defers
the introduction of new capacity competitive therewith. Old facil
ECONOMIC REPORT OF THE PRESIDENT
785
ities must become more decrepit and inefficient before they are replace
able. Their service lives are extended. The economy drags along in
consequence with a productive mechanism of higher average age, and
with more accumulated deterioration and obsolescence, than would
obtain in the absence of the tax.”
A reduction of the corporate rate by 5 points, from 52 to 47 percent,
which we recommend as an interim objective, would make eligible for
investment a whole range or tier of projects now excluded. Our cal
culations indicate many billions of dollars worth. Both from a longrange standpoint, and from the standpoint of near-term economic
stimulation, this reform deserves top priority.
As for the scale-down of the hign-bracket rates on personal income,
little need be said. Those rates are generally recognized as indefensi
ble. Such a scale-down, say to a top of 65 percent, would cost rela
tively little in revenue and would be strongly stimulative. Here, as
with corporate rate reduction, the effect is twofold: the supply of dis
posable funds is enlarged, and the attractiveness of investment projects
is simultaneously enhanced.
If these top-priority tax reductions fail to provide a sufficient in
crease in the Federal deficit for the purpose of monetary expansion,
other reductions will of course be in order. As to these, in the event
they are needed, we reserve our recommendations for the fiscal com
mittees of Congress.
Conclusion
We should like to make another point in closing. We have urged
that corporate and top-bracket rate reduction be given priority if it is
found necessary to enlarge the Federal deficit to achieve an appro
priate rate of monetary expansion.
Actually, we go further. We believe that these two reforms are
so urgent, and so long overdue, that they should be enacted even if an
enlargement of the deficit is not deemed necessary. In that event, the
loss of revenue—around $3 billion a year—should be compensated
either by a reduction of Federal expenditures, increases in other levies,
or from new sources of revenue—such, for example, as a broadened
excise tax system. The elimination of these wartime relics should not
be longer delayed.
Finally, we should like to say a word on the importance of con
trolling the expenditure side of the Federal budget. No effort to re
lieve the economy of repressive taxation can get far if the budget con
tinues to expand at its recent rate. This can only compound our fiscal
difficulties over the long run. Restraint on outgo is absolutely basic.
NATIONAL ASSOCIATION OF MANUFACTURERS
T
h e
T
ax
B
arrier
to
E
conomic
G
rowth
S t a t e m e n t of G e o r g e G. H a g e d o r n , D i re ctor of Research, N a
tional Association of M a n u f a c t u r e r s o n t h e E c o n o m i c R e p o r t
of t h e President a n d t h e R e p o r t of t h e C o u n c i l of E c o n o m i c
Advisers for t h e J o i n t E c o n o m i c C o m m i t t e e of Congress, F e b r u
a r y 15, 1963
I appreciate this opportunity of commenting, on behalf of the
National Association of Manufacturers, on the President’s Economic
Report and on the Report of his Council of Economic Advisers. It is
a source of gratification that these reports recognize forthrightly that
the American economy is not growing as fast as it can grow and as it
needs to grow. The ominous slowing down of the rate of economic
recovery in 1962 and the persistence of a rate of unemployment which
approaches 6 percent are factors none of us can afford to ignore. I
am also in agreement that the Federal income tax system is one of the
major barriers which have prevented us from attaining a satisfactory
rate of growth and has repeatedly slowed down upward movements
in economic activity well before they have reached full fruition.
Regretfully, however, I must say that the agreement ends there. The
administration has incorrectly diagnosed the particular manner in
which Federal taxes act as an impediment to economic growth and
has misconceived the specific objectives which tax changes should
serve. As a result, the tax program which the administration offers
could have only limited success in the short run and no success at all
in the long run. It would also have side effects which, in both the
long and short run, would have a damaging impact on our economy.
The administration believes that the chief present barrier to further
recovery and growth is an insufficiency of demand. It therefore rec
ommends a package of tax changes whose central objective is to in
crease the purchasing power of consumers.
The National Association of Manufacturers believes, on the con
trary, that the tax drag on the economy springs from the fact that
taxes act as a barrier to the formation and effective use of capital.
Our present tax system impedes both the accumulation of additional
capital and the allocation of capital to the purposes in which it can
be most useful. It produces these injurious results through its impact
on the supply of investible funds and on the incentive for investing
them in ways which would lead to dynamic growth. We therefore
conclude that changes in the tax system should be primarily designed
to deal directly with this problem of tax barriers to capital formation.
A tax program heavily oriented toward stimulating consumer pur
chasing power offers little hope of permanently raising the rate of
economic growth. On the other hand, the quick effectuation of such
a program would maximize the danger of x*enewed inflation and of
deterioration in our international balance-of-payments position. A
787
788
ECONOMIC REPORT OF THE PRESIDENT
program so oriented cannot, without abandoning its own central
purpose of expanding total demand, ever lead us back to an era of
balanced Federal budgets. By its own inner logic it discourages
attempts to reduce or control Federal expenditures, as has been made
plain by statements of administration representatives before your
committee.
The type of tax program which this association advocates—i.e., one
primarily directed toward increasing the availability of funds for
private capital investment in a wide variety of projects and improving
the incentives for such investment—-is the best way of raising employ
ment levels and improving the rate of long-term grow7th. It offers the
prospect of restoring the Federal budget to balance within a reason
able length of time. It encourages control of Federal expenditures
since its purpose is in no way frustrated by reductions in the demand
for goods and services by the Federal Government. Such an ap
proach poses no serious danger of inflation. By raising the levels
of American productive efficiency it should contribute materially to
improvement in our balance-of-payments position.
This is not to say that a reduction of the tax burden on consumers,
allowing them to spend a larger part of their before-tax incomes on
consumer goods and services, cannot and should not be part of a tax
revision program. But this should be regarded as one of the bene
fits made possible by the greater economic growth resulting from a
properly oriented tax revision, rather than the means by which such
greater growth is achieved.
These conclusions are based on an analysis of the present state of
the American economy and its recent trends, as well as on more basic
considerations of what makes an economy grow in the long run.
OBJECTIVES OF T H E A D M IN IS T R A T IO N T A X PROGRAM
The Economic Report of the President, and other statements by
the administration, present a variety of purposes which their tax pro
posals are intended to achieve. The ultimate objectives—with which
no one can quarrel—are to raise the rate of economic growth, to pro
vide incentives to investment both for expansion and greater efficiency,
and to provide jobs for our growing labor force.
The means by which the administration expects its program of tax
revision to reach these goals are also somewrhat varied. Some atten
tion is given to the need to strengthen business incentives and release
more business capital. Recognition is given to the deterrent effects
of high individual rates in the upper brackets. These rates, says the
Council, “* * * undoubtedly have a dampening effect on incentives to
invest and take risks; and they impair the ability to accumulate invest
ment funds.” 1 Cuts in taxes on business income “* * * will strength
en investment incentives by increasing the after-tax profits that busi
nessmen can expect to earn on new productive facilities.” 2 Such cuts
will also: “* * * add to the supply of internal funds, a large part of
which is normally reinvested in the business * * *.” 2
Yet it is clear that the strengthening of incentives and the release
of capital plays at best a secondary role in the administration’s analy1 “ E conom ic R eport o f the President,*’ together with Annual R eport o f the Council o f
Economic Advisers, January 1963, p. 45.
* $ id., p. 47.
789
ECONOMIC REPORT OF THE PRESIDENT
sis of the kind of tax revisions that are needed. The emphasis is on
the bolstering of consumer purchasing power as the central and over
riding objective. In the President’s message, for example, a dis
cussion of incentives to investment is concluded with the statement:
“Thus—and it is no contradiction—the most important single thing we
can do to stimulate investment in today’s economy is to raise con
sumption by major reduction of individual income tax rates.” 3
The specifics of the tax-revision program that the President lias
since proposed confirm the conclusion that improvement of incentives
and of capital resources is given very little weight as compared with
the objective of releasing additional consumer purchasing power.
The steepness of progression in individual tax rates is of course a
severe burden on incentives for investment and risk taking, and on the
availability of private capital. Yet instead of designing the proposed
tax revision to mitigate the severity of rate progression the adminis
tration has done the reverse. Taken as a whole the program gives
greater reductions to the lower brackets of income than to the middle
and higher brackets. Thus it intensifies the steepness of progression
in the effective tax burden.
T H E RECORD OF IN V E S T M E N T A N D PROFITS
Despite the economic sluggishness of the past 5 years the postWorld War II period has been one of substantial economic growth.
Although this growth pervaded most aspects of our economic activity,
there have been two factors which have fallen well behind in the pro
cession: business investment and corporate profits. This is true
whether we make the comparison back to 1948 (the first postwar peak)
or to 1957 (the beginning of the current period of chronic sluggish
ness), as shown in the following table (based on data in appendix C
to the Economic Report) :
Percent increase
1948 to 1962
Gross national product_______ _____________ ______ _______ _____ ________
Consumer income after taxes......... ............................. ......................................
Consumption expenditures ....................................... ................ .............. .........
Government expenditures 1................................................ ................................
Business expenditures for plant and equipment_______ ___________________
Corporate profits after tax................................. ................ .................................
Percent
113
102
100
216
70
27
1957 to 1962
Percent
25
24
25
40
1
17
1 Purchases of goods and services, transfers, interest, and subsidies—all levels of Government.
Clearly, consumer incomes and expenditures have kept up with the
general economic growth and Government expenditures have run
well ahead of it. Just as clearly, business investment and profits have
lagged behind. This record on its face would cause us to doubt that
either increased consumer purchasing power or Government expendi
tures holds the key to our growth problem.
To do them credit, the Council of Economic Advisers neither ignores
nor glosses over this record of investment and profits trailing the
rest of the economy. In fact the Council, in analyzing why the econ
8 Ibid., p. XVII.
790
ECONOMIC REPORT OF THE PRESIDENT
omy fell short of its expectations in 1962, reaches the following con
clusion : 4
“The error, then, was in the area of business investment, which fell
about $8 billion short of the level that had been expected for the year
1962. Indeed from the fourth quarter of 1961 to the fourth quarter
of 1962, total business investment actually declined.”
In the same paragraph the Council states rather plaintively that
such a decline in investment “* * * was unusual for the current stage
of expansion.”
The subpar performance of corporate profits during 1962 is also
recognized in the Council’s Report in a table accompanying the text
(table 1, p. 14), although the text proper does not dwell upon it. Be
tween the fourth quarter of 1961 and the third quarter of 1962, profits
after taxes actually declined whereas the gross national product and
the disposable income of consumers showed merely a slowing down
in their rate of increase.
Yet the Council concludes that the failure of investment and of
profits to grow satisfactorily in 1962 is support for its belief that what
is needed is a stimulation of consumer demand.
Their argument in a nutshell is as follows: By 1962 businessmen
had experienced “* * * a long record of consistently, not merely
temporarily, redundant capacity. Excess capacity meant lower profit
margins. Further it meant that new’ investment was more likely to
be risky and less likely to be profitable.” 5 The existence of this re
dundant capacity means, according to the Council’s reasoning, that
comparatively little is to be gained from attempts to stimulate in
vestment directly. Furthermore, the Council believes that the large
liquid holdings of corporations and the fact that they have not in
recent years used up their own internal sources of savings, indicates
that lack of funds is not the barrier to higher levels of investment.
By this reasoning the Council arrives at the conclusion that the most
promising way to encourage business investment in plant and equip
ment is by raising the level of demand for the ultimate products the
plant and equipment are intended to turn out—i.e., consumer goods.
By raising the rate of capacity utilization, the Council argues, profit
margins and incentives for new investment will both be improved.
Administration witnesses have argued at great length that, through
the magic of the so-called “multiplier” a tax cut designed to raise con
sumer purchasing power will expand total demand by an amount sev
eral times as great as the amount of the tax cut. Their contention is
that the additional incomes arising from the initial spending of the
tax-cut dollars in turn srenerate further spending and further addi
tions to income, and so ad infinitum.
Thus the administration spokesmen have turned an observed de
ficiency in investment and in profits into an argument for a tax pro
gram primarily oriented toward raising consumer purchasing power.
The line of argument has a certain surface plausibility. Yet it is
clear that in the long run no nation can make its people prosperous
4 “ Econom ic R eport o f the President,” together with Annual R eport o f the Council of
E conom ic Advisers, January 1963. p. 15.
e Council Report, p. 17.
E C O N O M IC
REPORT
OF
THE
P R E S ID E N T
791
by providing them with more purchasing power. If it were that
easy there would be no poor countries in the world. The administra
tion argues, however, that our immediate problem is one of lack of
purchasing power to keep existing facilities operating and thereby
to stimulate investment in new facilities. Interpreted in this way,
the validity of the argument depends on the contention that at present
widespread excess capacity exists in the American economy. Without
such excess capacity, mere increased demand cannot call forth an
increase in output or employment. The magic multiplier then operates
to raise prices rather than to expand production.
I do not believe that a realistic appraisal supports the premise that
the American economy is suffering from excess capacity to any degree
that is significant for investment prospects. On the contrary, there
is a more general condition of restraints on growth arising from in
sufficiency of capacity to supply the particular kinds of demands that
may be expected to increase with economic growth. The evidence for
this view will be given later, but first it is necessary to examine the
concepts of “capacity” and “capacity utilization.”
T H E M E A N IN G OF “ C A P A C IT Y ”
In mid-1962 your committee’s Subcommittee on Economic Statistics
held hearings and prepared a report on “Measures of Productive
Capacity.” These contained many useful contributions to better un
derstanding of this complex subject.
Among the facts brought out in that investigation is the extreme
crudeness of the existing statistical measures of capacity and rates
of capacity utilization. Furthermore, such measures are very limited
in their coverage since they deal only with manufacturing capacity
and do not cover other sectors of the economy which may be expanding
faster than manufacturing. Finally, various measures of capacity
and rates of utilization show wide discrepancies among themselves.
To say these things is not to disparage the competence of those who
have worked in this field, but to recognize the inherent complexities
of the subject. The fact remains that the available statistics on
capacity and its rate of use are a shaky guide in questions of national
economic policy.
The distinction between the “engineering” concept of capacity and
the “economic” concept, as brought out in the subcommittee's report,
is a highly significant one. The engineering approach attempts to
measure the physical limits imposed on output by the available stock
of equipment and plant. The economic approach recognizes that,
before this physical limit is reached, a rate of operations may be
attained at which costs rise so steeply that it is not profitable to use
existing facilities more intensively. When this latter point is passed
there is a strong tendency for industry to build new capacity—pro
vided of course that the"necessary capital can be found. For that
reason the concept of economic capacity, rather than engineering
capacity, is the significant one in dealing with the issue of whether,
currently, excess capacity is the chief factor restraining further in
vestment.
792
ECONOMIC REPORT OF THE PRESIDENT
But there is an even broader problem which arises in appraising
the condition of the country in respect to its economic capacity. That
is the question of how we shall combine measures of capacity utiliza
tion in various fields in order to guide us in reaching such an overall
appraisal. A low rate of capacity utilization in one field does not
in any realistic sense offset a high rate of capacity utilization in
another. Hence, there may be little point in averaging them together.
Economic growth inevitably means economic change, since the
various sectors of the economy never grow at uniform rates. A dy
namic economy is one that is changing in shape as well as in size.
In most periods, we find some industries operating at or close to
their full economic capacity while others are operating well below
capacity., The significance of this state of affairs depends on the
relative prospects for growth of the two categories of industries.
Where the tides of growth are leading to increased demand for the
products that are already being produced at capacity levels, the
excess capacity for producing other goods and services is irrelevant.
It may also be noted that similar observations apply to the supply
of liquid funds in the hands of corporations. Statistics on nationwide
totals of such funds are relatively meaningless. Unless the funds
are available for the particular kinds of new opportunities that are
arising in an economy striving to grow in new directions, they cannot
be a means of supporting investment for growth.
C A P A C IT Y U T IL IZ A T IO N — T H E S TATISTIC AL EVIDENCE
The question to which we are seeking the answer is this: Is the
slowing down of economic growth observed in 1962 generally the result
of (a) the insufficiency of capital resources for investment which
would expand output and jobs, or (&) the inadequacy of demand to
keep our existing capacity occupied, which thus dampens the incentive
to further expansion ?
The general considerations which have been discussed up to this
point are intended to clarify rather than to answer this question. To
answer it we turn to the economic record of what actually happened
in 1961 and 1962. There are two statistical tests that may be
applied: the profits test and the price test.
The profits test.—In an economy operating generally well below the
capacity (realistically measured) of its efficient physical facilities
we may expect increases in output to result in more-than-proportional
increases in profit. With the growth in output overhead costs can
be spread over a larger volume of sales. Each successive additional
dollar of sales carries a larger component of profit. On the other
hand, where an economy is pressing against the ceiling of capacity
(i.e., capacity to produce, at competitive costs, the particular products
that are wanted) we may expect increases in output to be accompanied
by little or no increase in profit. Inefficient high cost facilities must
be drawn into service, or the facilities already in use must be operated
beyond their most profitable rate.
793
ECONOMIC REPORT OF THE PRESIDENT
What actually happened to output and profits in 1961 and 1962 is
indicated in the following- table (quarterly figures at annual rates,
as reported in appendix C of the Economic Report) :
[Dollars in billions]
Gross
national
product
Corporate profits
Before taxes
After taxes
1961—1...........................................................................................
II.........................................................................................
I l l ........................................................................................
IV ........................................................................................
1962—1...........................................................................................
II.........................................................................................
I l l ........................................................................................
IV ........................................................................................
$500.8
513.1
522.3
538.6
545.0
552.0
555.3
562.0
$39.8
44.8
46.3
51.4
50.1
50.9
51.1
$20.3
22.9
23.7
26.3
25.6
26.1
26.1
I 1961 to IV 1961.........................................................................
IV 1961 to III 1962......................................................................
Percent
+7.5
+3.1
Percent
+29.1
-.6
Percent
+29.6
-.8
The first quarter of 1961 was a cyclical low point. During the first
phase of the recovery, lasting through the fourth quarter of 1961, total
profits rose about four times as fast as total output. This suggests
that 1961 was a year in which efficient unused capacity was being
drawn into operation thus giving a substantial lift to profits.
After the fourth quarter of 1961 output continued to grow, although
at a somewhat slower rate. But this further growth of output pro
duced no further growth in profits. This indicates that output was
expanded only by drawing in relatively costly and inefficient facilities
which yielded no increase in profits. The iact that substantial idle
facilities remained in some industries is of no relevance if, as seems
to have been the case, expansion took place in directions which pressed
against available capacity to produce at competitive costs.
The price test.—If the slowing down of economic growth in 1962, as
compared with 1961, was due to a slackening of demand we should
expect to find less upward pressure on prices in 1962 than in 1961. If,
however, the factor holding down the economy was a capacity ceiling,
we should expect to find that the slower growth in output in 1962 was
accompanied by increased pressure on prices.
Price increases have been moderate in the past few years, as com
pared with the earlier postwar period. They have not been entirely
absent, however. The broadest possible price index—the implicit
price deflator for gross national product—shows a persistent rise of
well over 1 percent a year since 1957.
794
ECONOMIC REPORT OF TH E PRESIDENT
The following table, derived from appendix C of the Economic
Report, shows me course of this implicit price index over the past
2 years (1954=100):
1961— 1
115.4
I I
115.6
II I
116.0
I V
116.2
1962— 1
116.6
I I
117.2
II I
117. 7
I V
118.1
Percent increase at annual ra te:
I 1961 to IV 1961__________________________________________________
0.9
IV 1961 to IV 1962_________________________________________________
1. 6
The rate of price increase was greater in 1962 than in 1961. This
does not suggest that the slowing of growth in 1962 was due to a slack
ening of demand pressures. But it is exactly the result we should
expect if expanding demand was meeting capacity bottlenecks in 1962.
To summarize: Both the profits test and the price test lead to the
same conclusion. The discouraging performance of our economy in
1962 was not a symptom of insufficiency of demand. It was rather
the outcome of the inability of the economy to generate sufficient
capital and offer adequate incentives, for expansion of our productive
capabilities.
Apparently a turning point was reached in about the fourth quarter
of 1961. The subsequent behavior of profits and prices disprove the
contention that we were running into a barrier of insufficient consumer
purchasing power. The barrier was the tax burden on the private
economy which deprived it of the capital needed for further expansion.
Our conclusion may seem to fly in the face of common observation
since the unused capacity in some of our basic industries is highly
visible. The answer is twofold: First, the general lift which can be
given to the economy by releasing capital for expansion in other fields
will help to draw much of this unused capacity into operation. Sec
ond, some of this visible unused capacity may turn out to be of merely
historical interest, since it is either too inefficient to be used or it is
capacity for types of production which are no longer required in the
new directions our economy is taking.
T H E IN C E N T IV E TO IN V E S T M E N T
For investment to occur there must not only be funds available for
the purpose, there must also be the incentive of a reasonable prospec
tive profit to be earned on the new investment.
The administration maintains, in essence, that the necessary incen
tive can be created simply by expanding the general level of demand
and that this will in itself raise the investment to satisfactory levels.
But this contention is belied by the record of profits since the fourth
quarter of 1961 as already cited. Despite the steady rise in total output
since that time, at a rate of about 3 percent a year, profits after taxes
have not increased at all. Mere increase in demand for final products
without any increase in profit is not going to create incentive for the
investment we need for growth.
One of the factors reducing both present and prospective profits is
the high level of labor costs. There has been some easing in the rate
of increase in unit labor costs in more recent years. However, this is
ECONOMIC REPORT OF THE PRESIDENT
795
hardly cause for very much satisfaction since it was achieved largely
as the result of a substantial overhang of unemployment in the labor
market. It raises the question of whether, if we do succeed in improv
ing economic conditions and thereby reducing unemployment, we will
not thereby intensify the upward pressure on labor costs which squeezes
profits and thus suppresses growth.
The source of the upward pressure on labor costs, which can
apparently be held in check by labor-market forces only when unem
ployment is at a level of about 6 percent, is the exceptional power
of labor unions. If we are to escape from a vicious circle in which all
efforts to achieve higher growth simply lead us back to an unemploy
ment rate of 6 percent, the monopoly power of labor unions must
be dealt with as such. Although the question of taxes is now at the
center of the stage, the growth-suppressing power of labor unions to
raise costs is a problem to which Congress must also seek a solution.
Meanwhile, tax revisions can be used as a means of improving in
centives for business operations and business expansion. An important
objective of tax changes should be to raise the prospective after-tax
incomes of corporations, unincorporated enterprises and individuals.
This will strongly increase the incentives for using the financial re
sources of business which are presently available, or which will be
come available, for the new investments which will expand output
and create newjobs.
T H E IM PO R T A N C E OF C A PIT A L F O R M A TIO N
Regardless of the exigencies of our immediate economic situation,
it is undeniable that long-run economic growth is dependent on achieve
ment of the maximum rate of increase in the Nation’s potential for
producing goods and services. As many nations have learned to their
sorrow, mere expansion of monetary purchasing power cannot create
national prosperity and high standards of living. Only a set of con
ditions which permits a high level in the production of real goods
and services can do that.
Marty factors are of course involved in the growth of productive
potential: the fund of technological know-how^, the skill, training,
and morale of the labor force, as well as the accumulation of capital.
However, the leading student of the subject, Prof. Simon Kuznets,
has arrived at the following conclusion after an exhaustive study of
past trends in capital accumulation : 6
“* * * Granted that, without the accumulated body of knowledge
and a healthy and educated labor force, such stock of capital is use
less. Yet, if knowledge does exist and human labor is available to
apply it, effective use of those resources requires material capital
goods. Major additions to our technology—the mechanization of
spinning or weaving, the introduction of coal and coke for smelting
iron and making steel, the invention of the stationary steam engine
and its use for transportation, the discovery of electric power and its
production in giant hydroelectric plants, and the brilliant promises of
power and automation from applications of atomic energy—each has
called for large inputs of resources into construction and equipment.
6 “ Capital in the American E conom y,” by Simon Kuznets, Princeton University Press,
1961, p. 391.
937 6 2 O— 63— p t. 2-------- 11
796
ECONOMIC REPORT OF THE PRESIDENT
One persistent bottleneck in the use of knowledge in economic pro
duction has been the scarcity of the resources for the prodAiction of
capital goods needed for the application of new knowledge * *
[Emphasis added.]
We have previously argued that a tax revision program strongly
oriented toward freeing resources for capital formation is the most
effective way of meeting the economic difficulties of the immediate
present. Professor Kuznets’ findings demonstrate that it is also the
most effective means for promoting long-term economic growth.
A tax program which emphasizes the quick expansion of consumer
purchasing power would very quickly run into the bottleneck of insuf
ficient capital resources. After all, even according to the administra
tion’s calculations, the gap between current output and current
productive potential is only some 7 or 8 percent. Does the adminis
tration anticipate that, some time in the near future, it will have to
reverse its tax action for raising consumer purchasing power in favor
of a program to provide more funds for capital formation ? If not,
won’t the added consumer purchasing power simply waste itself in a
futile demand for goods and services exceeding our productive
potential? The highly touted multiplier will then turn out to be
merely a device for hastening the inflationary results of such a
condition.
Conclusion
The tax barrier to economic growth is not the only serious economic
problem facing the Nation. It has been emphasized in this com
mentary both m response to a similar emphasis in the President’s
Economic Report and because of a conviction that prompt action in
the tax area is the most immediate requirement for a resumption of
national progress.
For reasons which have been given, tax revision should not be
approached with the objective of raising consumer purchasing power.
This is a self-defeating program leading to economic trouble, rather
than to economic progress. Additional real after-tax purchasing
power for consumers is a reward we can earn through removing the
tax barrier to growth but it is not the means by which we can reach
that end.
Instead, the central objective of tax revision should be the release
of capital and of incentives for using it. It should be mobile capital
which is available for a wide variety of purposes. Therefore, reduc
tion of individual tax rates on midale and upper incomes, as well as
reduction of the corporate rate, must play a large part. We must
seize the opportunity to moderate the murderous steepness of pro
gressive tax-rate increases through the middle and upper brackets.
Since the problem is a large one the tax reduction must be sub
stantial in magnitude. It should, therefore, be spread over a series
of years. The anticipatory effect of a prescheduled program of sub
stantial tax reduction, of the right kind, should produce an immediate
improvement in the American economy’s muscle tone.
The guiding philosophy must be one which encourages simultaneous
control on the expenditure side of the Federal budget. The purchas
ing power approach, by its own logic and by the statements of its
advocates, encourages the view that the very purpose of tax reduction
would be thwarted by concomitant expenditure reduction.
NATIONAL ASSOCIATION OF MUTUAL SAVINGS BANKS
New York, N.Y., February 11+, 1963.
Hon. P a u l H. D o u g la s ,
Chairman, / oint Economic Committee, Congress of the United States,
Washington, Z?.(7.
D e a r S e n a t o r D o u g la s : This is in response to your letter of Janu
ary 23 inviting comments on the materials ana recommendations
included in the 1963 Economic Report of the President.
The President’s report and the appended report of the Council of
Economic Advisers are sound analytical, and especially well written,
documents. We find ourselves in substantial agreement with the
economic outlook projected in the reports. Our views on the 1963
economy were formulated late last autumn and we have seen no
reason to change these views in light of recent developments.
The underlying strength of the economy has convinced many earlier
recession-minded economists to change their views. Moderate eco
nomic expansion, which characterized the economy in the fourth
quarter of 1962 and early 1963 may be expected to continue through
the remainder of the year. The rate of business expansion, however,
will not be sufficient to reduce unemployment to levels consistent with
employment goals of the Employment Act. Moreover, as the Council
points out, the difficult task of reconciling international balance-ofpayments problems with domestic economic needs will continue as a
major problem for Federal policymakers.
The Council’s report on expected financial developments in 1963
is less exhaustive than its projections for business in general. Our
views are that in the economic climate anticipated, relative interest
rate stability in short- and long-term financial markets may be ex
pected to continue through most of the year. Demands on capital
markets will continue large but fortunately also will the flow of
saving. The only major increase in capital market demands is likely
to come from the Federal Government sector reflecting the expected
large budget deficits in fiscal 1963 and 1964. In this respect we ap
plaud the position of Chairman Martin of the Federal Reserve urging
that Federal deficits be financed to the maximum extent feasible
through bona fide long-term savings rather than through the creation
of bank credit.
In this regard, we believe it desirable for the Treasury to be
unshackled from the requirement of paying no more than 4*4 percent
interest oil new securities of more than 5 years’ maturity. While
rising interest rates are not in prospect for 1963, occasional upward
thrusts during the year could hamper Treasury debt management
operations.
Another matter which we continue to urge, in connection with the
formation of national economic policy, is official recognition of the
essential role of saving in stimulating and financing the Nation’s
economic growth. The crucial role of saving in the economic growth
797
798
ECONOMIC REPORT OF THE PRESIDENT
process has been borne out increasingly by scholarly research. One
recent study, conducted by the highly regarded National Bureau of
Economic Research, concluded that historically the main limitation
on capital formation in the United States has been an inadequate
volume of saving. This conclusion is supported by the experience of
advanced foreign nations where rapid economic growth has been
associated with high rates of saving.
It is gratifying to note, therefore, that the importance of saving
in our national economic policy was recognized in the President’s 1968
Economic Report. In urging his new program of tax reduction and
reform, the President indicated that, together with these tax measures,
the maintenance of “monetary and credit conditions favorable to the
flow of savings into long-term investment in the productive strength
of the country” is desirable.
With respect to the President’s tax program itself, there is no .
doubt that enactment of tax reduction provisions could provide strong
stimulus to the economy, perhaps without inflationary effects for a
while. We are not yet convinced, however, that such strong medicine
is necessary in 1963 in view of rising Federal expenditures for defense
and related activities. Perhaps it would be better to delay tax reduc
tion temporarily as the economy continues to expand, in the mean
time concentrating attention on controlling Federal expenditures.
The huge Federal deficit now in prospect could become difficult to
manage unless the Treasury is given greater freedom.
The administration’s reform proposals, including the recommended
limitation on deductions by individual taxpayers of mortgage interest,
property taxes, and other expenditures to the amount exceeding 5
percent of adjusted gross income, also would have an impact on the
economy. In view of the complex nature of the proposed revisions,
we are not prepared to comment at this time on their net effect on
specific sectors or the overall economy.
May we say in connection with the President’s other recommenda
tions that the savings bank industry continues to support Cabinet
status for housing and “truth in lending.” Moreover, we are on record
as supporting the President’s Executive order on desegregation in
housing, excepting only that we continue to urge a broadening of this
order to include conventionally financed as well as FHA and YA
financed housiug. Broad housing legislation, finally, in the areas of
urban renewal and rehabilitation, as well as in widening the market
for private housing, will continue to receive our industry’s support.
The only major legislation in which we have a strong interest is the
proposal to authorize Federal charters for mutual savings banks. The
advantages of Federal chartering from the standpoint of the public
interest have been recognized by the Commission on Money and Credit,
private research and industry groups, and individual savings and loan
leaders, who have endorsed the idea. We are hopeful that the Presi
dent’s Committee on Financial Institutions, under the chairmanship
of Walter W. Heller, will agree that a Federal system of mutual sav
ings banks will further national economic policy of accelerating
economic growth on a sustainable basis with relative price stability.
As you know, there have already been press reports that the Heller
committee has endorsed the principle of Federal charters for mutual
savings banks.
ECONOMIC REPORT OF THE PRESIDENT
799
With the 100th anniversary of dual chartering for commercial banks
approaching, it is appropriate that the Federal mutual savings bank
bill, introduced with bipartisan support early in this session, is ex
pected soon to be the subject of congressional hearings. In these
hearings, evidence of the vitality and importance of mutual savings
banking will be presented, and the benefits to the Nation of an ex
panded savings bank systemsubstantiated.
Attached to this letter are materials summarizing the importance
of Federal charters to savings banks and to the Nation. It is respect
fully requested that these materials—a letter to Mr. Heller of October
9,1962, and a leaflet on broad benefits of Federal charters—be inserted
in the printed hearings as appendixes to this letter. Because several
of the substantive arguments supporting Federal charters are in
cluded in the attached materials, and because detailed economic evi
dence will be presented at congressional hearings, we have not
burdened thi_s letter with further statements on Federal charter
benefits.
Thank you for the opportunity to comment on the President’s
Economic Report. We hope this letter will prove useful to the Joint
Economic Committee in preparing its own report in the coming weeks.
Sincerely yours,
Grover W .
Ensley,
Executive Vice President.
NATIONAL ASSOCIATION OF MUTUAL SAVINGS BANKS
New Y ork, N.Y., October 9, 1962.
Dr. W alter W . H eller,
Chairrrum, Committee on Financial Institutions,
Executive Office of the President,
Washington, D.C.
Dear D r. H eller : This letter is in response to the White House re
lease of August 21 inviting written suggestions or comments from
interested groups on the study being conducted by the interdepart
mental Committee on Financial Institutions. It follows up earlier
correspondence with Gardner Ackley in which it was urged that the
Committee endorse the recommendation of the Commission on Money
and Credit favoring Federal charters for mutual savings banks.
As you know, the Federal charter bill was initially introduced in
the Congress on July 1,1960. On October 2 and 3,1962, amended bills
were reintroduced in the Senate and House respectively, both on a biartisan basis.1 Several copies of the Multer bill are attached,
opies of his introductory statement together with that of Senator
Sparkman will be sent to you shortly. Under separate cover I am
sending you also a copy of our monograph prepared for the Commis
sion entitled “Money and Credit, Mutual Savings Banking: Basic
Characteristics and Role in the National Economy.” I will make
specific reference to portions of this monograph at a later point.
You are probably aware that, following initial introduction of Fed
eral charter legislation over 2 years ago, the Housing and Home
Finance Agency and Veterans’ Administration studied and endorsed
the bill while the Federal Reserve commended it for careful consider
ation. The Federal Home Loan Bank Board, which originally op
posed the bill, has now, under Chairman McMurray, informally en
dorsed it. It is evident, therefore, that major Federal agencies are
favorably inclined toward Federal charters for mutual savings banks.
It is not my purpose here to present detailed arguments, economic
and otherwise, in support of the proposal for a Federal mutual savings
bank system. A comprehensive brief, including detailed statistical
data, will be submitted in connection with congressional hearings on
the Federal charter bill, expected to begin in February 1963. More
over, substantial evidence of the advantages of Federal chartering has
already been presented in our monograph. See especially pages 253266. In this letter, therefore, I would like only to summarize the
basic case.
Legislation authorizing the establishment of a Federal mutual sav
ings bank system should be supported on at least three broad grounds:
(1) National economic goals of accelerating economic growth, achiev-
g
1 S. 3776 (Sparkman, Democrat, Alabama, and Bush, Republican, Connecticut); H.R.
13318 (Multer, Democrat, New York) ; H.R. 13319 (Barrett, Democrat, Pennsylvania) ;
H.R. 13347 (Carey, Democrat, New York) ; H.R. 13320 (Fino, Republican, New York) ;
H.R. 13321 (Halpern, Republican, New York) ; H.R. 13322 (Rains, Democrat, Alabama).
801
802
ECONOMIC REPORT OF THE PRESIDENT
ing maximum employment, and maintaining relative price stability,
will be furthered; (2) equality of competitive opportunity, now de
nied savings banks, will be provided; and (3) a sound vehicle for
broadening the investment powers of other savings institutions, now
narrowly circumscribed, will be made available. Let me expand
somewhat on these three broad areas.
FURTH ERING NATIO NAL ECONOMIC GOALS
The geographic extension of mutual savings banking, practical only
through Federal charters, will support two basic economic objectives:
(1) An increased flow of saving, more evenly distributed throughout
the nation; and (2) an increased availability of mortgage and other
long-term credit with a consequent reduction in costs of borrowing and
in regional mortgage yield spreads. There is general agreement that
these objectives are essential to the longrun accomplishment of ac
celerated economic growth with relative price stability. On occasion,
it is true, short-run considerations tend to obscure the objectives of
longer-run goals. The fact, for example, that we have been for some
months now in a sidewise economic movement scarcely means that our
longer-run need for increased saving to finance capital formation has
diminished. Professor Wallich of Yale put it well, I believe, when
he said in a recent article, that:
“We can no longer afford to discourage saving—it is needed to
finance growth. Even though in the present state of the economy,
there seem to be more savers than investors, that is largely a question
of the business cycle and should not determine longrun "tax policy.”
I am sure you are also familiar with the findings of Simon Kuznets
in his monumental National Bureau study, Capital in the American
Economy, and with the recent experience of foreign nations, both
pointing to the crucial role of savings in economic growth. Kuznets
concluded that the essential restraint on capital formation in the
United States has been an inadequate supply of savings rather than
inadequate demand of capital. Foreign nations that experienced
more rapid growth than the United States in the 1950’s also had higher
ratios of personal savings to disposable income and devoted larger pro
portions of total output to capital formation. The recent report by
Prof. Warren Hunsberger of Johns Hopkins on the Japanese econ
omy indicated that the key to that nation’s phenomenal rate of
growth has been the ability “ * * * to create the needed capital
through domestic savings * * * .”
If we agree that a high rate of saving and reduced costs of mortgage
and other credit are essential to our long-range economics goals, it re
mains for us to demonstrate that geographic extension of savings
banking through Federal charters will contribute to these objectives.
As noted earlier, evidence on this point has been included in our mono
graph, and a comprehensive economic brief will be presented in con
nection with forthcoming congressional hearings. Let me at this point
only summarize some pertinent findings from the recent study of
Chicago banking by Professors Schweiger and McGee of the
University of Chicago:
1. The ratio of sayings in local institutions to personal income is
higher in mutual savings bank areas than in nonmutual savings bank
areas at comparable levels of per capita income.
ECONOMIC REPORT OF THE PRESIDENT
803
2. In leading savings bank areas actual personal savings were larger
than expected relative to prevailing income levels (on the basis of
regression analysis of the savings/income relationship) while in major
nonsavings bank areas the reverse was true.
3. Restricted entry into financial markets has led to insufficient sav
ings facilities, inefficient allocation of resources, and a restricted
supply of credit available only at high costs to borrowers.
On the basis of their findings, Schweiger and McGee concluded that
maximizing competition among financial institutions, and reducing
restrictions on freedom of entry into thrift markets, would substantial
ly increase the volume of local savings. In this framework, they
specifically recommended the amendment of Illinois banking laws to
permit the establishment of mutual savings banks.
E Q U A L IT Y OF C O M PETITIVE O P P O R TU N IT Y
As a practical matter, it is now quite difficult to implement the
Schweiger-McGee recommendation or, for that matter, to serve the
needs of numerous private citizens throughout the Nation, who have
expressed serious interest in the establishment of savings bank fa
cilities. Recent efforts to have savings bank legislation adopted on a
State-by-State basis have been frustrated by the weight of entrenched
local competitive opposition. Only in Alaska was the enactment of
such legislation successful, and this required a 2-year effort. Inci
dentally, the unusually large volume of deposits attracted by the
Alaska Mutual Savings Bank in less than 1 year, accompanied by
continued rapid growth of previously existing savings institutions in
Anchorage, is indicative of how a new vital institution can increase
the flow of savings in a community.
If extension of savings banking beyond the present 18 States is
desirable on economic grounds, therefore, it can best be achieved
through Federal charter legislation. Such legislation would provide
for savings banking the advantages of a dual banking system long
available to commercial banks, savings and loan associations, and credit
unions. As the 100th anniversary of dual banking approaches, and
commercial bank groups everywhere proclaim its merits, it is anom
alous that savings banks alone among major deposit-type institu
tions are not a part of the dual banking system.
The result is that savings banks operate at a competitive disadvan
tage, with severe restrictions on freedom of entry into the financial
markets, and without the benefits of the system of checks and balances
between Federal and State supervisory authorities. Not only have
financial institutions thrived under dual chartering but also the super
visory systems themselves. In the face of the current reappraisal
of State-Federal supersivory relationships, it is well to remember
that some States did not make provision for supervised savings and
loan associations and credit unions until Federal charters for such in
stitutions had been authorized. Authorization of Federal charters
for mutual savings banks will redress the current imbalance between
savings banks and other financial institutions, without weakening the
State supervisory systems.
937 6 2 0 — 63— pt. 2--------12
804
ECONOMIC REPORT OF THE PRESIDENT
BROADENED IN V ESTM E N T POWERS FOR OTHER SAVINGS IN ST IT U T IO N S
There has been increasing support for the view that investment
powers of savings and loan associations are too narrowly prescribed.
The advantages of such broadened powers have been recognized not
only by students of finance—including the Commission on Money and
Credit—but also by spokesmen for the savings and loan industry.
Present members of the Federal Home Loan Bank Board, moreover,
in direct contrast to their predecessors, have recently been urging the
broadening of savings and loan investment outlets.
Flexible lending and investing powers have long been advocated by
savings bank leaders. In our monograph (see pp. 265-266), it was
suggested that, in periods when demands for home mortgage credit
fall short of the available supply of funds, the financial fabric of our
economy, and of savings and loan associations in particular, would be
strengthened if these institutions had broader investment outlets.
The lack of alternative uses for funds, on such occasions, causes some
savings and loan managers to “reach” for mortgage loans by stretching
appraisal values, accepting marginal borrowers, liberalizing credit
terms unduly, and by otherwise reducing the quality of credit. We
pointed out that it is basically unsound for a huge financial industry
to be locked into one sector of the capital market and into one type of
credit instrument. No other main type of financial intermediary is
so limited in its operations.
Broadened powers for savings institutions can be achieved soundly
and most expeditiously through the Federal charter bill, which pro
vides for conversion of savings and loan associations to Federal mu
tual savings banks. The establishment of appropriate safeguards
and standards for conversion would effectively limit the broadening
of powers to those savings and loan associations willing and able to
qualify as banking institutions. Otherwise, to authorize a sweeping
expansion of financial powers for an entire industry, restricted mainly
to the highly specialized function of home mortgage finance, would be
to permit de facto a radical change in basic orientation and objec
tives—indeed it would redefine the very basis of savings and loan
existence—yet without requiring appropriate organizational and
structural changes. An increasing number of savings and loan leaders
support this basic position.
For all of the reasons summarized in this letter, and on the basis of
the more detailed documentation cited in our monograph and in the
study of Chicago Banking, the Committee on Financial Institutions
should endorse the recommendation of the Commission on Money and
Credit in favor of Federal charters for mutual savings banks.
I hope that such endorsement will be strong enough, moreover, as
to encourage the active support of the President in favor of legislation
necessary to implement the committee’s recommendation.
Thank you for the opportunity to express my views on this impor
tant question. I shall look forward to the committee’s final report
in November.
Sincerely yours,
G r o v e r W . E n s le y ,
Executive Vice President.
H ow
FEDERAL M UTUAL SAVINGS BANKS
80 5
806
ECONOMIC REPORT OF THE PRESIDENT
Here’s what a nationwide system
of mutual savings banks can provide:
Increased savings through the addition of competitive
facilities that promote thrift. . .
Increased flow of funds into housing and home owner
ship ...
Lower borrowings costs, resulting from additional
mortgage funds and better distribution throughout the
nation . ..
Other benefits as more money is saved for local invest
ments in farms, small businesses, and community
improvements.
Mutual savings banks provide these benefits in the 18
states in which they are now chartered.
ECONOMIC REPORT OF THE PRESIDENT
Legislation now before Congress, introduced under
bipartisan sponsorship, would extend these benefits
to all 50 states. Briefly, the legislation provides for
the establishment of Federal mutual savings banks:
Chartered and supervised by the Federal Home Loan
Bank Board; Insured by an existing agency of the Fed
eral Government; Authorized to offer a broad range of
depositor services; and Granted broad and flexible in
vestment authority, with primary emphasis on home
mortgage lending.
The proposed legislation also permits state-chartered
mutual savings banks and state and Federally-chartered mutual savings and loan associations to convert
voluntarily into Federal mutual savings banks.
Through conversion, savings and loan associations
would gain the broader investment and other powers
they now seek.
There are 512 state-chartered mutual savings banks
now operating in 18 of the 50 states and in the Virgin
Islands.
MUTUAL SAVINGS BANKS — first organized in 1816
— are dedicated to promoting thrift and are operated
solely for the benefit of their depositors. They channel
the savings entrusted to them into housing and other
long-term capital needs of their communities and
states.
MUTUAL SAVINGS BANKS provide their communities
with convenient facilities where the savings of indi
viduals are readily available and earn maximum re
turns consistent with safety . . . They have a record
of safety and stability unsurpassed in the financial
annals of the nation.
MUTUAL SAVINGS BANKSare the model for a system
of Federal mutual savings banks that will serve these
same purposes, provide the same services, and spread
the benefits of personal savings, home financing, and
capital formation to all areas of the nation.
807
ECONOMIC REPORT OF THE PRESIDENT
808
THE
M U TU AL
SAVIN GS
B AN K
RECO RD
on the savings side
Personal savings tend to be greater in areas where
mutual savings banks exist than in comparable areas
served only by other types of financial institutions.
A study by a research team at the University of Chicago
shows that the ratio of savings to personal income in
local institutions is higher in communities with mutual
savings banks than in those where per capita personal
income and other factors are the same but where there
are no mutual savings banks.
Of the 10 states with the highest increase in savings
relative to personal income in the last decade, five are
states inwhich mutual savings banks are a major force
in the savings market.
In areas where mutual savings banks exist and vig
orously promote thrift, savers derive the benefit of a
favorable rate of interest resulting from a free and
competitive environment for savings.
At the start of 1963, the nation’s 512 mutual savings
banks were serving the owners of more than 22 million
savings accounts. Deposits totaled more than $41 bil
lion, were earning interest at an average annual rate of
4 per cent, and were protected by the banks’ reserves
as well as by government insurance.
ECONOMIC REPORT OF THE PRESIDENT
THE
M U TU A L
SAVIN GS
B A N K
RECO RD
on the investment side
The 512 mutual savings banks channel the bulk of
their more than $46 billion of assets into home mort
gages and capital markets, thus contributing signifi
cantly to meeting the nation's long-term credit needs.
Savings banks now have $32 billion invested in mort
gage loans.
Since 1952 mutual savings banks have channeled a
larger volume of savings into Federally-underwritten
mortgages than any other type of lender. They are the
largest holders of VA loans and the second largest
holders of FHA loans.
Where there are mutual savings banks, mortgage
loans tend to be more readily available at lower costs
to borrowers than in the non-mutual savings bank
areas.
Even in the rapidly-growing Pacific Coast States, mort
gage interest rates in periods of large demands and
tight money have tended to be lower in the State of
Washington, where there are mutual savings banks,
than in California, where they do not exist.
Savings banks, after meeting the credit needs of their
communities, also invest in out-of-state mortgage
loans. These loans now total over $8 billion in the 32
non-savings bank states.
Moreover, savings banks have $12 billion invested in
the securities of private businesses, of municipalities
and states, and the Federal Government.
809
810
ECONOMIC REPORT OF THE PRESIDENT
BENEFITS OF FEDERAL MUTUAL
S A V IN G S
B A N K S
To You: Mutual savings banks, conveniently located throughout
the 50 states, will provide you with a wider choice among savings
facilities and access to local mortgage lending institutions.
To Your Community: More savings in local institutions will mean
more funds for new homes, urban rehabilitation and renewal, new
schools, highways, and other community improvements. In addi
tion, farm and local business enterprises will have access to more
credit for modernizing and expanding their operations.
To the 50 States: The addition of savings banks to the states’
financial system will generate increased capital for the economic
expansion of the states . . . The existence of Federally-chartered
savings banks will help state legislators and bank supervisors
maintain and strengthen the vitality of state-chartered banking
services, and, inthe 32 non-savings bank states, encourage them
to develop state-chartered savings banks.
To the Nation: In a recent study by the National Bureau of Eco
nomic Research, it was concluded that an inadequate supply of
savings rather than an inadequate demand for capital over the
long term has been the primary restraint on the nation’s eco
nomic expansion ... The establishment of Federal mutual savings
banks will encourage the higher rates of personal savings essen
tial to higher rates of capital formation with which to accelerate
the nation’s economic growth.
At present, savings banks are the only deposit-type institution
denied access to the demonstrated benefits of the dual banking
system. Entry of savings banking into new areas is consistent
with a basic premise of the nation’s private enterprise system —
freedom to enter markets throughout the economy, ensuring
maximum competition.
Conversion of mutual savings and loan associations into Federal
mutual savings banks with flexible investment powers will permit
them to adjust to financial and business changes and still con
tinue to promote thrift despite fluctuations in mortgage demands.
ECONOMIC REPORT OF THE PRESIDENT
SUPPORT FOR THE
FEDERAL MUTUAL
SAVINGS BANK BILL
Federal chartering of mutual savings banks has the
support of Federal Government agencies.. . independ
ent research groups . . . Democratic and Republican
members of Congressional Committees.. . an increas
ing number of individual savings and loan leaders who
see in the conversion provisions of the bill an oppor
tunity to gain broader investment and other powers
. . . and many commercial bankers who appreciate how
savings banks complement and supplement their own
institutions in serving the public.
The Commission on Money and Credit in its 1961 re
port on the adequacy of the nation’s banking structure
stated: “At present commercial banks and savings and
loan associations may obtain federal charters. Since
only 17* states now provide for the establishment of
savings banks, it is not possible to establish savings
banks in two-thirds of our states. Federal charters for
savings banks would permit operation in any state,
and this would stimulate competition and enterprise
among financial institutions, improve the banking
facilities in some communities, and perhaps encour
age greater conventional mortgage lending activity in
all areas.
“The Commission recommends that federal charters
be made available for mutual savings banks.”
* Since the Report was issued a new state — Alaska — provides for the
chartering of savings banks. One was established there in 1961, and
is helping to increase the state's personal savings and to meet its
home financing needs.
811
THE
N A T IO N A L G R A N G E
S t a t e m e n t of t h e N a t i o n a l G r a n g e B e f o r e t h e J o i n t E c o n o m i c
C o m m i t t e e of t h e C o ngress Considering t h e E c o n o m i c R e p o r t
of t h e President, P r e s e n t e d b y L. A l t o n D e n s l o w , Associate
L e g a l Counsel, F e b r u a r y 15, 1963
The Grange deeply appreciates the invitation of this Committee to
submit its views with respect to the materials and recommendations
contained in the 1963 Economic Report of the President.
At its 96th annual session held in Fort Wayne, Ind., last November,
the National Grange expressed its grave concern with the high levels
of taxes and urged that a determined effort be made to achieve reduc
tions. On the other hand, however, it has been our uniform position
over the years that taxes should not be reduced while the budget is
out of balance. Although we recognize the validity of the proposi
tion that there are expenditures which are economically justifiable,
even though they must be made from borrowed funds, we question the
wisdom of any action which wrould reduce tax revenues below the level
of budgeted expenditures.
At our last appearance before the Committee we urged that vigorous
action be taken to remove the barriers to our agricultural exports
which were being erected by the countries of the European Economic
Community. Since then the Congress has provided ample authority
to the President to deal with this problem by passage of the Trade
Expansion Act of 1962, and we note with great satisfaction the Presi
dent’s statement of intent to use that authority “to maximum advan
tage to the end that our agricultural and industrial products have
more liberal access to other markets—particularly those of the Euro
pean Economic Community.”
With respect to transportation, Grange policy continues to empha
size {a) support of lowTer freight rates, (5) preservation and strength
ening of agricultural exemptions, (o) preservation of competition,
even within an established policy of reasonable governmental regula
tion, and (d) opposition to unfair trade practices by which one mode
of transport may destroy another through unfair (noncompensatory)
competition.
Concerning wage and hour legislation, the Grange is opposed to any
changes which would discriminate against or adversely affect f armers.
It is fundamental to recognize that agriculture is subject to a costprice squeeze which does not affect other segments of our economy.
This has been the primary reason for the continuation of the agri
cultural exemption over the years.
The Grange agrees that education is a national problem and that
because of the mobility of our people and the interdependence of
every element of our economy, an inadequate school system in any one
State adversely affects the entire Nation. We believe that the Federal
Government should provide money needed to improve educational
opportunities in these areas of lower wealth, but that the control of
its use must remain in the hands of local and State authorities.
813
814
ECONOMIC REPORT OP THE PRESIDENT
The longstanding record of the Grange in community service is
well known. The mobility of the farm population and ties between
farmers and other businessmen show the stake that is involved in
developing whole trade areas as well as local communities. We have
welcomed the rural areas development effort as a new opportunity
for the Grange to join with others in developing and utilizing our
local resources, including manpower. Such enabling legislation re
quires local initiative to obtain results and the close cooperation of
many groups—farmers, industrial leaders, and private and public or
ganizations. Success in community and area development and in the
efficient utilization and training of available human resources requires
a clear identification of problems, evaluation of different means of
solving them, and an active program which will command the broadest
possible support by all interested groups.
(The following letters were received from 2 of the organizations
that were unable to submit statements:)
CONSUMERS UNION
A m h e r s t , M a s s ., February 20, 1963.
Senator 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 : I am very sorry that we were unable to
comply with your request for a statement on the Economic Report of
the President as we have been short handed in the last couple of
months. We are, however, most interested and in the future would
be happy to comply.
Sincerely,
C o l s t o n E. W a r n e , President.
LIFE INSURANCE ASSOCIATION OF AMERICA
N e w Y o r k , N.Y., February 18, 1963.
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 : When I received your letter of January
23 inviting me to comment on the materials and recommendations
contained in the 1963 Economic Report of the President, I had in
tended to work up a statement by the deadline of February 15 which
you indicated. Unfortunately, however, pressures of other duties and
some illness have prevented me from working up such a statement. I
regret this very much because I appreciated the opportunity. I hope
that you will keep me on your list for comment on the report next
year.
Sincerely yours,
J a m e s J . O ’L e a r y ,
Vice President and Director of Economic Research.
815
o
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