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•Advaa i n ran Adoo

RECEIVED WASHINGTON CGMMCENTER
8*35 PM FRIDAY 23 DECEMBER 1966
00 WTE 10
DE WTE 2789
FROM:
TOs
CITE:

RECEIVED IBJ RANCH CCMMCENTER
11*37 PM FRIDAY 23 DECEMBER 1966

VZCZCEEA664

JOE CALIFANO
THE PRESIDENT
CAP661320

-6 E C R E“ I

EYES ONLY FOR THE PRESIDENT

^
//

6 :3 0 P .M ., FRIDAY
DECEMBER 2 3 , 1966

. THERE FOLLOW CURRENT OPINIONS ON THE TAX INCREASE QUESTION AS
GATHERED BY ACKLEY, FOWLER AND ME.
I WILL HAVE DAVID GINSBURG* S
VIEWS SOMETIME LATE TOMORROW AND WILL SEND THEM TO YOU THEN.
WE PLAN TO HAVE A MEETING OF ALL YOUR ADVISERS ON TUESDAY MORNING
ON THE TAX INCREASE QUESTION.
AFTER THAT MEETING, I WILL SEND YOU
A REPORT WHICH WILL BE MORE PRECISE AND WILL RELATE SOCIAL SECURITY,
MONETARY EASE AND EXACT AMOUNTS OF PROPOSED INCREASES.

QUOTE:
1.

FEDERAL RESERVE
BREMER THINKS THERE IS NO NEED FOR A TAX INCREASE ON
ECONOMIC GROUNDS.
HE WOULD BE WILLING/TO RISK A MODEST
INCREASE ($4-5 BILLION) IF IT WERE NECESSARY TO PROTECT
THE HUMAN RESOURCE PROGRAMS, BUT ONXY IF IT IS NECESSARY
FOR THAT\PURPOSE.
HE WOULD NOT WAflT IT EFFECTIVE BEFORE
MIDYEAR. \
/

\

/'

(B)

<C)

ACKLEY WAS
ASSOCIATES
INCREASE.
A POSSIBLE

CD)

ROBERTSON FAVORS7 A TAX INCREASE EFFECTIVE AT MIDYEAR, BUT
NOT BEFORE. HE BELIEVES It,W IL L PERMIT EVEN GREATER PRO­
GRESS TOWARD MONETARY EASE ^HAN WOULD BE POSSIBLE WITHOUT
IT. BECAUSE HE WORRIES ABOUTxTHE BALANCE OF PAYMENTS
EFFECTS OF MONETARY EASE,
HE\FAVORS A BROADENED INTEREST
EQUALIZATION TAX, COVERING DIRECT INVESTMENT, TO REPLACE
EXISTING VOLUNTARY PROGRAMS. HEWANTS TO ASSURE OUR COM­
PLETE FREEDOM TO USE MONETARY POLICY FOR DOMESTIC PURPOSES.

(E)
2.

YOU HAVE MA\s EL’ 5 MEMO.
AS YCM) KNOW, HE DOES NOT FAVOR
A TAX INCREASE, AND DOES NOT/RELIEVE THAT MONEY WILL BE
ANY EASIER WIT\H A TAX INCRE/SE THAN WITHOUT IT.
HIS REAL
PREFERENCE WOULD BE FOR A /A X INCREASE PLUS A CONSIDERABLE
EXPANSION OF GR&AT SOCIETY PROGRAMS.
BUT HE DOES NOT
BELIEVE THIS IS FEASIBLE

THE EXCELLENT ECONOMIC STAFF AT THEXFEDERAL RESERVE STRONGLY
OPPOSESA TAX INCREASE, THEY ARE MOrX BEARISH THAN THE CEA.

UNABLE fO R E A C H GOVERNOR MITCHELL, BUT HIS
ON THE BOARD ARE SURE HE IS OPPOSED TO A TAX
HE WORRI£S\m ORE THAN ANY OTHER GOVERNOR ABOUT
RECESSION. \

COUNCIL 0> ECONOMIC ADVISERS

/

(A)

(B)
/



GKUN’ S PREFERENCE WOULD BE FOR A LESS STIMULATIVE SOCIAL
SECURITY PACKAGE AND NO TAX INCREASE. HE WOULD FALL BACK
TO A SMALL JULY 1 INCREASE. HE BELIEVES THE ANNOUNCEMENT
OF A TAX INCREASE REQUEST WILL ADVERSELY AFFECT WHAT WILL
IN ANY CASE BE A DANGEROUSLY WEAK FIRST HALF.
BY A VERY NARROW MARGIN, DUESENBERRY FAVORS A TAX INCREASE
PROPOSAL — IF IT IS SMALL, AND IS PROPOSED TO BECOME
EFFECTIVE NO EARLIER THAN JULY 1. ALTHOUGH HE IS BEARISH
ABOUT THE ECONOMY, HE BELIEVES THAT A PROPOSED JULY 1
EFFECTEVE DATE PROVIDES A HEDGE AGAINST THE POSSIBILITY
OF A LATER INCREASE IN THE DEFENSE BUDGET, YET PERMITS
THE INCREASE PROPOSAL TO BE WITHDRAWN IF THE ECONOMY
SnPTFWc; T d f t

M lirw

UiT T U T m i / q

tT

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QUOTE:
1.

FEDERAL RESERVE
(A)

(B)

YOU HAVE MAISEL’ S MEMO.
AS YOU KNOW, HE DOES NOT FAVOR
A TAX INCREASE, AND DOES NOT BELIEVE THAT MONEY WILL BE
ANY EASIER WITH A TAX INCREASE THAN WITHOUT IT.
HIS REAL
PREFERENCE WOULD BE FOR A TAX INCREASE PLUS A CONSIDERABLE
EXPANSION OF GREAT SOCIETY PROGRAMS.
BUT HE DOES NOT
BELIEVE THIS IS FEASIBLE.

(C)

ACKLEY WAS
ASSOCIATES
INCREASE.
A POSSIBLE

CD)

ROBERTSON FAVORS A TAX INCREASE EFFECTIVE AT MIDYEAR, BUT
NOT BEFORE. HE BELIEVES IT WILL PERMIT EVEN GREATER PRO­
GRESS TOWARD MONETARY EASE THAN WOULD BE POSSIBLE WITHOUT
IT. BECAUSE HE WORRIES ABOUT THE BALANCE OF PAYMENTS
EFFECTS OF MONETARY EASE,
HE FAVORS A BROADENED INTEREST
EQUALIZATION TAX, COVERING DIRECT INVESTMENT, TO REPLACE
EXISTING VOLUNTARY PROGRAMS. HE WANTS TO ASSURE OUR COM­
PLETE FREEDOM TO USE MONETARY POLICY FOR DOMESTIC PURPOSES.

(E)
2.

BRIMMER THINKS THERE IS NO MEED FOR A TAX INCREASE ON
ECONOMIC GROUNDS.
HE WOULD BE WILLING TO RISK A MODEST
INCREASE ($4-5 BILLION) IF IT WERE NECESSARY TO PROTECT
THE HUMAN RESOURCE PROGRAMS, BUT ONLY IF IT IS NECESSARY
FOR THAT PURPOSE.
HE WOULD NOT WANT IT EFFECTIVE BEFORE
MIDYEAR.

THE EXCELLENT ECONOMIC STAFF AT THE FEDERAL RESERVE STRONGLY
OPPOSES A TAX INGR£AS&.TH£Y-ARE-MORE BEAR1SHTHAN THE CEA."

UNABLE TO REACH GOVERNOR MITCHELL, BUT HIS
ON THE BOARD ARE SURE HE IS OPPOSED TO A TAX
HE WORRIES MORE THAN ANY OTHER GOVERNOR ABOUT
RECESSION.

COUNCIL OF ECONOMIC ADVISERS
(A)

OKUN’ S PREFERENCE WOULD BE FOR A LESS STIMULATIVE SOCIAL
SECURITY PACKAGE AND NO TAX INCREASE. HE WOULD FALL BACK
TO A SMALL JULY I INCREASE. HE BELIEVES THE ANNOUNCEMENT
OF A TAX INCREASE REQUEST WILL ADVERSELY AFFECT WHAT WILL
IN ANY CASE BE A DANGEROUSLY WEAK FIRST HALF.

(B)

BY A VERY NARROW MARGIN, DUESENBERRY FAVORS A TAX INCREASE
PROPOSAL — IF IT IS SMALL, AND IS PROPOSED TO BECOME
EFFECTIVE NO EARLIER THAN JULY 1. ALTHOUGH HE IS BEARISH
ABOUT THE ECONOMY, HE BELIEVES THAT A PROPOSED JULY 1
EFFECTEVE DATE PROVIDES A HEDGE AGAINST THE POSSIBILITY
OF A LATER INCREASE IN THE DEFENSE BUDGET, YET PERMITS
THE INCREASE PROPOSAL TO BE WITHDRAWN IF THE ECONOMY
SOFTENS TOO MUCH. HE THINKS IT WOULD BE WITHDRAWN.

(C)

ACKLEY'S POSITION IS ESSENTIALLY THE SAME AS DUESENBERRY’ S
BUT BY A SLIGHTLY WIDER MARGIN.

3.

CHARLIE SCHULTZE FAVORS A SMALL TAX INCREASE REQUEST, TO BECOME
EFFECTIVE JULY 1.
HIS REASONING .IS ESSENTIALLY LIKE THAT OF
THE COUNCIL.

4.

WALTER HELLER STILL COMES DOWN ON THE SIDE OF A SMALL TAX INCREASE
BY A VERY BARE MARGIN, EVEN NARROWER THAN REFLECTED IN HIS LAST
MEMO.
HE THINKS THAT A TAX INCREASE WILL BOTH PROTECT SOCIAL
PROGRAMS AND ENCOURAGE MONETARY EASE A BIT MORE THAN A NO-TAX
DECISION.
HE WORRIES THAT AN EMPHASIS ON THE ADMINISTRATIVE
BUDGET DEFICIT AS THE JUSTIFICATION FOR A TAX INCREASE WILL
IMPAIR ECONOMIC EDUCATION, AND MAKE IT HARDER TO
REVERSE THE DECISION IF THAT TURNS OUT TO BE NECESSARY
(THE PROSPECTIVE ADMINISTRATION BUDGET DEFICIT WOULD BE EVEN
BIGGER AT THAT TIM E).

/

.

IT IS INTERESTING TO NOTE THAT OKUN AND DUESENBERRY HAVE
SWITCHED THEIR POSITIONS.
THEY EACH HELD EXACTLY THE
OPPOSITE VIEW A FEW DAYS AGO BUT HAVE CONVINCED EACH
OTHER IN THE LAST WEEK.

JOE FOWLER SENT ME THE FOLLOWING MEMO AND PROPOSED PROGRAM
WHICH REFLECTS HIS CURRENT THINKING.




UNQUOTECOPV LB J

LIBRARY




A W (# § :' n

ra_l

Ad° °
DECEMBER £ 3,

1966

MEMORANDUM FOR THE PRESIDENT
SUBJECT:

A PROPOSED ECONOMIC PROGRAM AND RATIONALE

JOE CALIFANO HAS INDICATED YOU WOULD LIKE MY CURRENT
READING ON AN ECONOMIC PROGRAM.
IN THIS MEMORANDUM I WILL SET FORTH THE ANALYSIS ON WHICH
THE ATTACHED PROPOSALS FOR ECONOMIC POLICY I n 1967 IS PREMISED.
THIS PROGRAM IS CONSISTENT WITH OUR PAST ANALYSIS AND
PATTERN OF CONDUCT.
IT IS DESIGNED TO MINIMIZE ANY TENDENCY
TO A SERIOUS SEVERE DEFLATION IN THE PRIVATE SECTOR IN THE
FIRST HALF OF CALENDAR 1967, TO ASSURE A STABILIZATION OF THE
PRIVATE SECTOR ON A MODERATE GROWTH PATTERN WITH BETTER BALANCE
BETWEEN SECTORS IN THAT PERIOD, AND ALSO TO TAKE OUT INSURANCE
AGAINST EITHER A DEFLATIONARY OR INFLATIONARY TREND IN THE
SECOND HALF OF CALENDAR 1967 BY PRESERVING THE MAXIMUM NUMBER
OF OPTIONS IN THE FIRST SIX MONTHS.
IT IS ALSO DESIGNED TO GIVING A CONTINUING OPPORTUNITY
FOR MONETARY POLICY TO MOVE IN THE DIRECTION OF EASE THROUGHOUT
THE COMING YEAR GIVING THE PRIVATE SECTOR A CHANCE TO BREATHE
EASIER WITH INCREASING AVAILABILITY OF FUNDS AT LOWER INTEREST
RATES.
IT IS ALSO DESIGNED TO ASSURE FISCAL RESPONSIBILITY BY
FINANCING THE INCREASE IN DEFENSE EXPENDITURES IN FISCAL 1968
BY A ONE-YEAR TAX INCREASE EFFECTIVE JULY 1, 1967.
THE FOLLOWING IS THE RATIONALE OF THE PROPOSED PROGRAM
WHICH IS DESCRIBED WITH PARTICULARS IN THE ATTACHMENT.

THE THIRD AND FOURTH QUARTER OF 1966 REFLECT A WELCOME
MODERATION FROM THE RATHER FEVERISH EXPANSION PACE THE ECONOMY
EXPERIENCED IN LATE 1965 AND EARLY 1966.
THIS EXCESSIVE
EXPANSION RESULTED FROM THE SHARP INCREASE IN DEFENSE ORDERS
DURING THAT PERIOD ON TOP OF AN ALREADY EXUBERANT CIVILIAN
ECONOMY WHICH RESULTED IN BOTH IMBALANCES AND SOME EXCESS DEMAND
WITH ACCOMPANYING PRICE PRESSURES.
THE IMPOSITION OF SHARP MONETARY RESTRAINT BEGINNING
LAST DECEMBER 1965 WAS SUPPLEMENTED BY A MODERATE SHIFT
IN FISCAL POLICY FROM STIMULUS IN THE LAST TWO QUARTERS
OF 1965 TO RESTRAINT DURING 1966.
BETWEEN JANUARY 1 AND SEPTEMBER 1, 1966 CONGRESSIONAL
AND PRESIDENTIAL ACTIONS WERE TAKEN WHICH ELIMINATED $10
BILLION CF EXCESS PURCHASING POWER FROM THE ECONONMY —
THROUGH HIGHER SOCIAL SECURITY TAXES, THE TAX ADJUSTMENT PROGRAM,
AND THE ACCELERATION OF LARGE EMPLOYERS’ PAYMENTS OF EMPLOYEES’
SOCIAL SECURITY AND INCOME TAXES WITHHELD.
ALSO THE EFFECT OF SELECTIVE FISCAL RESTRAINT
EMBODIED IN THE PROGRAM OF SEPTEMBER 8 , 1966, INCLUDING
THE DEFERMENT OF FEDERAL EXPENDITURES, THE SUSPENSION OF THE
INVESTMENT CREDIT AND THE RESTRAINT ON FEDERAL AGENCY ACCESS
TO THE MONEY MARKET, ALLEVIATED SOME OF THE SELECTIVE IMBALANCES
THAT RESULTED FROM THE SHARP MONETARY RESTAINTS OF THE YEAR.
A PROGRAM TO HELP HOUSINGWAS ENACTED.
HOWEVER, THE RESUMPTION OF NORMAL PATTERNS IN THE
HOUSING INDUSTRY CALLS FOR ADDITIONAL PROGRAMS DESIGNED TO
ASSURE INCREASING AVAILABILITY OF FUNDS AND LOWER MORTGAGE
RATES TO ENCOURAGE MORE NORMAL ACTIVITY IN THAT AREA.
AS A RESULT OF THE COMBINATION OF HEAVY MONETARY AND
MODERATE FISCAL RESTRAINT AND THE SELECTIVE FISCAL
MEASURES REFERRED TO, THE UNHEALTHY AND UNSUSTAINABLE
BOOM THAT CHARACTERIZED THE LAST HALF OF 1965 AND THE FIRST
QUARTER OF 1966 HAS BEEN MODERATED AND COOLED ENOUGH TO
PERMIT A DESIRABLE SHIFT IN MONETARY POLICY FROM THE RIGID
RESTRAINT OF THE FIRST THREE QUARTERS OF 1966 TO A PATH
OF GRADUAL EASE.

THE IMPOSITION OF SHARP MONETARY RESTRAINT BEGINNING
LAST DECEMBER 1965 WAS SUPPLEMENTED BY A MODERATE SHIFi
IN FISCAL POLICY FROM STIMULUS IN THE LAST TWO QUARTERS
OF 1965 TO RESTRAINT DURING 1966.
BETWEEN JANUARY 1 AKD SEPTEMBER 1, 1966 CONGRESSIONAL
•AND PRESIDENTIAL ACTIONS WERE TAKEN WHICH. ELIMINATED $10
3 ILL ION OF EXCESS PURCHASING POWER FROM THE ECONONMY —
THROUGH HIGHER SOCIAL SECURITY TAXES, THE TAX ADJUSTMENT PROGRAM,
AND THE ACCELERATION OF LARGE EMPLOYERS’ PAYMENTS OF EMPLOYEES’
SOCIAL SECURITY AND INCOME TAXES WITHHELD.
ALSO THE EFFECT OF SELECTIVE FISCAL RESTRAINT
EMBODIED IN THE PROGRAM OF SEPTEMBER 8 , 1966, INCLUDING
THE DEFERMENT OF FEDERAL EXPENDITURES, THE SUSPENSION OF THE
INVESTMENT CREDIT AND THE RESTRAINT ON FEDERAL AGENCY ACCESS
TO THE MONEY MARKET, ALLEVIATED SOME OF THE SELECTIVE IMBALANCES
THAT RESULTED FROM THE SHARP MONETARY RESTAINTS OF THE YEAR.
A PROGRAM TO HELP HOUSING WAS ENACTED.
HOWEVER, THE RESUMPTION OF NORMAL PATTERNS IN THE
HOUSING INDUSTRY CALLS FOR ADDITIONAL PROGRAMS DESIGNED TO
ASSURE INCREASING AVAILABILITY OF FUNDS AND LOWER MORTGAGE
RATES TO ENCOURAGE MORE NORMAL ACTIVITY IN THAT AREA.
AS A RESULT OF THE COMBINATION OF HEAVY MONETARY AND
MODERATE FISCAL RESTRAINT AND THE SELECTIVE FISCAL
MEASURES REFERRED 1 0, THE UNHEALTHY AND UNSUSTAINABLE
BOOM THAT CHARACTERIZED THE LAST HALF OF 1965 AND THE FIRST
QUARTER OF 1966 HAS BEEN MODERATED AND COOLED ENOUGH TO
PERMIT A DESIRABLE SHIFT IN MONETARY POLICY FROM THE RIGID
RESTRAINT OF THE FIRST THREE QUARTERS OF 1966 TO A PATH
OF GRADUAL EASE.
THIS SHIFT IS TO BE APPLAUDED, ENCOURAGED AND CONTINUED.
INDEED, IT MIGHT BE DESIRABLE TO SUBSTITUTE ADDITIONAL
FISCAL RESTRAINT FOR MONETARY EASE AT THIS JUNCTURE IN
ORDER TO GET A BETTER POLICY MIX IF THE EFFECTS OF THE ACTIONS
ALREADY 1AKEN AND THE MODERATION OF THE ECONOMY IN RESPONSE
HAD NOT ALREADY MADE THAT SHIFT IN MONETARY POLICY PRACTICABLE
WITHOUT SUBSTITUTING FISCAL RESTRAINT IN THE FORM OF AN
EARLY TAX INCREASE.
IN VIEW OF THE NEAR-TERM ECONOMIC OUTLOOK, HOWEVER, IT
WOULD SEEM UNDESIRABLE TO EFFECT THIS NEAR-TERM SUBSTITUTION
OF ADDITIONAL FISCAL RESTRAINT FOR MONETARY EASE. INDEED,
THE DESIRABLE COURSE OF FISCAL POLICY NOW WOULD SEEM TO
BE TO COMPLEMENT THIS SHIFT IN MONETARY POLICY BY ALLOWING
A GENTLE LOOSENING OF FISCAL RESTRAINTS. THIS RESULT WILL
OCCUR NATURALLY AS DEFENSE EXPENDITURES INCREASE IN THE
LAST PART OF 1966 AND THE FIRST PART OF 1967. IT WILL BE
MANIFEST BY A SHIFT IN THE NATIONAL INCOME ACCOUNTS BUDGET
FROM THE PATTERN OF SURPLUS IN FISCAL 19 66 TO A MEASURED
DEFICIT FOR FISCAL 1967.
NEVERTHELESS, WITH THE INCREASED REQUIREMENTS FOR DEFENSE
EXPENDITURES IN FISCAL 1968 C$6.5 BILLION OVER FISCAL
1967) IT BECOMES DESIRABLE TO CONTAIN THIS SOMEWHAT STIMULATIVE
DEFICIT TO KEEP IT WITHIN ACCEPTABLE BOUNDARIES DURING
FISCAL 1968. IN THE MEANTIME, THE RESULTS OF THE SHIFT IN
MONETARY POLICY FROM RESTRAINT 10 GRADUAL EASE ACCOMPANIED
BY A MOVEMENT FROM SURPLUS TO DEFICIT IN THE NIA BUDGET
WILL SERVE TO ARREST THE RECENT DOWNTURN OF THE PRIVATE
SECTOR OF THE ECONOMY AND KEEP IT ON AN ACCEPTABLE PATH.
HOWEVER, IT WILL BECOME NECESSARY, BOTH TO ARREST IN
FISCAL 1968 ANY FURTHER INCREASE IN BOTH THE NIA AND
ADMINISTRATIVE BUDGET DEFICITS THAT HIGHER DEFENSE EXPENDITURES
ENTAIL AND 10 KEEP THE ROAD OPEN FOR FURTHER MONETARY EASE.
A MODERATE TAX INCREASE EFFECTIVE FOR THE FISCAL YEAR 1968
IS THE NECESSARY TOOL.
IN THE MEANTIME, WE SHOULD PURSUE A COURSE DESIGNED
TO RESTORE THE HOUSING INDUSTRY TO ITS NORMAL PROPORTIONS.
MOREOVER, IF THE FEBRUARY, 1967 COMMERCE-SEC SURVEY
INDICATES STILL FURTHER DECLINES, WE MAY WISH TO END THE
SUSPENSION OF THE INVESTMENT CREDIT, BUT WE CAN AWAIT
DEVELOPMENTS BEFORE RECOMMENDING ACTION ON THIS ISSUE.



/S /

/I/

HENRY H. FOWLER C o p y
HENRY H. FOWLER

LBU

L IBRARY

ATTACHMENT

ATTACHMENT
HKF PROPOSALS AS OF
DECEMBER 23, 19 66
PROPOSED PROGRAM
1. ENDORSE AND E NCOURAGE CONTINUING SHIFT IN
MONETARY POLICY FROM RIGID RESTRAINT (BEFORE OCTOBER)
TO D IRECTION OF EASE (NOVEMBER AND DECEMBER PATTERN)
WITH SOME MORE DEFINITE SIGNAL IN JANUARY,
2.
PURSUE COMPLEMENTARY FISCAL POLICY FOR THE RESI
OF FY 1967 ~ SHIFT NIA BUDGET FROM A POSTURE OF FISCAL
RESTRAINT TO STIMULUS (A SMALL SURPLUS IN THE 3RD QUARTER
OF 1966 TO A DEFICIT OF $ 8 . 6 BILLI ON IN 2ND QUARTER OF
1967) BY ALLOWING INCREASE IN DEFENSE E XPE NDITURES WITHOUT
ANY COMPENSATORY INCREASE IN TAX E S IN FISCAL 1967. THIS
WILL GIVE THE CHANGE IN DIRECTION OF MONETA RY POLICY THE
TIME AND SUPPORT NECESSARY TO STABILIZE THE TURN DOWN IN
THE PRIVATE SECTOR THAT HAS MARKED THE LAST FEW MONTHS.
THIS FISCAL POLICY WOULD NOT PRECLUDE E F FOR TS TO HOLD DOWN
THE ADMINISTRATIVE BUDGET DEFICIT IN FISCAL 1967 B Y MARKETING
ASSETS AND ADMINISTRATIVE AND LEGISL ATI VE M E A SUR ES TO
IMPROVE COLLECTION PROCEDURES.
3.
INCREASE SOCIAL SECURITY B E N EFI TS EFFECTIVE JULY I,
1967 (BUT NOT RETROACTIVE) BY $4 BILLI ON PER ANNUM WI T H NEW
FINANCING BY SOCIAL SECURITY TAX INCREASE EF FECTIVE JANUARY
1, 1968.
4.
CARRY FORWARD SPECIAL PROGRAM DESIGNED TO ENABLE THE
HOUSING INDUSTRY TO RECOVER &AR L Y NEXT YEAR, R E SU ME ITS
NORMAL PATTERN B Y THE LATTER PART OF 1967, AND BE PREPARED
TO GO AT TOP SPEED W ITH END OF HOSTILITIES IN SOUTHEAST
ASIA.
5.
INCREASE INCOME T AX E S AS OF JULY 1, 1967 BY A TE MPORARY
SURCHARGE OF 5 PER CENT T H R O U G H JUNE 30, 1968. THIS SHOULD
HAVE THE EFFECT OF STABILIZING THE DEFICIT IN THE FY 1968
NIA BUDGET AT TOLERABLE LEVELS (-$5 BILLION TO -$7
BILLION), DEFRAYING BY NEW TAXES ($6.3 BILLION — INCOME TAX
INCREASE PLUS LEGISL ATI VE SPEED-UP) THE INCREASED COST OF THE
VIETNAM WAR PROGRAMMED FOR FISCAL 1968 ($6.5 BILLION), AND
PERMITTING MONETARY POLICY TO CONTINUE ITS PATH TOWARD
EASE (INCREASED A V A IL ABI LIT Y OF FUNDS FOR THE PRIVATE SECTOR
AT LOWER INTEREST RATES), UNLESS THERE SHOULD BE A RENEWAL
OF INFLATIONARY PRESSURES.
6. USE V OLUNTARY PROGRAMS, SHARPENED STAND-BY AUTHORITY
UNDER INTEREST E QUA LIZATION ACT AFFECTING LOANS, AND INTERNA­
TIONAL NEGOTIATIONS TO MAKE POSSIBLE A CONTINUING POLICY
TOWARD MONETARY EASE WITHOUT CAPITAL OUTFLOWS THAT WOULD
THREATEN OUR BALANCE OF PAYMENTS.
7. THIS PROGRAM WOULD HAVE AVAIL ABL E THE FOLLOWING
ADDITIONAL TOOLS OR OPTIONS IN EVENT A THR EATENING D E F L A ­
TIO NAR Y PATTERN EMERGED IN THE WINTER AND SPRING OF 1967s


http://fraser.stlouisfed.org/
Federal Reserve Bank of St.(A)
Louis

INCREASE OF GOVERNMENT EXP ENDITURES IN CUT-BACK C O P Y LBJ L 1B R A R Y

WITH SOME MORE DEFINITE SIGNAL IN JANUARY.
2.
PURSUE COMPLEMENTARY FISCAL POLICY FOR THE REST
OF FY 1967 ~ SHIFT NIA BUDGET FROM A POSTURE OF FISCAL
RESTRAINT TO STIMULUS CA SMALL SURPLUS IN THE 3RD QUARTER
OF 1966 TO A DEFICIT OF $ 8 . 6 BILLION IN 2ND QUARTER OF
1967) BY ALLOWING INCREASE IN DEFENSE EXPENDITURES WITHOUT
ANY COMPENSATORY INCREASE IN TAXES IN FISCAL 1967. THIS
WILL GIVE THE CHANGE IN DIRECTION OF MONETARY POLICY THE
TIME AND SUPPORT NECESSARY TO STABILIZE THE TURN DOWN IN
THE PRIVATE SECTOR THAT HAS MARKED THE LAST FEW MONTHS.
THIS FISCAL POLICY WOULD NOT PRECLUDE EFFORTS TO HOLD DOWN
THE ADMINISTRATIVE BUDGET DEFICIT IN FISCAL 1967 BY MARKETING
ASSETS AND ADMINISTRATIVE AND LEGISLATIVE MEASURES TO
IMPROVE COLLECTION PROCEDURES.
3.
INCREASE SOCIAL SECURITY BENEFITS EFFECTIVE JULY 1,
1967 (BUT NOT RETROACTIVE) BY $4 BILLION PER ANNUM WITH NEW
FINANCING BY SOCIAL SECURITY TAX INCREASE EFFECTIVE JANUARY
1, 1968.
4.
CARRY FORWARD SPECIAL PROGRAM DESIGNED TO ENABLE THE
HOUSING INDUSTRY TO RECOVER EARLY NEXT YEAR, RESUME ITS
NORMAL PATTERN BY THE LATTER PART OF 1967, AND BE PREPARED
TO GO AT TOP SPEED WITH END OF HOSTILITIES IN SOUTHEAST
ASIA.
5.
INCREASE INCOME TAXES AS OF JULY i, 1967 BY A TEMPORARY
SURCHARGE OF 5 PER CENT THROUGH JUNE 3 0 , 1968. THIS SHOULD
HAVE THE EFFECT OF STABILIZING THE DEFICIT IN THE FY 1968
NIA BUDGET AT TOLERABLE LEVELS (-$5 BILLION TO -$7
BILLION ), DEFRAYING BY NEW TAXES ($ 6 .3 BILLION — INCOME TAX
INCREASE PLUS LEGISLATIVE SPEED-UP) THE INCREASED COST OF THE
VIETNAM WAR PROGRAMMED FOR FISCAL 1968 ($ 6 .5 B IL L IO N ), AND
PERMITTING MONETARY POLICY TO CONTINUE ITS PATH TOWARD
EASE (INCREASED AVAILABILITY OF FUNDS FOR THE PRIVATE SECTOR
AT LOWER INTEREST RATES), UNLESS THERE SHOULD BE A RENEWAL
OF INFLATIONARY PRESSURES.
6.
USE VOLUNTARY PROGRAMS, SHARPENED STAND-BY AUTHORITY
UNDER INTEREST EQUALIZATION ACT AFFECTING LOANS, AND INTERNA­
TIONAL NEGOTIATIONS TO MAKE POSSIBLE A CONTINUING POLICY
TOWARD MONETARY EASE WITHOUT CAPITAL OUTFLOWS THAT WOULD
THREATEN OUR BALANCE OF PAYMENTS.
7.
THIS PROGRAM WOULD HAVE AVAILABLE THE FOLLOWING
ADDITIONAL TOOLS OR OPTIONS IN EVENT A THREATENING DEFLA­
TIONARY PATTERN EMERGED IN THE WINTER AND SPRING OF 1967:
(A)

INCREASE OF GOVERNMENT EXPENDITURES IN CUT-BACK
PROGRAMS.

(B) LIFTING SUSPENSION OF INVESTMENT CREDIT AFTER
SEC-COMMERCE REPORT IN FEBRUARY IF UNFAVORABLE
OR LATER IN SUMMER- RETROACTIVELY TO JULY 1 TO
AVOID 4TH QUARTER "AIR POCKET” .
(C) MODIFICATION OR ELIMINATION OF TAX INCREASE
PROPOSALS BEFORE ENACTMENT.
8.
THIS PROGRAM WOULD LEAVE AVAILABLE THE FOLLOWING
ADDITIONAL TOOLS OR OPTIONS IN EVENT THERE WAS A SEVERE RENEWAL
OF INFLATIONARY THREATS RESULTING FROM EXCESS DEMAND:
(A)

HOLDING DOWN OF NONDEFENSE GOVERNMENTAL EXPEND­
ITURES IN FISCAL 1968.

(B) DEFERRING THE LIFTING OF SUSPENSION OF THE
INVESTMENT CREDIT.
(C)

INCREASING TAX RATES.

(D) MONETARY POLICY.
9.
WHEN COMBINED WITH ADDITIONAL SALES OF ASSETS EXPECTED
TO BE MADE POSSIBLE BY EASIER MONETARY CONDITIONS IN FY 1968,
THE BUDGET DEFICIT COULD BE HELD TO THE SAME GENERAL LEVEL
AS FY 1967 - NAMELY BETWEEN $11 1/2 TO $13 BILLION.
10. WHILE DETAILED ESTIMATES HAVE NOT BEEN COMPLETED THE

FOLLOWING TABLE SHOWS THE RANGE OF QUARTERLY NIA B U D G E , R ,
http://fraser.stlouisfed.org/
CHANGE
Federal Reserve Bank of St. Louis THAT WOULD RESULT FROM THIS PROGRAM:

, , RDADV




1966
III
CURRENT

IV

- .3

-3.3

- .3

-3.3

SOCIAL SECURITY BENEFITS
EFFECTIVE JULY 1, 19 67
INCOME TAX INCREASE
EFFECTIVE JULY 1, 1967
( NOT RETROACTIVE)
SOCIAL SECURITY FINANCING
EFFECTIVE JANUARY 1, 1968
FINAL NIA PATTERN

1967
I
CURRENT

II

-8.9

III

-8.6

-7.7

- 7.5

- 11.7

SOCIAL SECURITY BENEFITS
EFFECTIVE JULY 1, 1967
INCOME TAX INCREASE
EFFECTIVE JULY 1, 1967
(NOT RETROACTIVE)

IV

-11.5

- .7

- .7

- 7 .2

- 6 .8

-8.9

-8.6

- 7 .2

- 6 .8

SOCIAL SECURITY FINANCING
EFFECTIVE JANUARY 1, 1968
FINAL NIA PATTERN

1968
I

II

CURRENT

- 7 .4

-7.7

SOCIAL SECURITY BENEFITS
EFFECTIVE JULY 1, 1967

-11.4

-11.4

INCOME TAX INCREASE
EFFECTIVE JULY l f 1967
(NOT RETROACTIVE)

- 6.5

- 6.3

SOCIAL SECURITY FINANCING
EFFECTIVE JANUARY 1, 1968

- 5 .3

- 5 .1

FINAL NIA PATTERN

- 5 .3

- 5 .1

EVES CNLIf
DTG : 24 0235Z

COPY LBJ

LIB R A R Y


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102