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THE 1967 ECONOMIC REPORT
OF THE PRESIDENT

HEARINGS
BEFORE TH E

JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
NINETIETH CONGRESS
F I R S T S ESS I O N

F E B R U A R Y 7 8 A N D 9 1967
, ,
,

PART 2
Printed for the use of the Joint Economic Committee

U.S. G O V E R N M E N T P R IN T IN G O FFIC E
76-314

W A S H IN G TO N : 1967

For sale by the Superintendent of Documents, U.S. Government Printing Office
Washington, D .C . 20402 - Price 65 c e n t s




JOINT ECONOMIC COMMITTEE
(C reated pursuant to Bee. 5 ( a ) o f P u b lic L aw 304, 7 9th C ong.)
W IL L IA M P R O X M IR E , W iscon sin , C hairm an
W R IG H T P A T M A N , T exa s, Vice C hairm an
SENATE

H O U S E O F R E P R E S E N T A T IV E S

J O H N S P A R K M A N , A la b a m a
J . W . F U L B R IG H T , A rka n sas
H E R M A N E. T A L M A D G E , G eorgia
S T U A R T SYM IN G TO N , M issouri
A B R A H A M R IB IC O F F , C onnecticu t
JA C O B K . J A V IT S , N ew Y ork
J A C K M IL L E R , Iow a
L E N B. JO R D A N , Id a h o
C H A R L E S H . P E R C Y , I llin o is

R IC H A R D B O L L IN G , M issouri
H A L E BOGGS, L ou isia n a
H E N R Y S. R EU SS, W iscon sin
M A R T H A W . G R IF F IT H S , M ich igan
W IL L IA M S. M O O R H E A D , P enn sylvania
T H O M A S B. C U R T IS , M issou ri
W IL L IA M B. W ID N A L L , N ew Jersey
D O N A L D R U M SFE L D , Illin o is
W . E . B R O C K 3 d, T enn essee

J o h n R . S t a r k , E xecu tive D ire c to r
J a m e s W . K n o w l i s , D ire c to r of Research

E c o n o m is t s
W illia m H . M o o r s
J o h n B. H s n d b r s o k

G e o rg e R. Id en
D a n ie l J. E d w a rd s

D o n ald A . W e b s te r (M in o r it y )

II




CONTENTS
STATEMENTS
F ebruary

7, 1967

Wirtz, Hon. W. Willard, Secretary of Labor; accompanied by Arthur M.
Ross, Commissioner, Bureau of Labor Statistics____________________
F ebruary

Pa*§

238

8, 1967

Cohen, Hon. Wilbur J., Under Secretary, Department of Health, Educa­
tion, and Welfare; accompanied by Robert J. Myers, Chief Actuary,
Office of the Actuary, Social Security Administration; and Mrs. Ida C.
Merriam, Assistant Commissioner, Office of Research and Statistics,
Social Security Administration___________________________________

310

F ebruary 9, 1967

Martin, Hon. William McC., Jr., Chairman, Board of Governors of the
Federal Reserve System; accompanied by Daniel H. Brill, Senior Adviser
to the Board, and Director, Division of Research and Statistics: and
Robert Solomon, Adviser to the Board, and Director, Division of Inter­
national Finance------------ ------- ----------------------------------------------------Trowbridge, Hon. Alexander B., Acting Secretary of Commerce, accom­
panied by William H. Shaw, Assistant Secretary for Economic Affairs;
Edward K. Smith, Deputy Assistant Secretary for Economic Policy;
Louis J. Paradiso, Associate Director, Office of Business Economics;
and Robert L. McNeill, Deputy Assistant Secretary for Trade Policy,
Department of Commerce________________________________________
EXHIBITS

AND

ADDITIONAL

445

INFORMATION

Department of Labor:
President's Advisory Committee on Labor-Management Policy:
Report_____________________________________________________
Table; Training opportunities, fiscal years 1964-68; submitted at
request of Chairman Proxmire._____________________________
Unemployment totals, 1966; submitted in response to Representative
Griffiths' query_____________________________________________
Information relati ve to “ equal pay for equal work” ; supplied at request
of Representative Griffiths____________________________________
Additional material relative to above; responding to Representative
Griffiths’ query_______________________________ ______________
Tables: Miscellaneous tables showing employment status of selected
groups; requested by Representative Rumsfeld_________________
Table: Real spendable average weekly earnings, etc.; supplied at re­
quest of Representative Rumsfeld__________________________
Figures indicating workers covered by cost-of-living escalation
clauses; requested by Senator Miller_______________________
Table: Employment; submitted in response to Senator Miller’s
request_____________________________________________________
"Federal regulation affecting State activities and instrumentalities” ;
information supplied in response to Senator Miller’s request_____
Testimony of Secretary Wirtz before House Government Operations
Committee re H.R. 11916, September 12, 1966__________________
Information relative to teenage employment with Federal Govern­
ment; requested by Representative Widnall____________________




387

245
260

272
273
274
275
278
280
281
282
283
288

Department of Labor—Continued
Information relative to teenage opportunities in apprenticeship pro- Paw
grams; requested by Representative Widnall_______________
291
Table: Percent change and contribution to total change, selected
Consumer Price Index components, December 1965 to December
1966; supplied at the request of Chairman Proxmire___________
295
Memorandum: On-the-job training programs; furnished at request of
Chairman Proxmire_________________________________________
300
Additional information relating to above; requested by Representative
Scheuer_____________________________________1______________
302
Letter to Secretary Wirtz covering questions submitted by Senator
305
Percy, and responses by Secretary Wirtz______________________
Department of Health, Education, and Welfare:
Questions submitted by Representative Curtis and answers by
Department_______________________________________________ 338
Questions submitted by Senator Javits and answers by Department
346
Letter of Robert J. Myers, Chief Actuary of the Social Security
Administration commenting on the U.S. News and World Report
article “ Is Social Security To Get Out of Hand?” _______ _______
354
Question re administrative cost of welfare submitted by Representative
Griffiths and answered by Department________________________
364
Question relative to SSA payments abroad, submitted by Repre­
sentative Rumsfeld and Department’s response________________
365
Question relative to trend in private expenditures for health, education,
and welfare, submitted by Representative Rumsfeld and answer
supplied by Department________ _____________________________
372
Question relative to percentage pulled into poverty class by each 5percent increase in cost of living, submitted by Chairman Proxmire,
and Department’s answer____________________________________
381
Federal Reserve System:
Additional information relative to policy actions of Federal Open
Market Committee, supplied by Chairman Martin_____________
401
Letter from Chairman Martin to Representative Reuss concerning
review of discount mechanism________________________________
402
“ Earnings and expenses of the Federal Reserve Banks in 1966 and
1965/* additional material supplied by Chairman Martin at request
of Representative Brock_____________________________________
424
Material submitted in response to questions of Representative Brock
relative to monetary policy under certain inflationary pressures___
434
Department of Commerce:
Table: Interest rates and business failures, 1965-66; responding to
request of Representative Griffiths____________________________
469
“ The metric system and international trade/7 statement submitted in
response to request of Representative Rumsfeld_________________
474
Table: Detail of L
T.S. Government pensions and other transfers, in
the balance of payments, fiscal year 1966r submitted at request of
Representative Widnall_______________________________ _____479
Tables relative to counterpart funds; responding to request of Repre­
sentative Widnall___________________________________________
480
Brock, Representative William E.:
“ Earnings and expenses of the Federal Reserve Banks in 1966 and
1965” ; additional material supplied by Chairman Martin, Chair­
man of the Board of the Governors of the Federal Reserve System. 424
Questions to Chairman Martin and responses from the Board of
Governors of the Federal Reserve System relative to monetary
policy under certain inflationary pressures______________________
434
Curtis, Representative Thomas B.:
Questions to Department of Health, Education, and Welfare and
responses thereto____________________________________________
338
Griffiths, Representative Martha W.:
Table: 1966 unemployment totals; submitted by Department of
Labor______________________________________________________
272
Information relative to “ equal pay for equal work” ; submitted by
Department of Labor______ _________________________________
273
Additional material relative to above; submitted by Department of
Labor________________________________— ------- --------------------274
Questions relative to administrative cost of welfare; answers by De­
partment of Health, Education, and Welfare_________ __________
364
Table: Interest rates and business failures, 1965-66; supplied br
Department of Commerce---------- ------- ------------------------------------469



CONTENTS

Javits, Senator Jacob K.:
Statement made at opening of hearing on Tuesday, February 7, 1966, Questions to Department of Health, Education, and Welfare, and
answers thereto_________________________________ - ___________
Miller, Senator Jack:
Figures indicating workers covered by cost-of-living escalator clauses;
submitted by Department of Labor___________________________
Table: Employment; supplied by Department of Labor___________
“ Federal regulation affecting State activities and instrumentalities” ;
information supplied by Department of Labor___ _______________
Percy, Senator Charles H.:
Letter and questions to Secretary Wirtz, and letters and answers in
response____________________________________________________
Proxmire, Senator William:
Report: President’s Advisory Committee on Labor-Management
Policy; submitted by Department of Labor_____________________
Table: Training opportunities, fiscal years 1964-68; submitted by
Department of Labor________________________________________
Table: Percent change and contribution to total change, selected
Consumer Price Index components, December 1965 to December
1966; submitted by Department of Labor______________________
Memorandum: On-the-job training programs; submitted by Depart­
ment of Labor_________________ __________ ___________________
Question relative to percentage pulled into poverty class by each
5-percent increase in cost of living; answer submitted by Depart­
ment of Health, Education, and Welfare_______________________
Reuss, Representative Henry S.:
Letter submitted by Federal Reserve concerning review of discount
mechanism____________________________________ _____________
Rumsfeld, Representative Donald:
Tables: Miscellaneous tables showing employment status of selected
groups; supplied by Department of Labor--------------------------------Table: Real spendable average weekly earnings, etc.; submitted by
Department of Labor________________________________________
Question relative to SSA payments abroad, and answer supplied by
Department of Health, Education and Welfare_________________
Question relative to trend in private expenditures for health, educacation, and welfare, and answer supplied by Department of Health,
Education, and Welfare---------------------------------------------------------“ The metric system and international trade,” statement submitted
by Department of Commerce_________________________________
Widnall, Representative William B.:
Information relative to teenage employment with Federal Govern­
ment: submitted by Department of Labor___________________ 288
Information relative to teenage opportunities in apprenticeship pro­
grams: supplied by Department of Labor_________________ _____
Article: “ Is Social Security Getting Out of Hand,” reprinted from
U.S. News & World Report, Jan. 30, 1967______________________
Article: White House escalates war on air pollution, reprinted from
Business Week, Feb. 4 1967______________ ____________________
Table: Detail of U.S. Government pensions and other transfers in
the balance of payments, fiscal year 1966; submitted by Depart
men of Commerce____________________________ ______________
Tables relative to counterpart funds; submitted by Department of
Commerce__ ________________________________________________

V

P **
m
23534$
280'
281
282
305
245
260
295
300
381
402
275
278
365
372
474

291
350
355
479
480

CHARTS
DEPARTMENT OF LABOR

1. Labor force and employment: 1953 to date-----------------------------------------253
2. Major unemployment indicators: 1953 to date_____________________ __ 254
3. Unemployment rates by age and sex: 1953 to date.------------------------- ----254
4^ Negotiated wage-rate adjustments and the unemployemnt rate, 1954
through 1966_-______ _____________________ ____________________
255
5. Wholesale and consumer prices by major sectors____________________
256
6. Year-to-year changes in consumer service prices------------------ -----------257




CONTENTS

VI

DEPARTMENT OF HEALTH, EDUCATION, AND WELFARE
Present and proposed OASDI contribution rates________________________
Employee contributions for OASDI_________________________ __________
Monthly social security cash benefits under present law and under pro­
posal______________________________________________________________

Page
331
332
333

FEDERAL RESERVE SYSTEM
Wholesale prices— special groupings of BLS indexes_____________________

444

DEPARTMENT OF COM ERCE
M
1.
2.
3.
4.
5.
6.
7-

Gross national product______ __________ _____ ______________________ ___457
Government purchases of goods and services________________________ ___458
Dynamic sources of private demand________________________________ ___459
Measures of utilization______________________________________________ 460
_
_
Change in business inventories_______ ______________________________ _ 461
Consumer spending on nondurables and services moves with income__ _ 462
_
Prices in wholesale and retail markets_______________________________
463
TABLES
DEPARTMENT OF LABOR

1. Characteristics of persons enrolled in M DTA courses, calendar year
1966_________ _________________________________________________
2. Estimated annual rates of increase in hourly cost of wage and benefit
changes negotiated in key collective bargaining settlements, 1966_„
3. Estimated annual rates of increase in hourly cost of wage and benefit
changes negotiated in key collective bargaining settlements in
construction, 1966______________________________________________
4. Year-to-year percent change in output, output per man-hour, manhours, 1947-66_________________________________________________
5. Average annual percent change in output per man-hour and related
data, 1947*66.____ ______________________________ ________ ______
6. Indexes of output per man-hour, compensation per man-hour and unit
labor costs in the private economy, 1947-66--------------------------------7. Average annual rates of change in output per man-hour, hourly com­
pensation, and unit labor costs in the private economy for selected
years__________________________________________________________
8. Key wholesale price trends, 1964-66_______________________________
9. Key consumer price trends, 1964-66----------------------------------------------10. Price trends for selected consumer services, 1963-66________________

247
248
248
249
249
250
250
251
252
253

DEPARTMENT OF HEALTH, EDUCATION, AND WELFARE
1. Social welfare expenditures under public programs, selected fiscal years,
1934-35 through 1965-66__________________________ _____ ________
322
2. Trends in poverty and low-income status, 1959-65— Number and
percent of noninstitutional population who were poor or near poor_ _
326
3. Incidence of poverty in 1964 of unrelated individuals and persons in
families, by race and metropolitan— nonmetropolitan residence------------ 328
4. Number of poor persons and incidence of poverty, 1959 and 1965________329
5. Financing OASDHI (percent of payroll)____________________________ ___330
6. OASDHI— Benefits in current-payment status for individuals, by
country or continent— Montnly amount payable to beneficiaries
living abroad, by type of beneficiary, June 30, 1966-----------------------366
7. OASDHI— Benefits in current-payment status for individuals, bv
country or continent— Number payable to beneficiaries living abroad,
by type of beneficiary, June 30, 1966_____________________________
368
DEPARTMENT OF COM ERCE
M
1. A 3-year performance of selected major economic measures---------- 456




THE 1967 ECONOMIC REPORT OF THE PRESIDENT

TUESDAY, FEBRUARY 7, 1967
C ongress of t h e U nited States,
Joint E conomic C ommittee,

Washington, D.C.
The joint committee met at 2 p.m., pursuant to recess, in room
S-228, the Capitol, Hon. William Proxmire (chairman of the joint
committee) presiding.
Present: Senators Proxmire, Ribicoff, Javits, Symington, Miller,
and Percy; and Representatives Reuss, Griffiths, Moorhead, Curtis,
Widnall, Rumsfeld, and Scheuer (visitor).
Also present: John R. Stark, executive director, James W. Knowles,
director of research, and Donald A. Webster, minority economist.
Chairman Proxmire. The committee will come to order.
We expect to vote in the Senate in 5 or 10 minutes and Senator
Javits and I will have to leave. Before we do, however, I believe
Senator Javits would like to make a statement. Senator Javits?
Senator Javits. I would like to make my statement now because it
is not directed to this particular Secretary who is to be our witness
today, but to the Secretary of the Treasury, who testified yesterday.
Mr. Chairman, I rise to a point of personal privilege in this matter.
The outburst of the Secretary of the Treasury yesterday with respect
to me personally was both intemperate and injudicious and not war­
ranted by the facts which were clearly before him.
He apparently needed a scapegoat for what I considered to be a
serious mistake in administration policy and he chose me. I am
honored because it was a serious mistake and I repeat it.
Now, Mr. Chairman, what apparently aroused the Secretary’s ire
is that as the senior Republican present in the absence of my beloved
colleague, Congressman Curtis, I read the unanimous statement of the
minority taking exception to various policy decisions which had been
made by the administration in the preceding year and the word used
by the Secretary quite gratuitously was to challenge my qualifications
to speak “ purportedly” for the minority. This is baseless and untrue.
The minority statement is before the Secretaiy, it is unanimous. In­
deed it has been unanimous, Mr. Chairman, for the last 5 years. It
was unanimous in 1966. I joined them in it then and it had been
unanimous for some years before. I read it because of the absence
of Congressman Curtis. I hardly think that any other appellation
but intemperate can be applied to an attack which he made from the
theory that I “purported” to represent the minority when I read its
unanimous statement, as it was my duty to do.




235

236

THE

1967

ECONOMIC REPORT OF THE PRESIDENT

I was the senior Republican present. I am sorry about this incident.
Secretary Fowler, I thought, has been a friend of mine for many years
and I really deplored, terribly, this outburst. I will forgive him, but
I see no excuse for it and it did not help his case.
Xow, as to the merits—as long as he did challenge me—the fact is
that I have stood with the minority on this committee for years and
perhaps it might be of interest that an analysis of the 2 years during
which I have been the ranking Republican member on Labor and
Public Welfare indicates that the minority was never more together
there than it is now and has been for the past 2 years. Many of the
things I advocated, my party has been against, many they have been
for. That is the fate of everyone. I guess it is the fate of every
Senator or Congressman including the chairman of this committee,
and I honor them for it. I would not pick on them for it.
I do think that a case was made of the kind of personal sort, and
it seems to be almost an attempt to divert attention from the merits.
I had my say on that and I hope neither of us will bring the question
up again, although I will be happy to debate it ad infinitum if Secre­
tary Fowler desires it. I f he does that is fine with me.
The allegation that the Republicans had a position different from
mine on a tax increase is simply untrue. The fact is that though
there was evidence to that effect in the House? the Senate minority
leader was for a tax increase and I call attention to the President’s
press conference on February 26 where the President of the United
States was asked this question: “What is your reaction to Senator
Dirksen’s statement earlier this week that a 5-percent tax increase is
in the offing?” Then in July we have again in the Congressional
Quarterly a flat statement that Senate Minority Leader Everett Dirksen urged the President to increase taxes to dampen inflation.
As Secretary Fowler admits, this view was backed by the leading
experts at the time. The Council on Economic Advisers itself was
pretty much bound by the administration. They seemed to me at
least hearing their testimony last year, to lean toward tax increase
and there was a tremendous body of opinion for it.
Now, finally, and I shall not deal with the matter beyond that, I
would like to make just one other statement.
It seems to me that the primary economic explanation the Secretary
gives for the apparent c6ntradiction that interest rates this year are
going down while last year they were going up—which he claims
justifies the policy which I assume was his, he espoused—is that this
year the demand for credit is softer, whereas last year interest rates
were pushed up by too many conditions which could have been abated
by a better fiscal policy.
The Federal Reserve Board had to use its muscle because the admin­
istration was not using its muscle in the form of a tax increase. This
resulted in a disastrous burst of inflation which is now leading us to an
economic softening as witnessed by the drop in housing starts—prob­
ably the single most deleterious economic fact which developed in that
time.
Xow, Mr. Chairman, I think the Secretary had better think pretty
coolly and not let his anger run away with his reason. The administra­
tion is putting forward a tax increase proposal with all this heat,
whereas the Council of Economic Advisers sat here the other day and




THE

1967 ECONOMIC REPORT OF THE PRESIDENT

237

told us, “Take 90 days to think it over and watch the economy, it is
not all that hot.”
The most persuasive argument on behalf of the minority state­
ment is the fact that interest rates last year reached their highest
levels in 40 years, and that the economy was threatened with a seri­
ous financial crisis in late summer of 1966. The tightness of monetary
policy last year was dramatic proof that fiscal policy did not ade­
quately restrain the economy, whatever the Secretary or other admin­
istration spokesmen may now claim.
The Federal Reserve in December 1965 raised the discount rate—
2 months later than it wished to do so—after becoming convinced
that the administration was not pursuing, and had no intention of pur­
suing, a sufficiently restrictive fiscal policy. Subsequent events bore
out that judgment.
To be sure, the administration did take some restraining actions, but
they were not adequate to cool down the booming economy and moder­
ate the excessive demand for credit throughout the year. Interest
rates rose in response to market forces which could have been re­
strained only by an appropriate fiscal policy. Had the Federal Re*
serve supplied adequate reserves to meet the extraordinary demand
for funds without an increase in the level of interest rates, prices
would have gone through the roof. Even with a tight money policy,
price increases were sharp and—as stated by the administration—
we have not yet seen the end of the inflationary road.
Secretary Fowler chides the minority for being Monday morning
quarterbacks on the question of advising a tax increase for 1966. The
record shows that the minority members of the Joint Economic Com­
mittee, last March, unanimously said that the administration's fiscal
policy was not adequately restraining and that monetary policy would
have to carry too heavy a burden. We said that reductions in nonessential Federal expenditures would be preferable to a tax increase,
but we clearly said a tax increase would be necessary in the absence
of genuine expenditure restraint.
Expenditure restraint was not forthcoming. 1967 administrative
budget expenditures are now estimated to be $14 billion higher than
the estimate made by the administration in January 1966.
Nor was the minority alone in calling for further fiscal restraint
during the year. Walter W. Heller, former Chairman of the Council
of Economic Advisers and the architect of the “New Economics,”
said repeatedly that a tax increase was needed. That recommenda­
tion was echoed by Arthur F. Burns, Chairman of the Council under
President Eisenhower, and Otto Eckstein of President Ivennedy?
s
Council of Economic Advisers. A number of eminent witnesses who
appeared before the Joint Economic Committee at its annual hear­
ings last year said that restraint in the administration’s fiscal program
was more apparent than real. Chairman Ackley of the Council of
Economic Advisers, told this committee just last Thursdav that the
question of a tax increase in 1966 was “a close question” throughout
the year.
It is beyond my comprehension how the Secretary can now say fiscal
policy was perfect last year when all the signs point the other way.
Does he mean to suggest that the high level of interest rates was a
plot by the Federal Reserve and h$d nothing to do with underlying




238

the

1 9 67 ECONOMIC REPORT OF THE PRESIDENT

economic forces? Does he suggest that the break in price stability
which began in 1965 would have occurred even if fiscal policy had
been tighter? If fiscal policy was sufficiently restraining in the first
half of the year, why did the administration ask for suspension of
the investment credit in the second half?
Secretary Fowler tells us now that an increase in taxes early last
year would have been a mistake because of “selective weaknesses” that
were developing in the economy. These weaknesses, particularly in
the housing industry, Mere the direct result of the administration’s
high-interest policy that was made so necessary by the absence of
adequate fiscal restraint, It seems clear today, as it did all last year,
that the policy mix was wrong and that spokesmen for the adminis­
tration simply cannot bring themselves to admit the error of their
policies.
After having derided the minority members of the committee for
their support of greater fiscal restraint, not to speak of the many
eminent economists who supported this position, Secretary Fowler
now says that a tax increase is needed this year. What was wrong last
year, when the economy was booming, has suddenly become right this
year, when weakness is pronounced. The only explanation the Secre­
tary can give for this apparent contradiction is that interest rates
this year are going down, while last year they were going up. He
misses the point entirely, which is that interest rates are going down
this year because the economy and the demand for credit is softening,
whereas last year, interest rates were pushed up by boom conditions
which could have been abated by a better fiscal policy.
Last year the administration relied too heavily on monetary policy
and not enough on fiscal policy. This year it seems determined to rely
too heavily on fiscal policy and not enough on monetary policy. Last
year the result was serious inflation, a recession in housing and other
“selective weaknesses” in the economy. This year the result could be
a sharp slowdown in growth and a deepening balance of payments
deficit.
So, as I love our country more than I care about any personal slight
to me, Mr. Chairman, I urge the Treasury and the Secretary of the
Treasury to divest himself of these petty, intemperate remarks and to
et down to cases and to bring himself in line with the Council of
Iconomic Advisers as to what the policy which he recommends really
means as far as we are concerned.
Thank you, Mr. Chairman.
Chairman Proxmire. Our witness this afternoon is the Secretary of
Labor, Willard Wirtz, and accompanying him is the Commissioner of
the Bureau of Labor Statistics, Arthur Ross.
We are delighted to have both these extremely able representatives
from the executive branch.
Mr. Wirtz, you have a concise statement; go right ahead.

f

STATEMENT OP HON. W . WILLARD WIRTZ, SECRETARY OF LABOR,
ACCOMPANIED BY ARTHUR M. ROSS, COMMISSIONER, BUREAU
OF LABOR STATISTICS

Secretary Wirtz. Thank you, Mr. Chairman and members of the
committee. It is a short statement.




THE

1967 ECONOMIC REPORT OF THE PRESIDENT

239

Chairman Proxmire. Senator Javits and I are going to have to
leave for a vote in the Senate but we will be back soon and Congress­
man Reuss will chair the meeting while we are gone.
(At this point Congressman Reuss assumed the chair.)
Secretary W irtz. Mr. Chairman, and members of the joint com­
mittee, the brevity of this statement marks my respect for the broad
understanding the members of this committee have of the vitally
important subject of these hearings, and my concurrence in the views
other members of the administration have already presented to you,
and I mean all of the views of the other members of the administration.
I f there is a single point of particular emphasis in my own meas­
urement of the condition of the economy it is this: It seems to me
right to assert full employment (in the fullest sense of that term)
at wages producing a decent standard of living for everyone as a
first-priority national purpose.
I expect there is probably no disagreement about this—except as
there may be differences of judgment about the operational relation­
ship of the means of serving this purpose to the means of serving
other purposes. I recognize these differences are important.
This testimony may also reflect another possible bias which should
be made clear. Respecting a strong, continuing constantly expand­
ing economy as the most important single element in the achievement
and maintenance of full employment at adequate wages, it seems to
me no less necessary to center a full employment policy on that type
of unemployment which will not yield to overall economic growth.
We are today at that point where the most serious remaining un­
employment is more personal than economic, where there are skill
shortages, and where the primary need is to develop people’s abilities
so as to permit their using the opportunities that are available.
If the economy were to falter, this situation would worsen immedi­
ately. Continued economic growth is the essential condition of full
employment at fair wages. But it is not, alone, enough.
This is the context for the following somewhat more detailed
observations.
E

mployment

^Employment increased in 1966 by a solid and phenomenal 1.9 mil­
lion. This is p eop le in job s .
The civilian labor force increased by 1.8 million which is half
a million more than would have resulted from population growth
(and the continuation of normal trends) alone. (See chart 1, p. 253.)
Most of the unexpected increased affected adult women and teen­
agers.
The “unexpected” additional workers were primarily adult women
and teenagers.
The number of adult women (20 years and over) was expected to
increase by about 470,000; it increased in fact by 740,000. Almost
all of this extra gain of 270,000 was among women 20 to 34 years
of age. This development is apparently associated with the recent
decline in birth rates, especially in the number of children born to
mothers in the 20- to 24-year age group.
Among teenage girls, the labor force increase was about 230,000
more than the trend expectation of 190,000. The employment op­




'2 4 0

THE

1967

ECONOMIC REPORT OF THE PRESIDENT

portunities provided by the expanding economy as well as the special
youth program were the primary factors in pushing up the labor
force participation rates for teenage girls as well as for the 16- and
17-year-old boys.
Despite this unprecedented expansion in the work force, unemploy­
ment was reduced by 400.000. The jobless rate for married men
dropped to 1.9 percent, its lowest point since this series began in 1955.
(See chart 2, p. 254.) On the average, only 1.1 million adult males
were jobless and looking for work, compared to nearly twice that
number in 1963.
Adult female employment rose by 900,000 to a record 23.5 million,
while teenage employment recorded it largest annual gain on record,
rising by 750,000 to 6.9 million. Three times as many teenagers found
jobs in 1966 as in 1964.
There were three-fourths of a million more teenagers in the labor
force in 1966 than there had been the year before. Due to the high
level of economic activity and the concerted efforts on the part of
governments, private industry, and community organizations, the
number of unemployed in this group did not increase. It remains,
however, too high.
Teenage unemployment has been one of the most troublesome man­
power problems of the 1960’s. Between 1963 and 1966, teenage un­
employment remained at the 1 million level and as a result steadily
made up a larger proportion of total unemployment. At the same
time, the number of teenagers in the labor force increased by 1.5
million—more than during the entire 10-year period from 1953 to
1963. The generation of jobs kept this large increase in the teen­
age labor force from creating an increased level of unemployment,
but the teenage jobless rate is still an unacceptable 12 percent. (See
chart, 3, p. 254.)
In 1966, the unemployment rate for Negroes dropped to a postKorean low of 7.5 percent. At the same time, however, there was
a slight slowdown in the rate of improvement for Negroes compared
with that for whites.
. If you look at the figures for teenage Negro boys and girls the
improvement for their chance slowed up in comparison with the im­
provement of the employment situation as far as the white group
is concerned.
The jobless rate for Negroes, which had declined steadily between
1963 and early 1966, moved upward toward midyear and failed to
return to the 7.1-percent rate (seasonally adjusted) established in the
first quarter. In 1963, the jobless rate for Negro boys (teenagers)
was 1.8 times as large as that for white boys; in 1966 this ratio in­
creased to 2.1. For Negro girls, the differential has moved from 2.4
to 1 in 1962, to 2.8 to 1 in 1966.
M

anpower

P

rograms

and

P

olicies

The Economic Report for 1967 contains this statement:
“Although precise targets cannot be set for the ultimate minimum
levels of unemployment or the speed of the downward movement, it
is clearly unnecessary and undesirable to accept 4-percent unemploy­
ment as a permanent objective of U.S. economic policy.”




THE

196 7 ECONOMIC REPORT OF THE PRESIDENT

241

I agree with this suggestion—the first is that we must keep con­
stantly in mind that the way we measure unemployment in this coun­
try limits it only to those who are looking for work and unable to
find it. It does not include those who have given up or who are nonparticipants in the work force for one reason or another and does not
include an undercurrent factor of which we are becoming increasingly
aware and concerned.
Agreeing completely with this statement, I note three points:
First, as regards the concept of unemployment itself, a person is
counted “unemployed” if he nas no job and is actively seeking one.
This omits significant factors of “nonparticipation in the work force,”
and underemployment.
Second, there is an enormous variation in the elements which are
taken together to develop an “average” unemployment rate.
The rate of unemployment in the United States for 1966 was 3.9
percent.
It was only 1.3 precent for professional personnel, but 31.1 percent
for Negro teenage girls.
It was only 1.9 percent for married men as a whole, but 21.2 per­
cent for Negro teenage boys.
It was only 2.8 percent for skilled workers, but 7.3 percent for the
unskilled.
The first two points preface the third: We are developing man­
power policies and programs aimed directly at hard core unemploy­
ment.
This means not waiting for the unemployed to come to us, but
going out to reach them with programs which will help motivate
them, enhance their employability as well as their basic education,
give them occupational training, develop and place them in jobs, and
follow them up with support services so that whatever initial success
is achieved with them “ takes.”
Employers are being much more active participants in the develop­
ment of recruitment, referral, training, and work-training programs.
Two-thirds of the training slots available under the Manpower
Development and Training Act are being allocated to the hard-core
unemployed. The trainee population now includes much larger pro­
portions than before of vouth, minority group members, and long­
term unemployed (table l).
The remaining third of the training opportunities under MDTA
are being used to help meet particular and serious skill shortages.
During tiiis fiscal year, about 82,000 trainees out of the projected total
of 235,000 are being deployed explicitly in that direction. Special
training programs are being set up for hard-to-fill occupations requir­
ing only relatively brief periods of learning, such as nurses aids and
hospital orderlies, and for some of the entry jobs in the repair and
mechanic fields. Refresher training is also being provided for profes­
sional personnel for whom there are large unfilled demands. For
example, refresher training for 10,000 professional nurses was author­
ized for this fiscal year, 10 times the corresponding number for last
year. In 1966, more than one out of every four persons enrolled in
MDTA courses (27 percent) received training for occupations in
which personnel shortages had developed.




242

THE

196 7 ECONOMIC REPORT OF THE PRESIDENT

A 1966 amendment to the MDTA which permits adequate allow­
ances for employed persons taking part-time training should help
meet these manpower demands, by enabling persons to upgrade their
skills while employed.
There has been a large increase in on-the-job training, so that it now
takes equal rank with institutional training. Such on-the-job train­
ing has the advantages of lower average cost per trainee, greater
specificity in learning content, the earnings it offers during the learn­
ing process, and a 90 percent job placement record.
Most of the OJT programs have been generated by industry and
labor organizations which have served both as prime contractors and
as providers of opportunities for this kind of training on their own
sites.
W

ages

Hourly labor costs, including expenditures on supplementary bene­
fits, rose more rapidly in 1966 than during recent years. Yet produc­
tion and nonsupervisory workers’ real take-home pay was lower at
the end of 1966 than at the end of 1965 in most majority industry
divisions.
The increase in hourly earnings and hourly labor costs in 1966 re­
sulted from wage and fringe increases, a more rapid growth of unem­
ployment in some of the higher wage manufacturing industries than
m lower wage activities, ana the increase in social security taxes (af­
fecting employers’ hourly labor costs).
The fall in real spendable weekly earnings was due to a decline in
weekly hours worked, the rise in the consumer prices, and the em­
ployees’ part of the increase in social security taxes effective in
January 1966.
Analysis of major collective bargaining agreements concluded dur­
ing 1966 indicates—for other than construction industries—we have
given you the fairest figures—
(1) For key contracts, a median package (wages plus benefits)
increase of 4.1 percent a year, assuming equal spacing o f changes over
the life of the contract. This compares with 3.3 percent last year.1
(table 2).
(2) Considering wage rates alone, an increase of 3.7 percent a year
as measured over the life of the contract, compared with 3.3 percent
in 1965 and 3 percent in 1964.
(3) A median first-year wage adjustment of 4.4 percent, compared
with 3.8 percent in 1965 and 3.2 percent in 1964. Negotiated adjust­
ments were the largest since 1957. Despite the fact that the rate of
unemployment in 1955,1956, and 1957 was slightly higher than in 1966,
first-year rate adjustments were larger in those years than in 1966.
(See chart 4, p. 255.)
During 1966, settlements in the construction industry continued to
be larger than those in other industries (table 3).
An unusually high proportion of workers in nonunion establish­
ments received increases in 1966—about 80 percent as compared with a
previous record (before 1965) of between 50 and 60 percent. About
i Limited to contracts of 5,000 or more In 1968 and 10,000 or more in 1065; other
information refers to contracts affecting 1,000 or more.




THE

196 7 ECONOMIC REPORT OF THE PRESIDENT

243

half of the workers in nonunion factories received wage rate increases
in both 1965 and 1966, where the previous experience was that they
usually received rate increases about once every 2 years.
Labor cost developments in 1967 will be affected by the usual collec­
tive bargaining forces; the increase in the minimum wage under the
Fair Labor Standards Act and the extension of this act to additional
groups of workers; an expected smaller rise in the CPI during 1967
than during 1966; the fact that deferred increases under long-term
contracts will be somewhat smaller on the average this year than they
were in 1966; and the social security tax increase which became effec­
tive at the beginning of the year (but which represents a smaller
change than did the 1966 increase).
The most clearly identifiable factor is the extension of the Fair
Labor Standards Act and the increase there results in the increase in
the hourly labor cost of the economy as a whole.
It is estimated that the direct effect of the increase in minimum wage
rates under the Fair Labor Standards Act and its extension to addi­
tional groups of workers will be to increase the hourly labor costs for
the economy as a whole by approximately three-tenths of 1 percent.
The effect in certain industries will, of course, be larger.
P roductivity

In both 1965 and 1966, productivity in the private economy rose at
a rate of about 2.8 percent, compared with the long-term (postwar)
trend of 3.2 percent, and with a 3.5-percent average annual rate dur­
ing the most recent 5-year period (tables 4 and 5, p. 249).
Usually, some slowing down in the large rate of increase in output—
such as is anticipated in 1967—is accompanied by a decline in the rate
of productivity growth. Other factors m the economy may tend, how­
ever, to run counter to this pattern and stimulate rather than retard
productivity growth. Foremost among these factors is the high level
of investment in new plant and equipment which has been growing at
an unprecedented rate since 1963. In each of the last 3 years, nonresidential fixed investment rose by at least 10 percent. Just as in­
vestment in capital which incorporates technological innovations
serves to stimulate productivity growth, investment in human res­
ources, through the manpower development programs and other train­
ing programs, will also serve to stimulate productivity growth.
Unit labor costs in the private economy rose by 3.7 percent in 1966.
This was the largest increase in over a decade and was twice the aver­
age annual rise for the entire postwar period (tables 6 and 7). This
increase represented a sharp break in the pattern, which had developed
since the beginning of the current expansion, of unit labor cost in­
creases averaging about one-half of 1 percent per year from 1960 to
1965 and with only small year-to-year fluctuations.




244

THE

1967 ECONOMIC REPORT OF THE PRESIDENT
P

rices

The December, 1965 to December, 1966 increase in the Wholesale
Price Index was 1.7 percent. The increase in the Consumer Price
Index was 3*3 percent. (Tables 8 and 9 and chart 5, pp. 251, 252,
and 256.)
(At this point Senator Proxmire assumed the chair.)
#The details set out in table 8, 9 and chart 5, and I call your atten­
tion to it because you get quite different figures depending whether
you take a December through December approach or whether you take
an average for one year or the other. Both are set out in the accom­
panying tables and charts.
Over one-third of the average family spending is on services, and
they caused half of the total 1966 increase in the Consumer Price In­
dex. (Table 10 and chart 6, pp. 253, 257.) Pressures in this area will
continue, although with perhaps some moderating influences, as, for
example, in connection with mortgage interest costs. But since service
industries are still low paid, there will be likely wage movements re­
quired to obtain and keep competent employees; and since wages in
these industries constitute a large element of operating costs, these in­
creases are apt to be passed on. The increasing demand for medical
care services, stimulated by a growing population, higher income
levels, group insurance plane, and the medicare program, will also
mean continuing upward pressures on service costs in this area.
So far as other sectors of the economy are concerned, agricultural
supply and demand during 1967 are expected to be more nearly in
balance; pressure on industrial capacity probably will lessen; few, if
any, raw material bottlenecks are expected; and the more moderate
pace of economic advance that is anticipated should further diminish
inflationary pressures.
T

he

G

uideposts

Committee members have inquired of earlier witnesses about the
guideposts. I summarize my own position on this very briefly, and
only as a basis for whatever questions the committee may have.
First. The guidepost principle, that unless prices and wages stay in
line with productivity for the economy as a whole there will be in­
flationary pressures, is clearly sound.
Second. This is one principle that should guide price and wage
determinations in particular cases. There are also others.
Third. This productivity principle had been too little recognized
and understood prior to the Council of Economic Advisers’ statement
of it in its 1962 report, and in subsequent reports. It is not yet fully
understood, and it should continue to be developed and emphasized.
Fourth. The only real question is what governmental procedures
or methods should be followed in trying to influence the economy as
a whole, or to influence particular price and wage determinations, so
that this principle will be followed as far as is practicable. My judg­
ment on this is:
That legislative enactment of wage and price controls would
be a mistake;




THE

1967 ECONOMIC REPORT OF THE PRESIDENT

245

That the adoption, by statute, of new procedures for reviewing
wage and price developments 111 the economy warrants considera­
tion, but is not required by present circumstance;
That there should be continuing efforts by the administration
and by everybody informed and concerned to press the common
interest reflected in the guidepost principle; and
That these efforts will be more successful if it is not attempted
to develop a specific guidepost figure for prices and wages. There
aren't such figures which take proper account of the applicability
of the productivity principle to present circumstances, and its
necessary relationship to other operative facts and principles.
I commend to the committee’s consideration the unanimous report
of the tri-partite President’s Advisory Committee on Labor-Management Policy, dated August 18, 1966. It seems to me to state the key
and relevant facts and considerations here exceedingly well. I attach
copies for this committee’s convenience.
(The document referred to follows:)
P r e s id e n t ’s A

d v is o r y

C o m m it t e e

on

L a b o r -M a n a g e m e n t

Pouot

REPORT SETTING FORTH THE COMMITTEE'S VIEW S ON TH E GUIDEPOSTS FOR NONINPLATIONART WAGE AND PRIOE BEHAVIOR, AUGUST 1 8 , 1 9 6 6

7 Introduction
.
A. The purpose of this memorandum is to provide the President with the C o m ­
mittee’ views on what are referred to in the 1962 Annual Report of the Council
s
of Economic Advisers and subsequent reports of the Council as “guideposts for
non»iinflationary wage and price behavior.”
B. In our judgment the 1962 report of the Council relative to the guideposts is
of particular significance. A copy of the relevant portions of the 1962 report is
attached. W e desire to emphasize the following portions of the report:
1 “Productivity is a guide rather than a rule for appraising wage and price
.
behavior for several reasons. First, there are a number of problems involved
in measuing productivity changes, and a number of alternative measures are
available. Second, there is nothing immutable in fact or in justice about the
distribution of the total product between labor and non-labor incomes. Third,
the pattern of wages and prices among industries is and should be responsive
to forces other than changes in productivity.”
2 “These are not arbitrary guides. These describe— briefly and no doubt
.
incompletely— how price and wage rates would behave in a smoothly functioning
competitive economy operating near full employment. Nor do they constitute
a mechanical formula for determining whether a particular price or wage deci­
sion is inflationary. They will serve their purposes if they suggest to the inter­
ested public a useful way of approaching the appraisal of such a decision.”
3 “These are advanced as general guideposts. To reconcile them with objec­
.
tives of equity and efficiency, specific modifications must be made to adapt them
to the circumstances of particular industries. If all of these modifications are
made, each in the specific circumstances to which i applies, they are consistent
t
with stability of the general price level. Public judgments about the effects on
the price level of particular wage or price decisions should take into account the
modifications as well as the general guides.”
C. Consistent with this approach we have agreed on the recommendations that
follow.

75-314— 67— pt. 2 ----2




246

THE

196 7 ECONOMIC REPORT OF THE PRESIDENT

II. Recommendations
A. That in the near future and at least once a quarter thereafter an objective
evaluation should be made of the economy by the Council of Economic Advisers
to determine the extent to which the economy as a whole is achieving the goals
reflected in the guideposts.
B. That if the evaluation indicates that the overall economy is falling short
of the goals reflected in the guideposts, the following steps be taken:
1. The Council of Economic Advisers should identify the nature and apparent
chief causes of the major problems or shortcomings.
2. To the extent that the causes may relate to matters within the purview
of the President's Advisory Committee on Labor-Management Policy, representa­
tives of that Committee and the Council of Economic Advisers should discuss
those problems to determine whether any appropriate corrective action can be
recommended.
3 The President’ Advisory Committee on Labor-Management Policy should
.
s
submit to the President a report identifying the problems or shortcomings and
including recommendations for corrective action.
III. Conclusion
A. W e believe that i is essential to the continued economic growth and health
t
of the country that the present inflationary trends be stopped, and that m a x i m u m
efforts should therefore be made to restrain, through voluntary procedures, unjus­
tified wage or price behavior.
B. W e believe that the goals reflected in the guideposts as set forth in the 1962
report of the Council of Economic Advisers providing for the alignment of wages
and prices with productivity in the economy as a whole need and deserve support.
C. W e believe that the procedures set forth in the section headed “Recommen­
dations” will assist in providing such support in that they will help to develop
a more general understanding of why voluntary restraints serve both the national
and private interests.
D. W e also believe that it is impractical if not impossible to translate the goals
reflected in the guideposts into formulae for application to every particular price
or wage decision.
E. W e believe that in a free society any policy to achieve price stability will be
acceptable and effective only if i bears equitably on all forms of income.
t




THE 1967 ECONOMIC REPORT OF THE PRESIDENT

247

T a bl e 1.— Characteristics of persons enrolled in MDTA courses, calendar

year 1966
Institutional program,
estimated total enrollment

On-the-job program,
estimated total enrollment

Characteristics
Total
Total ______________________________
________ _
______- -

Male

165,000
100.0
Percent

i 93,390
56.6

Female
71,610
43.4

Total
80,000
100.0

Male

Female

1 61,360
76.7

18,640
23.3

Percent distribution
Total..........................................................

100.0

100.0

100.0

100.0

100.0

100.0

Family status:
T pftr) f>f family nr hmisfthnlri
T
Other__ ________ ______________________

55.7
44.3

62.7
37.3

46.6
53.4

54.7
45.3

64.6
35.4

22.2
77.8

6.4
9.8
36.0
41.4
6.4

8.7
12.6
38.2
35.1
5.3

3.4
6.2
33.0
49.5
7.9

3.6
6.9
26.3
53.0
10.8

3.4
6.6
23.8
55.4
10.9

4.2
7.8
34.6
45.2
8.3

35.5
38.7
26.7

27.5
39.5
33.0

46.0
37.7
16.3

33.6
38.6
27.8

29.9
40.4
29.6

46.0
32.4
21.6

47.2
14.9
12.5
9.4
6.5
9.5

40.9
13.3
13.3
11.0
8.2
13.2

55.3
17.1
11.5
7.3
4.2
4.6

45.3
17.0
13.8
11.2
6.3
6.4

37.7
18.0
15.7
13.5
7.5
7.0

70.0
13.8
17.4
3.8
2.7
2.3

69.6
30.4

78.8
21.2

57.6
42.4

69.3
30.7

81.3
18.7

30.0
70.0

70.5
29.5

80.0
20.0

56.0
43.4

13.9
86.1

15.9
84.1

8.0
92.0

50.3
31.3
18.4

52.1
32.6
15.3

46.5
28.6
24.9

65.9
28.3
5.8

64.9
29.9
5.3

71.7
19.6
8.8

14.5
85.5

19.3
80.7

8.2
91.8

7.3
92.7

8.5
91.5

3.5
96.5

11.8
88.2

9.0
91.0

15.5
84.5

1.3
98.7

1.0
99.0

2.4
97.6

87.0
1.6
2.3
9.1

87.7
2.5
.7
9.1

86.1
.3
4.6
9.1

61.7
.5
1.9
35.9

59.7
.6
.8
38.9

67.7
.1
5.0
27.2

32.2
23.5
13.4
10.9
20.0

36.6
26.6
13.9
10.1
12.7

25.5
18.8
12.7
12.1
30.9

46.0
22.4
10.6
7.4
13.7

51.9
24.8
10.5
5.9
6.8

30.7
16.3
10.7
11.1
31.2

17.5
8.1
4.4
70.0

29.8
13.9
7.6
48.8

11.1
.2
.1
98.5

25.6
12.9
3.9
57.6

32.9
16.6
4.9
45.5

.6
.4
.1
98.9

8.7
91.3

12.1
87.9

4.3
95.7

3.5
96.5

4.0
96.0

1.9
98.1

61.8
35.9
2.3

66.4
30.9
2.7

55.7
42.4
1.8

84.6
13.8
1.6

86.0
12.2
1.8

79.9
18.9
1.1

Education, grade:
Less than 8th.
__________________
8th_________ .
...................................
9th to 11th............ - ....................................
1 2 th ._-______ ______________ __________
More than 12th _________ ___________
Years of gainful employment:
Less than 3. _ ______________ - - ___
3 t o 9 ..............................................................
10 or m ore._____
____________- _____
Number of dependents:
0__
„ ......................................... .......
1........... ............................. ...........................
2__
...............................................
3.......................................................................
4........................... ..........................................
5 and o v e r _
_ _ ___________ _____ ___
_
Wage earner status:
P rim ary__________- ______________ - - Other._____________ ____________ .....__
Eligibility for allowance:
______________________________
Yes
N o ..............................................................
Type of training allowance for which
eligible:
Regular_______________________________
Augmented_________________________ ...
Youth
___________________________
Unemployment insurance claimant status:
Yes____________________________________
N o................... ..............................................
Public assistance status:
Y e s ................................................................
No ........................ .......................................
Prior employment status:
Unemployed______
. . ____________
Family farmworker___ _______________
Reentrant to labor force*.______ _______
Underemployed.. ______________
Duration of unemployment:
Less than 5 w eeks._______________
5 to 14_________________________________
15 to 26................................ _........................
27 to 52.........................................
..........
Orer 52 _____________________________
Prior military service:
Veteran.
______ _ _____________
Peacetime service. . .
__________
Rejectee_______________________________
Other nonveteran^*___________________
Handicapped:
Yes
________ ______________ ______
N o ................. .................................................
Race:
W hite.............................................................
N e g r o ....____ - _________ _____*____ - __
Other nonwhite__________ - ___________

i Percent based on reports on approximately 68,000 trainees in Institutional programs and 17,000 in on-thejob training programs, received through N o r. 30,1966.

Sotuce: U.S. Department of Labor*




248

th e

19 6 7 ECONOMIC REPORT OF THE PRESIDENT

T a b l e 2. —Estimated

annual rates of increase in hourly cost of wage and benefit
changes negotiated in key collective bargaining settlementst 19661
Percent of workers affected.
Annual rate of increase
Equal
timing *

__ ____ __ _______ . _______ __ „____ „_„ ______
_
Under 3 percent
3 and under 3 ^ percent. _________ ________ ______ ______________________
3H aad under 4 percent. __ __ ___ ___ - ___ ______________ - _ - ____ _
_
4 and under 4H percent. *__ __ ___________
____ _____________ - ____
43^ and under 5 percent__________ _________ ____ ____ _______ _____________
5 and under 5 ^ percent. ________ _____ ___ ___ ___ *_______ _________ _
__ ___ - ____- _________________ ___ _ ___________
_
5H or more .
Number of workers (thousands)__ ____ ____ ____ ___ ___ ___ ________ „ __
_____________ _________
Median increase (percent) ________ - ________________

Actual
timing1

5
16
20
38
4 (21)
LO
O
11

5
6
12
18
17
20
22
4.5

1 Excluding construction, finance, and insurance. Estimates were prepared only for settlements affecting
5,000 workers or more.
3 Based on estimated increase in hourly costs at end of contract period and assumes equal spacing of wage
and benefit changes over life of contract.
* Takes account of actual effective dates of wage and benefit changes during contract period.
* Grouped to avoid disclosing estimates for individual settlements.

N ote —Because of rounding, sums of individual items may not equal totals.
Source: U.S. Department of Labor, Bureau of Labor Statistics.
T a b l e 3 . —Estimated

annual rates of increase m hourly cost of wage and benefit
changes negotiated m key collective bargaining settlements in construction*
1966
[Percent o f workers affected— Equal timing 2]

Annual rate of increase:
Under
percent____________________________________________
1
4 ^ and under 5 percent--------------------------------------- 12
5 and under 5 % percent--------------------------------------- 14
5
and under 6 percent______ ________________________________
6
6 and under 6 % percent-------------------------------------13
and under 7 percent_______________________________________
22
7 and under iy2 percent__ _____________________________________
8
7Vj and under 8 percent_______________________________________
3
8 and under SV2 percent--------------------------------------6
& 2 and under 9 percent--------------------------------------V
8
9 and under 9 % percent____ __________________________:
________
1
9x2 and under 10 percent_______________________________________
/
2
10 or more________________________________________ __________
4
Number of workers (thousands)________________________________ 310
Median increase (percent)_____________________________________ 6.6
1 Based on settlements affecting 1,000 workers or more.
Based on estimated Increase in hourly costs at end of contract period and assumes
equal spacing o f wage and benefit changes over life o f contract.
N o t e .— Because of rounding, sums o f individual items may not equal totals.
S o u r c e : U.S. Department o f Labor, Bureau o f Labor Statistics.




THE
T able

1967

249

ECONOMIC REPORT OF THE PRESIDENT

4.— Year-to-year percent change in output, output per man-hour, manhours, 1947-661
Farm

Total private economy
Output
Output per manhour
1047-48.......................
1948-49—....................
1949-50______ ______
1950-51.......................
1951^52____ ________
1952-53.......................
1953-54.......................
1954-55____________
1955-56____________
1966-57-............ .......
1957-58____________
1958-59____________
1959-60____________
1960-61____ ________
1961-62.......................
1962-63.......................
1963-64_____________
1964-65.......................
1965-66.............. .

4.8
-.3
10.2
6.3
2.4
5.1
- 1 .3
8.5
1.0
1.4
- 1 .3
7.0
2.4
1.9
6.8
4.2
5.5
6.2
5.3

M anhours

4.3
3.2
8.2
3.0
1.8
4.3
2.3
4.4
.1
3.0
3.0
3.6
1.5
3.3
4.7
3.5
3.8
2.8
2.8

0.4
- 3 .3
1.9
3.2
.6
.8
- 3 .6
3.9
1.7
- 1 .4
- 4 .2
3.2
.9
- 1 .5
2.0
.6
1.7
3.2
2.5

Output
Output per manhour
11.8
- 3 .2
5.4
- 5 .2
3.3
5.3
2.0
2.5
-.5
- 2 .4
2.5
1.4
3.8
1.4
-.5
3.2
- 3 .5
8.2
-5 .0

16.5
-2 .6
14.0
.5
8.7
13.2
5.2
.8
4.3
6.0
10.4
1.7
5.6
7.0
2.3
8.9
.5
11.3
4.7

Non farm
Man*
hours

- 3 .9
7
- 7 .4
- 5 .6
- 5 .1
-7 .0
- 3 .0
1.6
- 4 .6
- 7 .9
- 7 .1
- .4
- 1 .7
-6 .0
- 2 .7
- 5 .4
- 3 .8
- 2 .7
- 9 .3

Output
Output per manhour
4.4
-. 1
10.6
7.0
2.5
5.1
- 1 .5
8.8
2.0
1.6
-1 .5
7.3
2.4
1.9
7.1
4.3
5.9
6.1
5.8

3.1
3.9
6.3
2. 1
.8
3.0
2.1
4.5
-.5
2.1
2.6
3.4
1.3
2.8
4.6
3.0
3.7
2.1
2.4

M anhours

1.3
- 3 .9
3.9
4.9
1.6
2.1
- 3 .7
4.2
2,6
-.6
- 3 .8
3.7
1.2
- 1 .0
2.5
1.2
2.2
3.8
3.4

1 Output refers to the gross national product in constant dollars; man-hours based primarily on establish­
ment reports of the Bureau of Labor statistics.
Source: U .S . Department of Labor, Bureau of Labor Statistics.

T a b l e 5. — Average

annual percent change1 in output per man-hour and related
data, 1947-66
Item

Total private economy:
..................... ..... ......................
Output per man-hour 2__
Output K ............................................. .........................................................................
Employment.
.................... .................................................. ..................................
Man-hours............................................................ ... ................................. ................
Farm:
Output per man-hour,_______ _____________ ______
____ _______________
Output........
.............. ........................ .....................
_
..........
Employment
.............. .........................................
Man-hours________________ __________ _________ ________ _______ __________ _.
Nonfarm:
Output per m a n - h o u r .____________ _____________ ___________ _________
__________ ________ __________________________
Output___ ______________ _
Employment_____________________ ____________ __
__________________
Man-hours.................. ............................ ............................. ........... ............................

1947-66

1961-66

3.2
3.7
.9
.5

3.5
5.5
2.0
1.9

5.9
1.4
—3.6
- 4 .2

5.7
.8
—4.8
- 4 .6

2.6
3.8
1.4
1.1

3.1
5.7
2.5
2.5

1 Computed from least squares trend of the logarithms of the Indexes.
* Output refers to gross national product in 1958 dollars; man-hours based primarily on establishment
reports.
Source: U .S. Department of Labor, Bureau of Labor Statistics.




250

th e

1967 ECONOMIC REPORT OF THE PRESIDENT

T a b le 6.— Indexes of output per man-hour, compensation per man-hour and unit

labor costs in the private economy,1947-66
[1957-59=100]
Output per
man-hour

Year

Compensa­
tion per
man-hour

69.1
72.1
74.4
80.5
82.9
84.4
88.0
90.0
94.0
911
96.9
99.8
103.4
105.0
108.5
113.6
117.6
122.1
125.5
129.0

519
59.9
60,7
619
71.2
75.4
80.2
82.5
816
90.0
95.8
99.8
1014
106.5
112.4
117.3
122.0
128.2
132.9
141.6

1947....... ... ................... ................
1948.._....... ..... ... ..........................
1949 ......... ............. ......................
1950.............. ......... ............... .......
1951 .... ........ ......... ......................
1952......... ....................................
1953......... .................. ..................
1954...................... ........................
1955............................................ .
1956........ ...................... ........... ...
1957........................... ...................
1058......................... ;...................
1959.... .........................................
1960........... ..................................
1061...... ............. ..........................
1062.. ................ ..... .....................
1963........................ .................... .
1064...............................................
1965.... ......... ................................
1966................................ .............

Unit labor
costs

79.4
83.1
81.6
80.6
85.9
89.4
91.1
91.7
90.0
95.7
98.9
100.0
101.0
103.3
103.6
103.3
103.7
1019
105.9
109.8

Source: U.S. Department of Labor, Bureau of Labor Statistics.
7.— Average annual rates of change in output per man-hourt hourly
compensation and unit labor costs in the private economy,for selected years1

T able

Item
Unit labor costs___ _____ ________________________________________
Output per man-hour____________________________________________
Compensation per man-hour____________ ____ ______ ____ -_____
Real compensation per man-hour_______________ — ____-_____ *__— __

1947-66
1.7
3.2
4.9
3.1

iAll rates computed from the least squares trend of the logarithms of the index numbers.
Source: U.S. Department of Labor, Bureau of Labor Statistics.




1961-66
1.1
3.5
4.6
3.0

T a b le 8 .—

,

Key wholesale price trends 1964-66
Quarterly percent changes, 1966

Wholesale price Indexes

March to
June

June to
September

September
to
December1

December to December

-0.8
-4.3
-6.3
-8.2
-3.0
-10.3
-1.4
-14.8
-2.8
-.8
-G.3
-1.5
.3
-1.1
-18.0
.5
0
.2
-4.6
1.5
1.2
2.2
.1
.a
-2.5
1.0
1.3
2.4
1.7
.6

1.7
.2
-1. 2
9.9
12.7
-12.5
14.5
— 7.8
1.1
6.1
-6.5
10.0
2.2
-.9
-17.4
2.8
1.9
1.3
1.1
3.8
4.5
5.0
1.7
1.2
2.8
5.7
1.7
.3
4.7
.5

3.4
9.6
11.1
-6.8
U
34.2
2.9
3 .6
8
8.5
2.8
29.3
2.2
1.4
2.0
46.7
3.7
1.6
1.3
4.3
1.4
2.2
.3
1.6
1.2
5.3
4.4
-.3
-.8
.9
-2.0

3.3
6.7
7.3
.7
8.6
9.5
13.6
15.4
6.1
5.9
9.0
9.3
2.2
3.6
26.6
5.0
2.1
1.4
6.5
2.5
3.5
2.3
1.9
1.3
5.8
6.8
.6
-.9
2.7
-.1

2.0
4.2
4.3
-1.4
-4.8
18.2
J5
.
3.0
4.1
1.1
13.3
.6
1.3
3.9
27.1
8.8
1.3
.5
1.2
1.2
1.7
0
1.2
.9
2.9
2.0
-.3
-.7
.9
-2.3

P R E S ID E N T

1.0
3.5
4.3
10.7
10.2
-.8
11.4
40.8
2.9
4.3
3.0
6.0
.3
-3.5
-10.0
-2.7
.2
.6
-2.2
.5
.9
.4
.6
.3
.6
.2
-.1
-1.0
.8
-.8

THE

0.3
-1.6
-2.4
-2.0
4.6
-6.0
-.1
-23.3
-.8
1.6
-3.7
1.3
.9
1
8.9
#.0
1.0
.
1
4.6
1.0
1.3
.6
.8
.1
6.8
3.0
.4
-.7
1.0
.3

O
F

1.2
2.7
3.7
10.3
.8
3.6
4.4
.3
1.9
.9
.6
3.3
.8
3.9
11.7
3.1
.7
.5
3.7
.8
1.0
1.7
.4
.4
— 1.8
1.4
.1
-.3
.5
.3

1965 to 1966 i 1964 to 1965

REPORT

AU commodities... ...
. ............. . .
.
Farm products and processed foods_____ ________________
Farm products___________ _______________________
Fresh fruits and vegetables_____ ________________
Grains.................. .... . ..... .....
.
Livestock________ _____________________ ______
Fluid milk... ................... ............
Eggs------------ ------------------------Processed foods...................... ...........
Cereals and bakery products_____________________
Meats.... ....... ......... .......... .......
Dairy products and ice crcam___ ____ ____________
Industrial commodities...... ...... ................. _
.
C rude materials_________________________ ________
Hides and skins______________ _____________ ___
Nonferrous metals_______ __________ _____ _____
Intermediate materials....................... .....
Finished steel products__________ _______________
Lumber_______ ______________ _____ __________
_
Finished: Producer goods______ _ ________ _____
Nonelectrical machinery_____ ______ ______ ______
Electrical machinery________ ___ ____________ .
Finished: Consumer nondurables... ......... .......
Apparel......... ................ . ........
Gasoline__________________ ____ ____________
Footwear____________________________________
Finished: Consumer durables___ _________ ____ _____
Passenger cars............... .... ........ ...
Household furniture_________ ____________ ____
Household appliances._________ __________ _____

1964 to 1965

ECONOMIC

1965 to 1966

Annual averages

1967

December
1905 to
March

Year-to-year percent changes

i December I960 data preliminary.
Source: BLS, Office of Prices and Living Conditions, U.S. Department of Labor, Jan. 27,1967.




b
O
O
I

T a b l e 9 .—

,

K ey consumer price trends 1964-66
Quarterly percent changes: 1966
March to
June

June to
September

September
to
December

December to December

Annual averages

0.9
3.1
1.1
3.4
1.2
7.1
5.6
8.9
2.5
4.9
6.7
.6
.8
1.4

i Seasonally adjusted, quarterly data only.
Source: B LS, Office o f Prices and Living Conditions, U.S. Department o f Labor Jan. 27,1967.




3.3
3.8
6.3
3.4
5.9
.
1
2.8
-6.4
9.8
6.0
2.1
2.8
3.1
6.3
3.4
.7
4.5
-3.4
-. 1
-.7
4.9
1.6
5.5
12.4
4.3
9.1
4.4
8.1
7.8
16.5

2.0
3.5
3.4
3.6
1.1
13.5
5.8
28.7
.5
-6.0
1.5
5
2.0
.9
3.5
4.0
-1.0
1.0
-4.4
-2.9
-5.1
2.7
1.0
2.4
.9
3.9
1.8
10.7
3.5
3.8
6.6

2.9
5.0
4.6
5.0
4.1
9.3
5.2
14.4
6.5
1.8
13.9
2.3
1.8
5.9
2.2
.1
2.5
-2.5
-1.8
-3.1
3.8
1.4
3.8
6.4
4.2
4.4
7.2
5.4
5.8
9.6

1.7
2.3
2.3
2.4
1.5
7.5
4.8
13.8
.3
2.1
-2.3
1.4
.8
1.7
3.8
-.4
.6
-.7
-2.2
-3.2
2.3
1.0
1.9
.4
3.7
2.1
9.5
2.8
3.6
5.8

P R E S ID E N T

ill
1*3
1.5
1.8
2.4

0.5
-.3
1.4
-.7
.3
-1.0
-.5
-3.3
-.1
-3.9
4.0
.7
.8
1.2
.6
0
1.4
-3.6
1.4
-.1
1.4
.5
1.5
3.1
.8
.1
.6
2.3
1.6
6.0

THE

— .7
— .7
— .2

1.1
1.1
1.5
1.2
3.2
-3.5
-3.1
-4.7
4.6
6.4
1.0
.6
.8
1.2
1.7
.3
1.0
1.6
-1.2
0
1.2
.5
1.1
2.1
1.9
8.9
1.6
2.4
2.2
5.1

1964 to 1965

O
F

— .I

0.8
-.2
1.3
-.4
1.0
-2.1
1.0
-6.8
2.5
-1.2
-9.4
.7
.6
2.6
.7
.5
1.3
-.7
.5
-.4
1.0
.3
2.7
6.0
.5
0
.9
1.7
2.0
2.1

1965 to 1966

REPORT

Alt items---------- ----- ------------- - --------Pood >-____ ______ _______ ______________________
Food away from home._- _________ _______________
Food at home i___________________________________
Cereals and bakery products_________________ Meats1___
______________ ______ ____ _
_
Beef and veal1________ ____ _______________
Pork '_______________ __________ _______—
_
Daliy products 1 _ ____________________________
Fresn fruits and vegetables *
_____________________
Eggs *----------- ---- -------------- -------Nondurables except food 1_________________ _______
Apparel l footwear 1
ess
............... .........
Footwear^___ _______ _____ _____ - ---- ------Gasoline______________________ _____________
Durable commodities t_____ _________ ______ _______
Furniture_______ _________ ______ ____________
Used cars
___ _____ ______ ________________
N e w cars 1
..... .......... ............ .......
Appliances______ __________ __________________
Services_____________ ______ ___________________ .
.
Rent_______ ____ ____________________________
Household services less rent________ ____- - _____
Mortgage interest rates... - - ________________
.
Transportation services_____________ ____- -......
Local transit________ _____ ____________ ____
Auto insurance________________ ____ - ----Medical care services_______________________
_.
Physicians' fees________________ _______ __
Daily hospital charges_____ __________ _______

1964 to 1965

ECONOMIC

1965 to 1966

1967

1)ecember
1986
to March

THE

Consumer price indexes

Year-to-year percent changes

THE

196 7 ECONOMIC REPORT OF THE PRESIDENT

T a b l e 10.—

253

Price trends for selected consumer services , 196S-66
December*to-December percent changes
Total.
1063-66
9.7
3.7
11.3
5.6
23.7

_
.
All services - -_ ____ .. ....__ _ _ . . . ____...
Kent . .
.
- ..
____. . .
....... .
Transportation services
,
,
Auto insurance.
„ .
Registration and linense fees
...
...
Parking and garage rent
. . .
Lor>al transit”
.....
Railroad fare, coach______________ _________
Airline fares
_ . .
.
Bus fares, intercity . _____ _ * . . . ___ ____
Medical care services
..
Physicians' fees
.
.
Dentist's fees... ...... .............. ......
Eye examination and eyeglasses.,............ .
.
Hospital daily rates___________ ___ ___ _____
Operating room charges_______ ________ ____
Household services ____
-____ ________________
Mortgage interest..
. ... .......... *___ _
Property taxes
_
. ... _______
Property insurance...... ...... .... .....-__
H o m e maintenance and repair services
Gas............ .... ..... ...............
Electricity. -________________ ._____________
Telephone___ ______ *_______ _________ ____
Domestic service__
_____ _________ _____
Babysitters
_
..„ ..... ...
D ay care
- ....._
_
Laundry, flatwork_____________ _____________
Other services__
___ ________ ___ ______
Laundry— m e n ’ shirts,___________ ______ ____
s
Dry cleaning___ __ _____ ______ . ___ _ ___
_
Tailoring charges .
- __ _____ __________ ._ _
_
Shoe repairs
. . . . . . . _________ _
M en's haircuts._________ ____ ____ ____ ... .
.
Beauty shop______ . ______________________ _
Movie admissions______ - ............... .
Bowling fees__________ ____ *__________ .___
Film developing___ _ _______________ . ____
Funeral services
..._____ __________ _
Bank service charges___ ......._____ ________
Legal services. _____ ______ _____ ________

1963 to 1964 1964 to 1965 1965 to 1966

12.8

4.1
13.1
11.4
.6

.5
6.9
14.9
15.3
10.8
8.1
29.9
19.0
9.6
12. 7
10.6
18. 2
13.3
.4
—.8
- 2 .0
18.8
11.0
13.8
17.9
10.1
11.4
10.0
7.4
.9
15.8
8.8
24.3
2.6
4.7
4.7
2.5
15.9

1.8
1. 0
2. 7

.5
7.0
2.3

2. 7
1. o
3.9
2. 6
10. 7

.6

1
2.2
1.8
2.1
.1

.2
3.0
2.6
3. 0
3.1
1.5
4.6
2.8
1.4
-.6
2.1
5.5
2.4
1.1
-.7
_ 2
5. 3
.3
1.5
2.4
2.3
1.2
1.1
.2
.4
3.9
1.8
6.9
- .2
2.1
.4
.8
8.0

.5
1.6
3.5
3.8
2.7
2.5
6.6
5.9
2.4
.9
4. 5
6.8
3.6
—.4
-.2
- 1 .7
5.8
5.8
4.9
5.4
2.8
3.6
2.6
1.1
.4
3.5
2.8
7.6
.4
1.6
1.8
-.1
3.2

.8
1.8

3.6

Source: B L S — Office of Prices and Living Conditions, U.S. Department of Labor, Jan. 27,1967.




Chabt 1

LABOR FORCE AND EMPLOYMENT
1953 to date
(Seasonally idjmted)

4.9
1.6

4. 3.
2.4
4.4
10.3
1.1

9.1
5.3
—.1
- .2
2.2
8.1
7.8
4.6
3.9
16.5
9.3
5.5
12.4
3. 7
4.9
6.8
- .3
.1
-.1
6.6
4.6
6.9
9.3
4.6
6.3
6.0
6.0
0
7.7
3.9
8.0
2.4
1.0
2.4
1.8
3.9

254

THE




19 6 7 ECONOMIC REPORT OP THE PRESIDENT
Chabt

2

MAJOR UNEMPLOYMENT INDICATORS
1953 to dale
(Seasonally adjusted)

* S c-'fi

-t i ’ifr,

63 lo rrflt;t

**g<nnm| ;-j

Chabt 3

whether uiumployed persons jou|til lutl-ar

lob).

chart 4

Negotiated Wage-Rate Adjustments-* in d the Unemployment Rate,
1954 through 1966.
U nem ployment

Rate

(Percent)

1967
ECONOMIC
REPORT
O
F
THE
PRESIDENT

NOTE
Th« itrlptrf bar I reprtwM Ihc m tdijn lirU contract *aar »*<« •dkuitmtnt
Th« *hiM
ban for 196]
through 1966 r tp r tu n l Iht 101*1 p *rc trtU |* * ! ( < m crtK * during ffw hk o< t»ch contract. rottvcilfd lo an annu* rat*
\J

adiuilmcntt includt no w a(* ch *n g « . d K F iu n m » t|H . and m c rr » « m

bul nckidt tut coil

1r<a|« b«n»M»

Tj Ptrctftt of J v tr * ft hourly earn>ngv adiusled to f ic ’ud* tKr ifb ct ol prtmiurn pay tor Ovtrtmft work




255

I f tilimilMl
4j Preliminary

256

THE

Chart

iN D tX

I3

5.

1 9 67 ECONOMIC REPORT OF THE PRESIDENT

W H O L E S A L E A N D C ONS UME R PRI CES BY MAJ OR S E C T O R S

( 19 57 5 9 = 1 0 0 )

IND EX

1 0)
-10

(1957-59

I I5

WHOLESALE PRICES

I0

I I0
Processed foods

05

„

105

------------------- |_ ----------------

Industrial com m od iti es

100

100
Farm products

^

9 5 --- V/-'

9 5

90

9 0

30

130

5

I 25

CONSUMER PRICES

0

120

5

II 5
Food

II 0

0
Nondurable commodities less food ,

105

5

"'•'Durable commodities

100

0
5

9 5

16
91




(963

1964

1965

1966

THE

1967 ECONOMIC REPORT OF THE PRESIDENT

C h a r t 6 . Y E A R - T O - Y E A R C H A N G E S IN C O N S U M E R S E R V I C E P R I C E S

( P e r c e n t c h a n g e s in a n n u a l a v e r a g e s )

Al l S e r v i c e s

1960
1961
1962
1963
1964
1965

61
62
63
64
65
66

Ho u se h o l d Services

1960
1961
1962
1963
1964
196 5

61
62
63
64
65
66

Transportation Services

1960
1961
1962
1963
1964
1965

61
62
63
64
65
66

Medical Care Services

196061
1961 62
1962 63
1963 64
1964 65
1965 66

Other Services

I9 6 0 61
196162
1 962 63
1963 64
1964 65
1965 66




257

258

THE 1 9 67 ECONOMIC REPORT OF THE PRESIDENT

Secretary W irtz. I will be glad, Mr. Chairman, and members of
the committee to respond as helpfully as I can to whatever questions
you may have.
Chairman Proxmire. Thank you for a very fine statement, Mr*
Secretary.
Kemember, last year, Mr. Secretary, you made a very vivid impres­
sion on me and other members of the committee when you zeroed in
on this 4-percent interim goal of unemployment and you said:
It will be very much the theme in m y testimony here this morning that I
point out that even as we stand now on what we have thought of as the interim
goal for so long, 4 percent unemployment, we realize that i really isn’ the goal
t
t
at a l It is only the 10-yard line and that the problem left before us is to make
l.
the last 10 yards, which we propose to do.

It is now a year later, the December figure was 3.8 and for the year
1967 it is projected by the Council of Economic Advisers to rise to
about 4 percent. It looks as if we are not making very much progress
and of course the implicit or explicit reason is that there is a feeling
that if we get unemployment much lower we are going to have a lot
more trouble with inflation.
I call your attention to our experience in the years 1952,1953,1954,
and 1955, especially the first 3 years I mentioned. In 1952 it was 3.1,
in 1953 it was 2.9, and in 1954 it was 5.6. Credit controls came off
in mid-1952 and price controls were off in April 1953. In spite of the
fact that they came off and there was some pent-up demand and un­
employment was below 3 percent, the cost of living rose only eighttenths* of 1 peraent—2.2 percent in 1952, and only eight-tenths of 1
percent in 1953, and the following year rose only four-tenths of 1
percent.
What I am trying to say is I think we ought to have a better anal­
ysis in the Council of Economic Advisers than the Council has given
us. They have done fairly well but I think we should pursue it a
little further, of the notion that in the coming year we cannot get
below 4 percent without unacceptable inflationary pressures.
Secretary W irtz. I didn’t say which 10-yard line we were on.
Chairman Proxmire. Maybe we have 90 yards to go.
Secretary W irtz. That is what I mean. There has not been a very
large advance, as large a gain in those terms as I would have hoped,
I do point out this, Mr. Chairman, and members of the Joint Eco­
nomic Committee, that there has been an extraordinary increase in
the labor force during this same period and we ought to count our
gains, not only in terms of that unemployment figure but also in the
increased participation in the labor force.
There has been a big increase in the number of jobs and some of
them have gone to people outside the labor force rather than those
who were unemployed. But I should like to say this: I think it
would be a mistake to suggest that there has been a basic difference
on whether you can go below the 4-percent unemployment figure with­
out having inflation. I do not understand the Council to take the
position, which is taken by some economists, that there is an immu­
table Keynesian principle that you do not go below 4 percent on un­
employment without having inflation. I don’t understand that to be
the Council’s point.




THE

1967 ECONOMIC REPORT OF THE PRESIDENT

259

I understand it to be, rather, when we get to that 4-percent figure,
it is up to us to push it on down by increasing the manpower supply
situation, by training those who are not presently trained and by
making further use o f the potential that we have.
I have no trouble with that approach and with the function of re­
sponsibility, not in personal terms, but in program terms for moving
it on down below the 4-percent level through an affirmative manpower
program. I go into this detail because I think there has been some
misunderstanding. I know the Council does not take the position
that we have to stop at that point.
Chairman Proxmire. I am sure they do not, but they do project
4 percent or expect this kind of unemployment at the end of the year.
We have table 18 on page 109 of the Economic Report which shows
273,000 persons; number of trainees involved in manpower involve­
ment and training in fiscal 1966 and fewer, 250,000 in 1967.
What is the projection on the present budget for fiscal 1968? W hat
is the expectation of the number of trainees, taking manpower train­
ing in fiscal 1968 ?
(Table 18, from the Economic Report, is reprinted below:)
T a b le

IS.— Training opportunities,fiscal yearst 1966-67
Number of trainees
(thousands)
Program

1966
Manpower Development and Training Act program.
Institutional training.....................................................
On-the-job training and other.....................................
Job Corps_____________________________________________
Neighborhood Youth Corps:2
In-school_________________ ______ —..............................
Out-of-school..................................... ................................
Summer----------------------------------------------------------------Work experience.................... ..................................................
Adult work program------------ ---------------------------- ---------Special impact........... .................... - .......................................

19671
273
160
113
10

106
65
209
64

250
125
125
31
125
60
165
46
25
8

1 Estimates.
2 Each position may be occupied by more than one person in the course of a training period, since train­
ees often do not occupy positions for the full period.
Source: Bureau of the Budget.

Secretary W irtz. About 275,000— 250,000 to 275,000, depending on
the mix.
Chairman Proxmire. S o it has not changed much in the past 3
years?
Secretary W irtz. It is about the same.
Chairman Proxmire. Does not that indicate we do not have much
of a drive to get down to the level of unemployment by the training
programs ?
Secretary W irtz. I answered your question, Mr. Chairman, perhaps
not in the terms in which it is put— with reference to the Manpower
Development and Training Act program. W e must take into account
the expectations of what can be accomplished through the other work
training programs. Quite an arsenal of weapons has been developed
which includes, as far as the youngsters are concerned, the Neighbor­
hood Youth Corps program and Job Corps program.




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19 67 ECONOMIC REPORT OF THE PRESIDENT

Chairman P r o x m i r e . This table includes the Job Corps and Neigh­
borhood Youth Corps, work experience, special impact, adult work
program, institutional training, on-the-job training.
Secretary Wirtz. And the total was----Chairman P r o x m i r e . 273 in 1956, 250 in 1967, and you indicated it
would be around that general figure in 1968.
Secretary Wirtz. A s far as MDTA figures are concerned. I think
that last group of figures is too low, or putting it differently, it is con­
servative. But if your question is whether it is through the direct ef­
fects of government training, work-training programs, we will take
sufficient strides toward the elimination of this last—I think in terms
of about a million—the answer is no, and it will have to depend upon
expansion of private training programs and on coordination of our
public and private training programs.
I know what you are reaching for and perhaps I erred in suggesting
to you that it is possible to do this with the present-day work training
programs. If we can enlist the coordinated support of private indus­
try, where we must look for these employment opportunities, or almost
all of them eventually, we can do most of this job in the next 2 or 3
years and by the job, I mean moving in on that part of the remaining
unemployment, which is susceptible to a work-training, public-private
approach. I would hope, and this is obviously a risky statistic—I
would hope that if the economy continues to do its part—we can train
as a consequence of public and private effort in the next 2 to 3 years,
approximately three-quarters of a million people. This would cut out
most of the area which remains to be cut out. It is a rule of thumb.
Chairman P r o x m i r e . Would you submit a comparison of how we
are doing now as compared in the last 3 or 4 years, overall? The fig­
ures I asked about were only partial. You are giving me a more com­
prehensive one and I would like to have some comparison to see what
progress we are making.
Secretary Wirtz. I will give you the figures. You are right. What
I have tried to project here is a more subjective judgment of what
involves a fairly complicated—I hope sophisticated—estimate of how
many people there are remaining who, as a result of progressive train­
ing programs, can be brought into employment.
(The table below was later submitted by the Department:)
Training opportunities, fiscal years 1964-68
Number of trainees (in thousands)
Program
Total
in
years

1963

Manpower Development and Training A c t*..
Institutional training..._______ __________
On-the-job training and other____________
Job Corps____________________
______ ____
Neighborhood Youth Cofps *
...................
In school_____________ ____________ _ _____
Out of school___________________ __________
Summer.
.............. . . ........................ ...........
Work experience........... . ____. . .
_______ _
Adult work program_____________ __________
Special im pact.*.............. ......... .............

1.219
733
486
41
1.384
403
237
684
110
25
8

59
57
2 ’

Totals............................. .............................

2,787

59

1064

125
112
13

1965

232
167
65
278
102
62
114

125

510

1966

1967 i

1968 1

280
112
168

273
160
113
10
401
106
55
240
64

250
125
125
31
350
125
60
165
46
25
8

3*5
130
60
165

748

710

635

1 Estimates.

a Each oDDortunity covers a “ full-time training period, although more than 1 person may undergo training
in the position during the course of the training period.
Source: Office of Manpower Research, Manpower Administration, U.S. Department of Labor.




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1967 ECONOMIC REPORT OF THE PRESIDENT

261

Chairman Proxmire. This is all related to the question raised by
your “Projections 1970” which is, I think a wonderful study and did
get proper support and praise in the press.
One of the most interesting statements in the study is as follows:
G N P would have to grow by about 4.3 percent a year between 1965 and 1970
to provide jobs for additional workers and to maintain the unemployment rate
at 4 percent.

The expectation of the Council is that the growth rate in the coming
year would be 4 percent—not 4y2 percent or 4.3 percent. This means
we are not going to make the kind of progress on unemployment, and
it would suggest that perhaps our fiscal policy is too constrained and
we could have more expansive fiscal policy—maybe we should not
have the tax increase the President is talking about, and at the same
time not have stringent monetary policy, lest it be easier than it has
been in order to get at this 4.3 percent growth which the Council is
not planning.
Secretary Wirtz. I understand the analysis and you understand my
response more in terms of operational possibilities and I do not pre­
tend an independent mastery of the relationship of the fiscal policy
to the unemployment figures. I have set myself to this extent—that
I think that the rate of growth which the Council projects will prob­
ably result in an extension of about the present unemployment situa­
tion and that the gain on that has got to come from these other pro­
grams—I believe, Mr. Chairman, and members of the committee, that
most of those who will be employed as a result of the expansion of the
economy are employed and putting it this way, most of those who
remain unemployed except for the frictional and seasonal unemploy­
ment—most of the others who remain unemployed will not be affected
by an expansion of the economy. I know the point that you are mak­
ing and can only say that I think as far as the effects of the expansion
of the economy on unemployment is concerned, it will be maintained
on the basis of the growth which the Council anticipates and that the
remaining problem, of an affirmative program to reduce unemploy­
ment ought to be in this separate area.
Chairman Proxmire. My time is up.
Congressman Curtis?
Representative Curtis. Thank you, Mr. Chairman.
Secretary Wirtz. Could I add one other point because it is closely
related?
Whatever I may have said just now about 1967 does not apply
in the future, and I think that while my statement will stand, the
projection for 1967 will cover that situation. I do not suggest that
a continuation of a growth rate beyond 1967 would do the job be­
cause I don’t think it would.
Rrepresentative Curtis. Mr. Secretary, when you talk about pro­
ductivity rates, you give us 2.8 percent and you project that in 1967
this will go down in the same degree. I note on tables 4 and 5, you
apparently gave us fiscal years. Have we got the first half of fiscal
1*967 available ; namely* the last 6 months of calendar 1966 ?
' Secretary Wirtz. I wanted to check, Congressman Curtis—you
aaejin the statement of productivity for 1967?
75-314— 67— pt. 2-------3




262

THE

1967 ECONOMIC REPORT OF THE PRESIDENT

Representative Curtis. The figure you give us is 2.8 percent. Rea]ly these are fiscal years in the table rather than calendar years, aren't
they ? What I want to known is what is the projection for the equiva­
lent which would be 1966-67?
Secretary W irtz. Fiscal 1967-68 ?
Representative Curtis. I am trying to correlate it with your own
table. Your table 4 has these figures, and I presume they are giving
fiscal years. I do not understand them otherwise. Maybe that is
the first question.
Secretary W irtz. Table 4?
Representative C u r t i s . Table 4 . You have 1964r-65, 1 9 6 5 -6 6 .
Maybe I am wrong. I interpret that to mean fiscal years.
Secretary W irtz. It is the average for 1 calendar year as compared
with the average for the preceding calendar year.
Representative Curtis. Then is 1966 actually 2.8 percent?
Secretary W irtz. Yes, sir, average for that year.
Representative Curtis. Very Good. What do you anticipate this
to be in calendar year 1967? You said it is going to decline, but
have you made any estimate of what your rate of decline might be?
Secretary W irtz. On the suggestion of a decline, Congressman, I
think you refer to what I said in my statement which notes that
usually some of these factors are accompanied by a decline in the
rate ot productivity growth and I have gone on to point to what I
confess to you is entirely secondhand information.
Representative Curtis. You have no estimate?
Secretary W irtz. I am working operationally on the principle that
it is likely to be about the same as it has been this year, perhaps
slightly lower, but it is a complicated situation because the change
in these factors resulting from this investment is such that there could
be an increase in productivity which would be different from what
we have experienced as a result of the change in the gross national
product as we approached it in the past.
I am advised that there are factors at work which would mean a
larger productivity increase this next year compared with the same ex­
pansion in the economy. But I cut through my own ignorance to say
to you that for operational purposes and on the best advice I can ob­
tain, I assume, I am expecting to see that productivity figure about the
same in 1967 as it was m 1966, but possibly slightly lower.
Representative Curtis. Most estimates I nave seen are a lower
figure.
Secretary W irtz. You hear 2 .5 or 2 . 6 ; it is in that area.
Representative CuRns. I wonder how much we might go further.
You say unit labor costs in the private economy rose by 3.7 percent in
1966.
Have you got any estimate for 1967 ?
Secretary v V i r t z . That doubles the previous difficulty because I
would have to add an explanation of what happens on wage costs as
well as productivity and I frankly have not done this.^
Representative Curtis. Now, to the wage-price guidelines and the
discussion there. I am quite pleased to see your statement because I
think it is getting back to what the guideposts were when they were
originally presented.




THE 1 9 67 ECONOMIC REPORT OF THE PRESIDENT

263

I always look at them simply as an economic exercise and a valuable
exercise. But when the administration went through actually forma­
lizing the guideposts and putting figures on them and working to ob­
tain compliance, I thought it got way beyond that original purpose.
Now, I have heard you were quoted as saying a 5-percent wage guide
possibility would be appropriate this year in view of inflation. Is
this accurate ?
Secretary W irtz. I thought it was accurate as reported originally.
But time has eroded the accuracy of it, I think. It was with reference
to the wage increases taking place this year, a good many of them
which have been in the neighborhood of 5 percent.
My comment was to the effect that I did not consider that an unrea­
sonable application of the various principles bearing on this situation,
and so in general, I was quoted correctly.
Representative Curtis. Many people feel we are developing a wagecost push this year and with the large number of labor contracts that
are due this year, this can be a very serious matter as far as Consumer
Price Index. Will you comment ?
Secretary W irtz. May I make it clear™*! wanted to emphasize that
in my previous statement it was a direction of what was happening
and had happened and it was a comparative reasonableness of that and
not a suggestion of a specific figure.
Representative Curtis. I am trying to direct your attention to what
might be the situation in this calendar year 1967 in respect to inflation.
The experience I would say here is entirely too high level of inflation,
and it looks like there is a real element of a cost-push situation. That
is why I asked the question of your estimate on productivity increases
which I myself think are going to go down. At the same time, mostly
due to the inflation of 1966, and the wage contracts coming up, it loo£s
like our wages are going to be pushed considerably beyond produc­
tivity.
Secretary W irtz. The point that you just made is vitally important.
To whatever extent there is a carryover from previous experience, and
that takes its most precise form in the extended contracts, that is one
thing. And one about which I cannot do very much.
If, on the other hand we can say ourselves there is not an increasing
head of steam on that, and that it may be decreasing, which I think to
be the case, then we are in a more satisfactory condition. You are
very right in suggesting there are some carryovers, cost-push effects.
Representative Curtis. Some companies I understand nave agreed
to give the Council of Economic Advisers advance notice of proposed
price increases. I wonder if any labor unions are going to give ad­
vance notification of their demands? Have they come to you in a
comparable way ?
Secretary W irtz. We all have a common experience that the advance
notices are usually considerably higher than the final settlement, and
if your question is Whether I have any basis of knowing what the final
settlements are going to be, I do not.
Representative Curtis. I was very much interested in the process, of
which a great deal was made last year by the Council of ^Economic
Advisers, as to the techniques used"by the administration in the area
of wage-price guideposts. Frankly, I was a little bit alarmed. I
thought tney were somewhat extra legal.




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ECONOMIC REPORT OF THE PEESIDENT

If this is going to go on, and apparently the Council of Economic
Advisers is going to continue discouraging industry price increases, I
am trying to see whether there are any plans to go in the other direc­
tion, especially since it looks like we have some real momentum going
toward a wage push beyond productivity increases, probably be­
cause of previous inflation.
Secretary W irtz. I am not quite sure as to the question.
Representative Curtis. The question is: Whether or not you are go­
ing to try to use exhortation to get the labor unions to try to hold
back on their wage demands in a way comparable to which the admin­
istration is going, to encourage industry to hold the price level?
Secretary Wirtz. Let me answer you in different words and if they
are not sufficient for an answer, come back and use your form of it.
There will be a stronger effort made to sell the general interest and
the self-interest of restraint on the wage side as on the price side be­
cause you can’t separate the two out.
Representative Curtis. I appreciate that.
Secretary Wirtz. I think the year’s record ends up with a fairly
complete public appreciation of the fact that even to the extent of go­
ing too far occasionally, we have tried to drive that home to everybody
concerned during 1966. There were errors. There were errors of
exhortation but they had a saving quality of evenness. They will in
the future.
Representative Curtis. In respect to the Manpower Training Act,
what have you done this year to get the job vacancies statistics?
Secretary W irtz. You and I have talked about that over a number
of years and I told you before that we haven’t been able to get the
appropriation from Congress, so w© are postponing it. I can tell
you now, in one way or another we have managed to get a pretty
complete picture of that situation now through Mr. Ross’ office, not
only collecting, but publishing each month a quite comprehensive
statement of the shortage situations. They are not statements that
will satisfy the purest among the statisticians. They do jibe with
general information, enough that there has not been much complaint
about them. We are doing it on an occupation-by-occupation, areaby-area basis. I think I can say to you with confidence that that
picture is now perhaps not statistically accurate, but practically suffi­
cient.
Representative Curtis. My time has expired.
Chairman Proxmire. Congressman Reuss?
Representative Reuss. Mr. Chairman, Mr. Secretary, your excel­
lent presentation includes the disheartening fact that unemployment
among Negroes, and particularly young Negroes, is trending up.
That is unhappily true, is it not?
Secretary Wirtz. Yes, sir. Trending up—
-riot in absolute terms,
but in percentages. We are just barely holding our own. The num­
bers are increasing but we are not pushing the rates down signifi­
cantly.
Representative Reuss. The administration has recommended a 6percent across-the-board tax increase to take effect on July 1. Will
not this have some effect on increasing unemployment, and will not
that effect hear very largely on Negroes and young Negroes in par­
ticular?
-'




THE 1967 ECONOMIC REPORT OF THE PRESIDENT

265

Secretary Wirtz. I don’t believe very much, Mr. Reuss. Because
I think that it is particularly true of this group that was involved is
perhaps less a shortage of opportunity than a completion of the re­
quirements for taking advantage of it and that this is peculiarly a
remaining area of unemployment which will not be remedied by an
expanding economy and will require affirmative individualized con­
centrated attention. I think there will be only a small incremental
effect.
Representative Reuss. I think every member of this committee
would agree, it needs tailormade, ad hoc attention. It needed that
all the way down from the 7-percent unemployment figure that we
had a few years ago. But a moment ago you said that most of the
current unemployed could be helped only by tailormade manpower
training methods, not by general increase in demand. Is it not true
that a substantial portion of the unemployed could be helped some by
general increases in demand, and will not therefore the proposed tax
increase, which means there will be less demand from the consumer
to buy goods, and less ability of investors to invest—will not the effect
of that tax increase be, on the margin, to deny a job to some Negroes,
and particularly young Negroes, who would get a job were it not
for that tax increase?
Secretary Wirtz. I don’t mean for a moment to avoid the obvious
fact that there is a relationship between the tax increase and the rate
of expansion of the economy, and that that has some relationship to
jobs. But I can’t help coming back to the fact that a third of our
unemployment is among the youth and a lot of these are nonwhite.
But the point is, as far as I am concerned, they shouldn’t be work­
ing, anyway. They ought to be in school or in training. So in terms
of the problem you pose it does not seem to me that the answer lies
in putting them into the jobs that an expanding economy would give
them—most of them being dead end jobs that the machines are just
waiting to take over. The answer to that problem lies in an extension
of education and training programs rather than in increasing the
number of jobs.
Representative Reuss. You do not think it lies in both?
Secretary Wirtz. It does lies in both, of course, especially in the
sense that if there should be a slipback in the economy, then that situa­
tion would worsen terribly. If the economy should fall back so that
there would be an increase in unemployment, this would happen for
the very reason that you are talking about. This situation would be
exceedingly serious.
My point is that as far as an affirmative improvement is concerned,
we have a lot bigger job in moving in on the personal aspects of it
than is involved in the economic application.
Representative Reuss. I agree with that.
Let me now turn to the wage-price guideposts and call to your at*
tention the very instructive and perceptive testimony you gave before
the House Government Operations Committee last fall.
Secretary Wirtz. I remember the occasion even with that descrip­
tion.
Representative Reuss. The Government Operations Committee fol­
lowing its hearings brought out a series of recommendations which




266

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19 6 7

ECONOMIC REPORT OF THE PRESIDENT

are contained in its October 11,1966 report1 and I would like to ask
unanimous consent that those recommendations be included at this
point in the record.
Chairman P ro x m ir e. It is so ordered.
The recommendations referred to appear below:
*
*
*
*
*
R e c o m m e n d a t io n s

1 That the President continue the present practice of including wage-price
.
guideposts in hia Annual Economic Reports as required by section 3(a) of the
Employment Act of 1946 and that he make comments on or revisions of such
guideposts in supplementary reports he m a y transmit to the Congress under sec­
tion 3(b) of the act.
2 That the Joint Economic Committee of the Congress continue its present
.
practice of holding full public hearings on the President’ Economic Report and
s
that these hearings give special attention to the wage-price guideposts contained
therein providing an opportunity for representatives of labor, management, and
the public to give their views on the guideposts.
3 That the Joint Economic Committee, in its report to the Congress, specif­
.
ically include its findings and recommendations on the guideposts. If the ad­
ministration’ guideposts are approved by the committee, this congressional
s
action will strengthen their public acceptability. If the Joint Economic C o m ­
mittee’ position on the guideposts differ from that of the President, i can be
s
t
expected that the President would review them in the light of the committee’
s
recommendations and that should result in greater public acceptance and, thus,
opportunity of success. This is particularly important with respect to the forth­
coming January 1967 guideposts since they inevitably must come to grips with
the erosion in the cost of living which has occurred, with the problem of equity
between different segments of our economy, and with the problem of the utiliza­
tion of manpower.
4 W e recognize that the application of the guideposts in specific wage or price
.
cases is a different and a complex matter. Here we endorse the suggestions of
Secretary of Labor Wirtz and the President’ Advisory Committee on Labors
Management Policy for action by that advisory committee in specific cases. This
would be consistent with section 4(c) of the Employment Act which permits the
Council of Economic Advisers to constitute advisory committees and to consult
with representatives of various groups as i deems advisable. Inasmuch as the
t
Joint Economic Committee of the Congress is already authorized by law to hold
hearings, we recommend that where the committee feels that i may usefully
t
supplement the work being done within the administration on specific cases, i
t
hold hearings on them and make its own findings and recommendations. W e
believe that such action on specific cases and when “crises” arise would help
reconstitute and reinvigorate the guideposts in a manner designed to secure the
greatest degree of public agreement and support. Thus, the essence of H.R.
11916 will have been obtained.

*
*
*
*
*
*
*
Representative R e u ss. Have you had an opportunity to look at
those ?
Secretary W f f t z . Yes, I have, Mr. Reuss, and I don’t recall them
in sufficient detail. I do remember the report.
Representative R eu ss. They are here at this point in the record, and
may I ask you to make your comment when you have a chance to re­
view them ? I strongly suspect from the testimony you gave that you
will approve of every comma in those recommendations, but that is
for you to say.
Secretary Wiirrz. I testified on the basis of my general recollection
to that effect. I don't recall the detail.

i Strengthening WajnvPrlce Cong., 2d 41st
Operations, H. Kept. 2231, 89thGuldeposta,seas. report by the Committee on Government




THE 1967 ECONOMIC REPORT OF THE PRESIDENT

267

Representative Reuss. Among the recommendations made were that
this committee include its findings and recommendations on the guideposts, and if the administration’s guideposts are approved by the com­
mittee, this congressional action will strengthen tneir public accepta­
bility. I f the Joint Economic Committee’s position on the guideposts
differs from that of the President, it can be expected that the Presi­
dent would review them in the light of the committee’s recommenda­
tions and that should result in greater public acceptance and, thus,
opportunity of success.
You might comment on that particular point.
Secretary W irtz. It makes good sense to me.
Representative Reuss. There have been expressions from members
of this committee during these hearings—in which, incidentally, we
are doing precisely the kind of review of the guideposts that the Com­
mittee on Government Operations had in mind—There have been ex­
pressions from members of this committee that the removal of num­
bers from the guideposts this year is not desirable, that it does not tell
labor and management what their obligations are. There is a sugges­
tion before this committee that meaningful guideposts next year in
wages would be a particularization of the CEA’s past guideposts, tak­
ing into account, perhaps, in addition to the productivity increase of
3.2 percent, about half of last year’s cost of living increase, working
out at something like a 5 percent wage guidepost, subject to all the
“ ifs,” “ and” and “buts” of the guideposts; and that the price guideposts should likewise follow the past productivity trend recommenda­
tions of the CEA, but with special emphasis this year on meaningful
action to urge price decreases where the over-average productivity
trend of the particular industry permits that.
I would like your comments on that proposal. Suppose the Joint
Economic Committee thought it wanted to state something like that?
Secretary W irtz. One question to make mv answer as helpful as
possible. Does your question anticipate one figure which effects the
productivity principle which was in the guideposts, or does it reflect
one figure which represents the proposed application of productivity
principle, costs of living, ability to pay—is it just the productivity
point that is to be put in the single figure or would all of these be
brought together?
Representative Reuss. The suggestion is that we use the same for­
mulation in other years as the Council has given it, that is to say, in
recent years like 1965 and 1966, but that we provide some partial
reckoning of the cost-of-living increases, added to productivity, which
would come to about 5 percent, and then on the price guideposts we
would suggest about what the Council did in 1965 ana 1966, with a
little more meaningful public education on the ability of overaverage
productivity industries to reduce their prices.
Secretary W irtz. I would respectfully disagree and be in complete
opposition for these reasons. Starting from the one which is implicit
in your last point—it will never be possible for this country to learn
a price guideposts expressed in specific figures the way it learns a
wage guideposts because of the difficulties of communication which
attend the situation. It is one of the great misfortunes.
Representative R b u ss. I did not suggest they should be.




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Secretary W irtz. I am talking about the difficulty. It was easy
for somebody to translate a single point affecting wages into a single
percentage point, and by “somebody” I mean the American public,
and to translate a principle into a decimal point—it was never done
on the price side, not because of any lack of attempt, but because
that message for interesting reasons just didn’t get across and there
is a lopsided reaction because the one was reduced to a decimal point
and the other was not.
My first point is in answer to your question, unless that problem
can be solved I think it would be a mistake to do it again.
My second point is, in the guideposts, 3.2 percent was intended
to reflect the productivity element. It was interpreted as reflecting
all elements. It was intended at least until 1966 to be a statement
of general application to the economy as a whole. It was applied and
interpreted in 1966 and the administration would share the responsi­
bility for this as a result, for particular cases. I don’t suppose we will
ever get out of that habit. I don’t think you could arrive at a single
figure, given today’s circumstances, which would represent a rational
application of the productivity principle and the other relevant fac­
tors, and if you could, Mr. Reuss, and respectively I would point out
that I think there is a built-in reaction in this country against being
told that matters of the nature that we are talking about here should
be reduced to a specific decimal point figure.
This country doesn’t like being told “not to put beans up its nose”
and that psychology was at work last year and it was 3.2 and this is
the second time this country has learned that a specific figure—and,
coincidentally, 3.2 is a poor translation of a broad set of principles
in a particular point and so I don’t think that another translation
into a specific formula is recommended by present circumstances.
Representative Reuss. I would suggest to you that this country has
not minded being told for a good long time that someone who reaches
his 21st birthday is thus an adult and subject to all the legal conse­
quences of being an adult.
Secretary W irtz. But the kids reject it.
Representative Reuss. And the day before he was not an adult,
and I have not heard great outcries in this country for changing that
rule and instead substituting one which says a person shall be an
adult, and so considered for legal purposes, when he becomes ration­
ally mature, because such a rule would be very difficult to apply.
Secretary W irtz. Your children are more mature than mine.
Representative Reusss. It would be difficult for society to decide
whether somebody was an adult or not. My big difficulty with having
vague guideposts is that nobody can tell whether he is being a “good
guy” or a “bad guy.”
Secretary W irtz. I don’t believe it is that simple any more than I
could translate moderation into 3.2 in the 1930’s. I don’t think you can
translate this situation into a decimal point figure. I have a good deal
of sympathy with a member of my family who says, “How old do I
have to be to be a member of this society, and why should I be denied all
kinds of things just because I have not reached the age?'”. I think
there’s got to be a point where you have to have a specified limit at a
fixed rate. Probably true of the age, although I have more trouble
there. But when it comes to translating all of the subtleties—the




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269

sophistication, experience, wisdom, responsibility—of setting wages
and of setting prices of this country into a single decimal point, I
think we have a very good tradition from the one which we had in
deciding how fast you could drive along the highway.
Representative Reuss. As a Milwaukeean, I recall I welcomed the
3.2 beer guidepost in the early 1930’s, and I think in the recollection
of most people who were around then it was a great thing.
Chairman Proxmire. Senator Javits ?
Senator Javits. Mr. Secretary, what is the outlook for labor dis­
putes this year and how will they affect the economic situation ?
Secretary W irtz. I could answer you in terms of cases which are
coming up which are significant of the portions which I think you
refer to.
That list includes—and this listing is not exclusive or complete—the
oil case which is already eventually settled. It includes the railroad
case which gives promise of settlement right down to the last two or
three or four issues. That was on a 5-percent basis. It includes the
trucking case which is presently in active negotiation. There is an­
other New York newspaper case shaping up and I don’t know with
what degree of concern it should be viewed. The meatpacking con­
tracts are open this year, so are the nonferrous metals. Pulp and
papers are coming up, and there are automobiles and farm implements,
and if I didn’t include rubber—the rubber industry—in that listing, I
should have.
Those are the principal ones, and I can only expect our problems
may come from one I haven’t included at all. As nearly as we can
anticipate the problems lie in those areas. I mean our prospects lie
in those areas.
Senator Javits. That represents a large share of the U.S. economy,
does it not? For example, trucking is absolutely based to the whole
economy. Is that not correct ?
Secretary W irtz. These are vital industries.
Senator Javits. What effect is this going to have on all these fore­
casts?
Secretary W irtz. The total in those industries would be about 3
million workers.
Senator Javits. Three million workers?
Secretary W irtz. Yes.
Senator Javits. What effect do you see the labor-management pic­
ture having upon the economy? Do you expect any big strikes this
year?
Secretary W irtz. I can’t answer that question.
Senator Javits. You just do not know?
Secretary W irtz. I just don’t know.
Senator Javits. Does the administration have any feeling about
any preparations it has to make to meet any such problems?
Secretary W irtz. Does it have any feelings about any preparations ?
Senator Javits. Are there any preparations being made?
Secretary Wirtz. The matter is, as it has been for some time., under
serious consideration. You mean whether there should be some rec­
ommendation to the Congress, is that it ?
Senator Javits. I was not really thinking about that.
Secretary W irtz. I am glad.




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Senator Javits. Does the administration really expect to have a
troublesome period of labor disputes this year which could be disrup­
tive to the economy ?
Secretary W irtz. I don’t know how to answer that question help­
fully. I hope I reflected it already. I have a feeling it is a matter
that must be watched very carefully and it is being. It is surely being
watched with the hope that every one of those cases will work out
privately. But it is—we are not sitting back and assuming that
nothing can happen.
Senator Javits. In the 1966 Economic Report, the statement was
made as follows:
The recent transit strike in N e w York City illustrates our helplessness in
preventing extreme disruption of the lives and livelihoods of a city of 8 million
people. I intend to ask Congress to consider measures that without improperly
invading State and local authority, will enable us to deal with strikes that may
cause irreparable damage to the national interest.

That was on page 17 of the 1966 Economic Report of the President.
Now, in 1967, not a word about emergency strike legislation.
Will you tell us, Mr. Secretary, whether the administration thinks
it is no longer necessary to consider what it proposed to consider in
1966 and if it does consider it still necessary what does it intend to
do about it?
Secretary W irtz. I will answer the first question, that interpreta­
tion would not be permissible and I ’m not in a position to answer
the second, because it is a matter which, as I say, the administration
has before it in a formal sense and you would appreciate my inability
at this point to speak to that.
Senator Javits. When do you think we may expect an answer from
the administration on this subject? Is there any time fixed?
Secretary W irtz. I couldn’t without sparring with you by helpful
on that and there is not a time fixed.
Senator Javits. Do you think we in the Congress would be right

or wrong in trying to fix a time ?
As you know, Senator Morse and I and many others have moved
in this matter and I have no—personally I have no particular desire
to press that resolution, which incidentally the Senate has passed
three times in other legislation, but I would like to lay before you
the proposition that we ought to know.
This is a critically important aspect of the U.S. posture to meet
the contingencies of, let us say, a national trucking strike.
May I therefore ask, Mr. Secretary, with the Chair’s permission,
should the administration choose to make a statement upon this sub­
ject, and I hope and pray—I have no desire to do anything but find
out what it has in its mind—I ask unanimous consent that should the
administration choose to make such a statement that it may be made
part of Secretary Wirtz’ statement ?
Chairman Proxmere. Without objection.
Senator Javits. Mr. Secretary, I agree with you, there is no use in
sparring and I admire you for your xrankness. Mr. Chairman, it is
understood that I cannot hold up the printing of the record but I as­
sume the administration will let us know and if they do not file, then
certainly they do not want to.




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271

Secretary W irtz. I will be glad to complete the record with any
proposal which is available before the record closes.1
Senator Javits. I will do my best to give you notice.
One of the things we have been considering very seriously in the
hearings on cities of the Government Operations Committee is some
underlying replacement for the basic welfare idea and one of those
concepts which has been underlying the replacement would be for the
Government to act as an employer of last resort.
Do you, as a Secretary of Labor, have any views upon that subject—
that is, the need to deal with the hard core unemployed and the need
to put them into some form of useful community enterprise by making
the Federal Government an employer of last resort?
Secretary W irtz. Yes, I do have a view; and it would be that, as
this situation has worked out in its complete form, it may include
something of that kind.
I think we are presently at a point where all of our available re­
sources and all of our available personnel are to be put rather toward
the development of the private employment very frequently as a l'esult, as an end result, training programs which might be ouite long and
which might sometimes go on indefinitely, but not by design. With
the economy working the way it is now, with as many potential private
employement possibilities as there are, with as much to be done as
needs to be done to complete the training of individuals for those, I
think our emphasis should at this point be on that, rather than on the
public employer of last resort point. But I am sure, Senator Javit,
that eventually we will come to a recognition that there are about,
as nearly as I can tell, a half of 1 percent of the people in the poten­
tial workforce who won't make it and eventually will get there. It
is in terms of priorities. And I think these other ihings ought to come
first.
Senator Javits. You do not care much for what we call the negative
income tax, basic family payment, or what? Would you care to com*
ment on that ?
Secretary W irtz. Yes, I would.
Senator Javits. What is your position on it ?
^Secretary W irtz. I am in the minority as far as that view or the
view of that group is concerned. I don’t think it advances our present
purpose in this country to be talking about a negative income tax. My
logic tells me that there is nothing wrong with that proposition, but
my practical good sense, or what passes for it, suggests to me that
pushing along that line, at this point, probably slows up our progress
m some of these other directions; and so I should like to see that item
put down lower on the agenda, because I think it gets in the way, as
far as the public is concerned, of doing some of these other things
that we ought to do first.
Senator Javits. Let me recapitulate because my time is up. You
are for government being the last resort in training ?
Secretary W irtz. Yes, sir; and that’s an important distinction.
Senator Javits. That you are all for?
Secretary W irtz. For the time being. Eventually it ought to be
private, but for the time being.
1 At time o f publication o f the hearings, no further information wi




L b*
lta le

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19 67 ECONOMIC REPORT OF THE PRESIDENT

Senator Javits. Which would include stipends if necessary?
Secretary Wirtz. Training allowances ? Yes, sir.
Senator Javits. And, finally, your own individual sentiment is for
the Government being the employer of last resort for the hard-core
unemployed left beyond the training stage ?
Secretary Wirtz. But that we ought to postpone that and not let
it get in the way of some of these more immediate things we like to
do. I think the President’s suggestion of a Commission to look at this
set of problems or possibilities is a good one.
Chairman P r o x m i r e . Mrs. Griffiths?
Representative G r i f f i t h s . Mr. Secretary, you refer, in your state­
ment, to the training slots allocated to the hard-core unemployed.
How many are allocated to women, and how many to men ?
Secretary Wirtz. My recollection is that—and I think your ques­
tion proceeds on the basis that it is about 35 percent women—between
30 and 35 percent women and 60 and 65 percent men.
Representative G r i f f i t h s . In fact there are more women unem­
ployed, am I right ?
Secretary Wirtz. I don’t believe it is. I will have to check that.
(The following information was later supplied:)
1966 unemployment totals____________________________________

2,976,000

Males_________________________________________________
Females ______________________________________________

1,622,000
1 354,000
,

Representative G r i f f i t h s . If a young teenage woman draws ADC,
does she go off the unemployed list ? Does she draw unemployment ?
Secretary Wirtz. I am advised that it would depend not if she is
getting payment, but if she is not actually looking for work. I f she
were actively looking for work she would be counted for unemploy­
ment.
Representative G r i f f i t h s . If a young man draws welfare and is
looking for work, I take it he is counted as unemployed. Would he be
if lie is not employed ?
Secretary Wirtz. He would not be counted as unemployed and
would not be counted in the work force.
Representative G r i f f i t h s . Are those women whose husbands are
disabled, and who have several children and are drawing Social Secu­
rity—are those women counted as unemployed ?
Secretary W i r t z . It would be the same answer.
Representative G r i f f i t h s . Same answer ?
Secretary W i r t z . Yes.
Representative G r i f f i t h s . How much success have you had with the
relocation program?
Secretary Wirtz. Very little. You mean the mobility ?
Representative G r i f f i t h s . Yes. Have you made any effort to relo­
cate women as domest ics ?
Secretary W i r t z . I will check, but unless I supplement the answer
to the contrary, the answer is “ No.”
Representative Griffiths. There are some jobs as domestics that are
wonderfully good-paying jobs and many women certainly would enjoy
having them. I know a woman who tried for weeks to hire one, at
$75 a week, to cook only, 1 day off, and the employer would furnish
a car, furnish the medical care and provide for social security pay­




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273

ments, and the family would arrange a pension program. At the
present time we are bringing women in from foreign countries for
such jobs. They return to those foreign countries and draw social
security payments. So you are hurting the balance of payments.
Secretary W irtz. I want to check aDOut the social security.
Representative G riffith s. 1 am sure this is right. I do not have any
question about it at all. To my amazement we have substantial num­
bers of people even in Yugoslavia who do nothing but check on social
security recipients and some of these people in some countries are
women who have worked here as domestics. So it seems to me that it
would be to our interests if you would move some of these women
around.
(See pp. 366ff. for tables relating to above.)
Secretary W irtz. There is a very real question as to whether the
American people are going to do this type of work.
Representative G riffith s. If they know such jobs are available,
I am sure they will respond. I came from a very poor area of this
country, Mr. Secretary, and I know that a lot of tliese people have
no idea that such work is available and that it pays these prices.
Do you or do you not have a group within your Department that is
seeking equal pay for equal work i
Secretary W irtz. We do have.
Representative G riffith s. How large is that group ?
Secretary W irtz. I would have to supply that for the record. It
is handled by the Wage and Hour people and I do not think that there
is a large, separate group on it.
(The information requested follows:)
The Equal Pay Act was incorporated by the Congress into the F L S A so as to
make possible a check on compliance with the equal pay standard in each investi­
gation conducted under the Act. Originally the proposal considered by the
Congress was for a separate equal pay act. As i now stands, a check on com­
t
pliance with the equal pay standard was made in each one of the more than
57.000 investigations completed in the last fiscal year and in the more than
28.000 completed in the first six months of this fiscal year. It would be fair
to say that the equal pay investigatory staff comprises all of the investigators
of the Wage and Hour Division.

Representative G riffith s. I have a letter from a woman in Penn­
sylvania who writes, “ I have worked in a large factory near Pitts­
burgh for 15 years. In 1963 the company and union signed into the
labor agreement a labor pool which included job class 1 through 4
which is common laborer. We worked in this pool. Now the union
of which I am a member signed a new agreement which classified
male and female jobs with the company.
“ Now, instead of going into this pool I am laid off when the job
is slow. The union said no woman will take the job. The company
has gone right along with it. Can title V II of the Civil Rights Act
of 1964 help us ? There are about 50 of us women laid off and the
company is niring men to sweep and do common labor which we have
done in the past.” Can you help them, Mr. Wirtz i
Secretary W irtz. Yes, ma’am.
Representative G riffith s. Will you do it ?
Secretary W irtz. If you give me their names.
Representative G riffith s. I have sent the letter to you, but what
can you do for them ?




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Secretary W i r t z . If the facts stand up as she suggested them to
you, the complaint would seem to come clearly within title VII. Now,
it is a gray area, but with the truth of those facts there would be a
basis for recovery.
Representative Griffiths. It is a phony classification.
In the city of Detroit, in some plants we have receivers and shippers.
The shippers are women. They draw less than the men who are the
receivers. The women have great responsibility. They can be sus­
pended for an error where a man cannot be suspended at all.
Under any circumstances if you can enforce equal pay for equal
work in our judgment, what would the effect be upon the economy?
Secretary Wirtz. In dollars?
Representative Griffiths. Yes.
Secretary Wirtz. That will be a hard question to answer, but I
think I could get an approximation of it, because we have made quite
a study of it and I would like to suply it for the record. I do not nave
such figures here.
(The information furnished in answer to above follows:)
Since the Equal Pay Act went into effect, investigations have disclosed more
than 10,000 employees underpaid under this provision. The amounts of under­
payments involved were about 3 % million dollars.

Representative Griffiths. In quantitative terms how much is dis­
crimination of Negroes costing the American economy?
Secretary Wirtz. Against Negro workers? That figure has been
estimated by the Council—the figure I have in mind is that an esti­
mate was made in the range of $15 to $16 billion in terms of the gross
national product, that being the price of discrimination. I will check
that and correct it for the record and will try to supply copies of the
figures as far as women are concerned.
Representative Griffiths. Thank you. I would be very interested
in seeing them.
(The information later supplied follows:)
The Council of Economic Advisers, in the 1966 Economic Report estimated
that the annual economic loss to the Nation on account of discrimination
amounts to $27 billion in terms of the gross national product.

Chairman Proxmire. I would ask Mrs. Griffiths to take over the
Chair for a few minutes.
(At this point Mrs. Griffiths assumed the Chair.)
Representative Griffiths (presiding). Senator Miller?
Senator Miller. I understand we have a vote in the Senate.
Representative Griffiths. Congressman Rumsfeld?
Representative R umsfeld. Mr. Secretary, in your statement you
indicate that on the average only 1.1 million of adult males were job­
less looking for work and nearly twice that number in 1963.
Could you compare that with 1960? Do you have the figures for
I960?
*
Secretary Wirtz. I can supply it, but I can bet it was about cut
in half between 1960 and 1963 and then cut in half again between 1963
and 1966. So that would carry it to~my first figure may be a little
hi 1 1
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1967 ECONOMIC REPORT OF THE PRESIDENT

Representative Rumsfeld. I believe you have indicated that it was
only 1.3 for professional personnel, but 31.1 percent for Negro teenage
girls. This is the rate of unemployment in the United States for 1966 ?
Secretary W irtz. Yes, sir.
Representative Rumsfeld. What was the figure for 1960 versus the
other 31.1 percent for Negro teenage girls ?
Secretary W irtz. I will supply it for the record and it will be
lower than this figure. That ngure has increased over that period
of time.
Representative Rumsfeld. The percentage has increased as well as
the number of individuals ?
Secretary W irtz. No; the percentage has increased. The number
of employed Negro teenage girls—employed has increased and the
number of unemployed has increased, I think.
Representative Rumsfeld. I would like that figure for, say, 196063, and 1966.
Secretary W irtz. These are readily available.
(The information requested above and subsequently supplied
follows:)
Adult males unemployed
Thousand«

1960
196 1
1962

2,060
2,518
2, 016

1963
1964
1965
1966

1 ,9 7 1
1 ,7 1 8
1 ,4 3 5
1 ,1 1 9

Employment *tatu* of nonwhite female*, H to 19
1960

1961

1962

1963

1964

1965

Employed............................ .
Unemployed............................

'202,000
68,000

193,000
70,000

191,000
75,000

184,000
91,000

197,000
87,000

200,000
85,000

231.000
104.000

Unemployment rate (precent).

22.3

26.6

27.2

33.1

29.6

29.8

31

1966

Representative R u m s fe ld . I would also like for the comparison
with the 21.2percent for Negro teenage boys.
Secretary W i k t z . All right, sir.
(The table below was furnished in answer to above request:)
Employment »tatu* of nonwhite male*, 14 to 19
1900

1961

1962

1963

1964

1965

Employed___________ __________
Unemployed.__________________

340,000
96*000

824.000
106.000

323,000
84,000

314.000
107.000

341.000
104.000

878.000
111.000

406.000
109.000

Unemployment rate (percent).

22.2

its "

25.3

22.9

22.7

21.2

2oT$T

1966

Representative R u m s f e l d . And for the 7.3 percent for the unskilled.
Secretary W x e tz . Right.




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19 67 ECONOMIC REPORT OF THE PRESIDENT

(The information requested follows:)
Employment status— Nonfarm (unskilled) laborers
1900

1961

1962

1963

Em ployed____________
Unemployed_____ _____

3,665, Of0
522, 000

3, 477, 000
588, 000

3, 559,000
502,000

3,574, 000
492, 000

Unemployment rate
(percent)................... .

12.5

14.5

12.4

1 .1
2

1954

1965

3,644,000 ' 3,875,000
354,000
430,000

1 .6
0

8.4

1966
3, 727, 000
288,000
7.3

Secretary Wirtz. On the first two the pattern will be the same,
number of employed has increased, number of unemployed has in­
creased, the unemployment rate has increased and that will be dif­
ferent for the third. That percentage has gone down.
Representative Rumsfeld. I suppose to make the number more
meaningful it would be helpful for me to have the total number of
individuals in each category in each of those periods, also?
Secretary Wirtz. We can give you both that in the percentage and
in absolute numbers. (See preceding table.)
Representative Rumsfeld. Fine; you also indicated that there has
has been a large increase in on-the-job training?
Secretary Wirtz. Yes, sir.
Representative Rumsfeld. Which, personally, I can say I am very
pleased with. I feel that this is important and very valuable.
I would be interested to explore with you briefly some facts about
what many Members of Congress in both Houses have talked of as
the Human Investment Act. I have in mind that at one point you
indicated you were not enthusiastic about the tax credit approach and
I recollect that at some point subsequent to that you indicated that
this might be a possibility. I feel very strongly that it would be a
way to bring the private sector into this to a greater extent, and that,
in keeping with your earlier remarks about the unemployment level
and the problems of inflation, this might be a technique or mechanism
whereby we could do this country a great service.
I would like some comment from you and hopefully a favorable
comment about this concept and about the administration’s possible
position with respect to it?
Secretary Wirtz. It is more operational than it is a point of policy.
If there were some way of accomplishing the purpose, which we all
seek, by a tax credit. I think there would be unanimity of reaction
to it. The difficulty is in trying to work out a program which would
subsidize, and I use that term in its sympathetic sense, the training of
those who would not otherwise be trained. It would seem a mistake
to subsidize training that would be done anyway. You could properly
point out that that is true of the investment credit as far as equipment
and machinery is concerned.
Representative Rumsfeld. I was about to do that.
Secretary Wirtz. And that leaves this remaining problem* It
doesn’t matter what machinery and equipment somebody buys; it does
matter that there is a social interest in trying to direct the training
where it is needed most, which distinguishes these two situations.




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The on-the-job training program, if properly administered does
permit the sharing in that decision of the employer and the public.
We have continued to proceed on the assumption that as we make the
on-the-job training procedures more flexible, reduce the amount of
redtape, diminish the number of restrictions upon it, be more flexible
about it, and leave more to the employer’s discretion, we perhaps move
toward the same result that you are talking about in connection with
the tax credit.
Now, you realize from what I have just said and from your proper
reporting of the previous development I am by no means ready to
propose to do away with that approach. I would go through wit hit—
I would go through with the on-the-job training program. We would
concentrate the subsidy on the cases which needed it most.
Representative Rumsfeld. Does the category of opportunity which
you are referring to as on-the-job training program offer the same ad­
vantages as would a tax-credit incentive to the private sector in terms
of seeing that the individuals once trained are trained for a job that
does in fact exist? This is a problem. You were talking about
statistical information with Mr. Curtis concerning what openings
really exist. The knowledge, it seems to me, as to wiiat is actually
needed and available, exists in the private sector. And I am wonder­
ing if this apparent advantage in the tax credit mechanism—in addi­
tion to the on-the-job training, might be sufficient to swing you over.
Secretary Wirtz. We are still proceeding on the assumption that if
we perfect the on-the-job training there can be the full measure of the
employer direction of the program and the particular training.
W e are also hoping to meet this other situation. If you put a tax
credit into effect and an employer has the possibility of on-the-job
training, of Mr. A whom the employer is relatively sure he can make
into a good working asset within 6 months, and Mr. B, who also re­
quires some basic education, a^d who, therefore, probably will take 2
years to become a comparable asset, he will take A. We are hoping
we can make arrangements which will encourage him to consider B
if we supply the supporting services of one kind or another. But 1
didn’t mean to take advantage of your question to answer another
one.
I do think that the on-the-job training program can properly be
administered with sufficient delegation, not in the constitutional sense,
of authority to the employer, and can achieve the full purposes of
the tax credit.
Representative Rumsfeld, Y o u mention real take-home pay was
lower at the end of 1966 than at the end of 1965. I would like to have
those figures; and for 1960, also.
Secretary Wirtz. We can give them—the figures are relatively com­
plete for the production workers in the manufacturing industries and
we can give you those. The tables are incomplete when you get out­
side of that. You want only the end round figures for production
workers and manufacturing.




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1967 ECONOMIC REPORT OP THE PRESIDENT

(The information below was subsequently supplied:)
Real spendable average weekly earnings , in 1957-59 dollars, for a worker
supporting 3 dependents
December
1960
Manufacturing.._____ ____________-___________--_____
Mining
____ ______ *______ ____ ____ . . . _______ _
...
________________ ________ ...
Construction.
Finance insurance and real estate_ .......____________
_

$76.09
87.89
92.03
i62.26
()
2

December
1965
$89.75
102.32
111.77
64.63
74.59

December
1966
$88.13
101.20
112.35
64.17
73.23

1 Data for eating and drinking places are excluded in I960, included in 1965 and 1966.
1 Not available-

Representative Rum sfeld. May I ask another question? It is a
bit remote, but of interest to me.
You have talked of the unemployment in the lower age groups,
late teens and early 20’s. In the event that it were possible for this
country to recruit sufficient manpower for military purposes through
a voluntary system and could elevate the compulsory system to fit
on top of the voluntary system, to be activated and utilized only in
the need of a major increase in military manpower, what effect might
this have on the psychology of this age group and their employ­
ment rates? Does it seem to you that this question of the draft in
this area causes some of the problems as far as placement, training,
getting going from the young person’s standpoint—the questions from
management’s standpoint as to their willingness to undertake training
and take a chance on somebody who has his military obligation still
facing him.
Secretary W irtz. Yes, sir, I think it would have an effect. When
you find these young Americans as they did last Sunday, you are
impressed and as long as your question is put in terms of psychologi­
cal effect, there are some very important psychological effects on their
thinking about the whole thing. I am sure that enters into their
thinking.
Representative Rum sfeld. As the Secretary of Labor in command
of this Department, have you communicated this to the President’s
Commission on the Draft with a view toward seeing if this admin­
istration might be willing to revise military personnel practices in
terms o f pay and other aspects of personnel policy so they might be
able to recruit a substantially larger, if not all the military man­
power required through a voluntary mechanism, rather than through
the compulsory mechanism?
Secretary W i r t z . I did testify before that group o n the subject
matter of this line of questions in October, I believe.
Representative Rum sfeld. Thank you, Mr. Secretary.
Chairman Proxmire. Senator Miller?
Senator M ille r. Thank you, Mr. Chairman?.
Mr. Secretary, at the beginning of your statement, you say:
It seems to me right to assert full employment (in the fullest sense of that
term) at wages producing a decent standard of living for everyone as a first
priority national purpose.




THE

1967 ECONOMIC REPORT OF THE PRESIDENT

279

The Full Employment Act of 1946 states, and I am going to skip
some parts of it: “The Congress hereby declares that it is the con­
tinuing policy and responsibility of the Federal Government to use
all practicable means to promote maximum employment, production,
and purchasing power.”
I was wondering why you would not have used that language rather
than what you used, or if as you see it there is any basic difference
between the two policies ?
Secretary W irtz. Senator Miller, you refer to that as the “Full
Employment Act of 1946.”
There is irony in the history which is that there was introduced to
the Congress a full employment bill which Congress enacted as the
Employment Act—they struck “ Full” from the title of the bill and
I think the point has relevance only to the psychology which has at­
tended the subsequent development of our thinking in this area.
We have been afraid—too many of us—to say “ full employment”
and mean it. And so my answer to your question is that I would
not be content with the philosophy of the full employment bill.
Senator M ille r. Why would you not seek to have Congress amend
that act? It seems to me, as just one member of this committee,
that if we are trying to promote maximum employment, we are trying
to promote full employment in the best sense of the word.
Secretary W irtz. I don’t think there is a shortage of legislation
on this point. I think the Congress has responded to this problem
in the enactment of the Manpower Development and Training Act
in 1962 and in its subsequent amendments on four different occasions.
Each time we have come up with needed additions developing a pro­
gram which is still surely not complete. So I think it is a relatively
good legislative picture. I think that the largest thing we need to
do now is to further develop and integrate the efforts of government
and of the private employer in this area.
Senator M ille r. Then wouH you agree that the Employment Act
of 1946 objectives which I have read coupled with the subsequent
legislation would indicate that the Congress intended by maximum
employment the concept of full employment in the best sense of the
word?
Secretary W irtz. Yes, I think that is right.
Senator M ille r. In addition to that is this word “ purchasing pow­
er.” Would you not consider that stability of the purchasing power
of the dollar, is an inherent part of that policy, not only the policy as
set forth in the Employment Act of 1946, but the policy that you
have stated in your statement ?
Secretary Wnrrz. Yes, I would*
Senator Mh ^ er. Then to the extent that you have indicated real
wages went down last year, we have fallen short of attaining that
purpose and policy, have we not ?
Secretary Wntrz. I think that’s right.
Senator M ille r. How many^ employees—if you have the figures,
fine—if vou do not, I would like to have you supply them for the
record—t>y year—how many employees are covered by escalation
clauses in thp United States ?
Secretary Wnrrz. We can supply that figure. My offhand ^estimate
would be 3 to 5 million* We will supply the specific figures..




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1967 ECONOMIC REPORT OF THE PRESIDENT

(The information below was later supplied in answer to above:)
About 3 million workers were covered by cost-of-living escalation at the be­
ginning of 1967, compared with 2.5 million at the beginning of 1966. In 1958
and 1959, when escalation was at a peak, the total was about 4 % million.

Senator Miller. It is going up each year as I understand it, is it
not?
Secretary Wirtz. Yes, it has gone up.
Senator Miller. I understand that there is a demand for escalation
clauses and there is a forecast for a number of potential renewals.
Secretary Wirtz. That is correct.
Senator Miller. If a guidepost is developed, should it not have a
fluctuating factor, based upon the stability of the dollar, so that when
there is an inflationary factor, that will be taken into account, so that
there will be a real wage increase, rather than one that has been
diluted by inflation ?
Secretary Wirtz. It presents a problem of terminology. If by
guideposts we are meant to refer in what I understand to be the origi­
nal, now almost in the classical sense, the phrase would apply only to
the productivity factor in this equation and if it were taken in that
sense, the answer to your question is that it would not be so effect.
But surely the guideposts, that phrase has come to mean in the popu­
lar transfer, popular understanding, a net figure to be applied to wages
or to prices, a net concept, and my answer would be that if that is
what it means, it should reflect what has happened.
Senator Miller. D o you think that is what it should reflect?
Secretary Wirtz. You see my difficulty is that I am opposed to the
attempt at this point to encompass all of these things in a single fig­
ure, so my approach would be to rather emphasize all of the subtle
factors, and I could answer your question in these terms, too* and I
would emphasize what has happened to the cost of living and real
wages as one of the factors to be taken into account.
Senator Miller. May I say that would be completely consistent
with your answer to my question regarding your statement of policy
at the beginning of your statement.
You have stated that employment increased in 1966 by 1.9 million
people ?
Secretary Wirtz. Yes, sir.
Senator Miller. If you do not have the figures, I would appreciate
your supplying them for the record. I would like to know how many
of the 1.9 million are represented by increased civilian Federal em­
ployees; how many are represented by additions to the Armed Forces
and how many are represented by increases in defense plant workers?
Secretary Wirtz. I don’t have it on a year-by-year basis. I no­
ticed your attention to this yesterday, Mr. Miller, and I did try to
get the best figures we have and we do come out with a different set
of figures from those. You were talking over a 5-year period. I can
give you the answer to the question in terms of yesterday’s question,
but not in terms of today’s.
Senator M ttxkr. I am not particularly bound by the years. I think
it would be helpful, however, in the context of the statement, to have
the additions in these particular three fields.

Secretary W irtz. I can give them to you off the cuff.




THE

1967 ECONOMIC REPORT OF THE PRESIDENT

281

Iii terms of 5 years our figure shows 274,000 increase in Federal
employment and 500,000 increase in terms of the production, the de­
fense industries.
Those are somewhat different from the figures you used yesterday
but I will complete the record if I may with those figures on a yearby-year basis oyer the last 5 years.
Senator M iller. Yes, and further, if you would, define the term
“ defense workers.”
Secretary W i r t z . Yes, surely. I wonder if it would be helpful to
include, because it has the same relevance in the economic trends, the
employment of State and local governments because there has been
a much larger development in that area than there has been in the
Federal Government.
Senator M ille r. I would like to see a balanced picture. I think
that would be helpful and meaningful, too. I am particularly in­
terested in the impact of Federal employment, armed services and the
defense plants' increase of workers.
Secretary W i r t z . We will supply that.
(The table which follows was supplied in answer to the previous
dialog:)
Employment
[In thousands]
1966

1965

1964

1963

1962

1961

Armed Forces......... .....
Defense industries (total)----

3,390.0
2,127.1

2,841.0
1,849.3

2,726.0
1,670.4

1,942.0
1,756.9

2,764.0
1,794.6

2,813.0
1,702.2

2,530.0
1,617.5

Ordnance and accessories_
Aircraft and parts____ ....
Ship and boat building__
Electronic components___
Communications equip­
ment.............. .

268.1
818.7
171.3
391.6

233.7
675.0
164.7
339.4

22M
603.2
154.1
279.0

266.2
638.7
137.2
260.3

271.6
654.1
141.1
269.2

252.9
629.4
141.2
255.6

235.9
607.1
141.7
229.9

Federal Government.......
State and local government___

477.4
2,769.0
8,675.0'

1960

436.5

409.0

424.5

458.6

423.1

402.9

2,543.0
8,095.0

2,483.0
7,541.0

2.482.0
7.150.0

2,492.0
6,781.0

2,510.0
6,489.0

2,506.0
6,270.0

Senator Miller. Mr. Secretary, there was quite a bit of conversation
about saddling you with a child known as the Job Corps. I presume
you have made some studies about the potential handling of the Job
Corps if it were to be absorbed by the Labor Department. You have
made some studies on that point, have you not?
Secretary Wirtz. No, sir, I have not. It will be an unplanned
parenthood,if that happens.
Senator Miller. I wonder if you could have somebody on your
staff give us a memorandum on this subject, analyzing the pluses and
minuses?
Secretary Wirtz. I should be a little hesitant, if you don’t mind.
That program is administered by another agency of the Government
and whatever critique I might have in the form of a statement as to
w'hat would be involved—if it would be a part of the Department of
Labor—would present possibilities of embarrassment. I should be
glad to give you a statistical and financial reporting on it because
those are matters within the purview of my responsibility as a mem­
ber of the Council.
Senator Miller. I certainly do not want to cause you any embarrass­
ment, Mr. Secretary, and you know that.




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THE

19 6 7 ECONOMIC REPORT OF THE PRESIDENT

Secretary W irtz . I do.
Senator M ille r. We may be faced with a problem in proposed legis­
lation which will be submitted to your office for comment. This might
anticipate something, but if you could do something which would give
use some feasibility analysis, c[uite apart from your own evaluation,
which might not be embarrassing, I tnink it would be helpful.
(No additional material had been received for inclusion in the rec­
ord at time this volume went to press.)
Senator M ille r. Well? there has always arisen some concern over
whether or not the minimum wage law applied properly to State em­
ployees. Have you made an analysis o f that legal question?
Secretary W irtz. Yes; but I suppose I am not only entitled, but
obligated, to repeat at this point and regret to say to you behind the
defense- that this is presently before the courts and the first case was
instituted on January 17. This is litigation to which I am party de­
fendant and I would regret that I cannot answer any specific questions
on this.
Senator M ille r. Here again I would not want to embarrass you.
Perhaps this point was raised and an analysis made at the time of
the minimum wage increase bill ?
Secretary W irtz. That proposal was not in the administration bill.
It came up, one part of it, in the House Ways and Means Committee
and the other part came out of a conference and lacked the legislative
history which you have so properly assumed it might have. I have
checked that history and it does not include the kina of consideration
to which you refer because it all came up in—as a matter of fact, it
came up in the House committee and another part of it was added on
the floor of the House. It went out in the Senate. It came back in
conference. So it does not have the legislative history which includes
an analysis.
Senator M ille r. Was there a recommendation by your Depart­
ment?
Secretary W irtz. There was not.
Senator M ille r. To the extent you could give us a memorandum
on this matter, would you, without embarrassing your position in con­
nection with the litigation, I would appreciate it.
Secretary W irtz. I can easily describe the scope of the coverage.
As a matter of fact, it is about 1.7 million employees. I think I should
add that my impression, and I don’t mean to suggest I haven’t been
interested in it, my impression is that it presents a quite, almost novel
issue in the sense that there will be no exact precedent. So the various
courts approaches to it will be almost a case of first impression. I will
be as helpful as I can in giving: y°u whatever background I can on it.
Senator M ille r. One further point. Is there anything, say in re­
cent times, in the last 15 or 20 years, that has been gone into by the
Labor Department on this point, and perhaps you could provide us
something on that.
Secretary W irtz. I will check.
(The information requested follows:)
F e d e r a l R e g u l a t io n A f f e c t in g S t a t e A c t i v i t i e s

and

I n s t r u m e n t a l it ie s

The Department of Labor studied the legal issue of extending the Fair Labor
Standards Act to employees of State schools when amendments for this purpose
were under consideration in 1906. It was our conclusion that the Federal power




THE 1067 ECONOMIC BEPORT OF THE PRESIDENT

283

to regulate interstate commerce supported the proposed amendment. We, there­
fore, saw no legal objections to the proposal. However, our opinion was not
asked on this point and we made no specific recommendation to the Congress
regarding this coverage. Cases upholding the applicating of Federal regulation
to State activities under other laws include, United State* r. California, 297
U.S. 175; California v. Taylor, 353 U.S. 533, City of Tacoma v. Taxpayer*, 357
U.S. 320; Parden v. Terminal Ry . of Alabama, 377 U.S. 184 and Oklahoma v.
Atkinson C o 313 U.S. 508.
Senator M ille r. Thank you, Mr. Secretary.
Chairman Proxmire. Senator Symington?
Senator Symington. Mr. Secretary, it is good to see you. I am

sorry to be late, but we had a Space Committee hearing on the tragic
accident.
In your statement you talk about Government procedures and the
economy as a whole. In your second point you say, the adoption,
by statute of new procedures for reviewing wage and price develop­
ments in the economy warrants consideration, but is not required by
present circumstance.
What is the definition of “new procedures” to which you refer?
Secretary Wirtz. That is perhaps too precise a reference to rather
extended testimony which I submitted before the House Government
Operations Committee on September 12 and I should be glad to supply
that.
(The testimony referred to was subsequently supplied for inclusion
in the record of these hearings and follows:)
T e s t i m o n y o r S e c r e t a r y o f L a b o r W . W il l a r d W ir t z B efo re t h e S u b c o m m it t e e
o n E x e c u t i v e a n d I i e g i s l a t iv e R e o r g a n i z a t i o n o f t h e H o u s e C o m m it t e e on
G o v e r n m e n t O p e r a t i o n s , R e g a r d i n g H.K. 11916, S e p t e m b e r 12, I960

I testify in support of the proposal in H.B. 11916 for joint executive and
legislative consideration of “price-wage guideposts which would, if observed,
achieve noninfiationary price and wage behavior.” (Sec. 2(a) of H. R. 11916).
I would recommend further consideration, however, of the provisions in the bill
which appear to contemplate the establishment of “guideposts” as operative rules
(Sec. 2(b): “The price-wage guideposts . . . shall take effect upon transmit­
tal . . .”), and the provision'(in Sec. 3) establishing procedures for considera­
tion by the Joint Economic Committee of particular cases.
The debate and controversy there has been about the “guideposts” set out
in the last five Annual Reports of the Council of Economic Advisers has tended
increasingly to conceal their unquestionable value.
In its 1962 Report, the Council enunciated this principle: that for the economy
as a whole price levels should remain constant and wages should increase only
as productivity does.
This principle is essentiaUy right, and its enunciation was extremely impor­
tant.
There isn’t much general understanding of the 4
‘laws” of economics. As the
society becomes more complex, and with increasing recognition of the role of
pubUc policy-making in the operation of these laws, this lack of understanding
becomes increasingly significant. Identification of this relationship between
productivity and prices and wages permits a more meaningful and discriminating
expression of what Is otherwise expressed only as the “public interest.” It is
at least a little like the value of the original identification of the impUcations
of an apple’s dropping from a tree.
An infinitely larger number of people in this country understand today that
if either prices or wages or both move up faster than productivity warrants there
is trouble ahead— at least the possibUity of it
-or
This has become a significant and meaningful part of the good sense which
goes into private price and wage decisions in this country—even though it may
not be articulated, or sometimes even recognised, in particular cases. A new
factor has taken its pxoper place beside the previous recognised factors (taking




284

THE

196 7 ECONOMIC REPORT OF THE PRESIDENT

wage decisions as an example) of “inequities,” “ability to pay/’costs of living,”
and so forth.
I support strongly the general provisions of H.R. 11916 because i will permit
t
the fuller and more effective development of this principle of sound reason and
good sense.
First, it will offer larger assurance that the right answers will be developed
to som# still unresolved problems about the productivity guidepost principle.
Second, it will work into this policy-formulation process an element of broader
participation, which will increase the acceptability of the answers which are
worked out. A good deal of the objection to the Council's formulation is that
i seemed to constitute stabilization without representation.
t
Third, this proposed procedure m a y be expected to focus additional public at­
tention on this matter and to increase public understanding— both of what guideposts are and of what they are not.
There are hard problems regarding the productivity guideposts which remain
to be resolved. I mention some of them briefly here, but only for the relevance
their identification has to the subject of the effectiveness of the type of gov­
ernmental procedure proposed in H.R. 11916.
If the wage-price guideposts are to be more than statements of an ideal— and
therefore unreal— set of facts, they have to include provisions for adjustment
when the facts get out of kilter.
There is the problem right now of what to do when prices for food and services
(and for goods in general) go up by more than the overall increase in
productivity. For the guideposts assume that real wages will increase as pro­
ductivity does— and this would require significantly more than 3.2% wage in­
creases today.
What account is to be taken of the fact that wages have been traditionally—
but irrationally— lower in agriculture and food processing and in a good many
service trades than in most durable manufacturing industries? If these wages
are to go up, by more than the productivity “par” for the economy as a whole,
is this to mean lower increases for manufacturing workers— whose cost of
living increases as a result of higher prices for food and services?
Is there a place in guidepost theory for the inevitable effect on wages and
prices of a shortening of the supply of skilled workers in certain industries as
unemployment rates drop— but s i l stay at about 4 % ? Does this theory con­
tl
tain some unarticulated or even unrealized assumption that a certain unemploy­
ment figure constitutes “full employment*— because anything below that will
*
create upward price and wage pressures? If so, i is wrong.
t
There is also the practical question, obvious in the light of present circum­
stance, as to whether i is the more advisable public policy to press the guidet
posts in terms of a specific decimal point conclusion or in more general terms.
They appear to have more utility right now as the basis for a defense in depth
rather than as a Maginot line.
There are hard questions— that warrant the fullest possible consideration in
a variety of forums.
There has been legitimate objection that the C E A ’ development of the pro­
s
ductivity guideposts has included too little participation by those whose ex­
perience includes fuller participation in the functions of price and wage
determinations. The point i made both in terms of the quality of the policy
s
formulation and in terms of the pragmatics of general acceptance of the con­
clusions which are reached.
It could also be expected that the type of proceeding contemplated in Section
2 of H.R. 11916 would result in a much fuller public understanding than there
is today of how the productivity guideposts actually operate in practic^-and
particularly of what is involved when they dotf’ operate.
t
The general public impression today is that “the guideposts were broken” in
a series of several specific cases, principally cases involving wage Settlements.
Thoy were broken in fact (if that form of statement is permissible regarding
the working of an over-all principle rather than a specific rule) When food and
service prices went up so that the real earnings of workers were not advancing
in line with increased productivity. The rest was inevitable. TTie importance
of an understanding of this is that i affects materially the diractio* of the force
t
of public opinion in connection with repairing the “breach.”
All of these considerations point to the advisability of the kind of procedure
proposed in Section 2 of H.R. 11916 for the participation by representatives of
the Congress in the kind of policy development represented by the productivity
guideposts.




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196 7 ECONOMIC REPORT OF THE PRESIDENT

285

More difficult questions arise in connection with applying the guidepost prin­
ciples to particular cases.
During the past five years the t
cage guideposts have been applied consciously
and meaningfully in collective bargaining and by employers unilaterally in a
substantial number of specific wage cases. The 1965 maritime settlement is
illustrative. There have been others. Particularly in the last year or so, the
guideposts have affected materially the policies of the Federal Government in
the making of wage adjustments for its own employees* It is more than just a
matter of averaging, that the over-all wage movement in hard goods manu­
facturing industries over most of the period between 1962 and 1965 came out
very close— just a little below— the 3.2% productivity increase figure.
There is less basis for evaluating the extent to which the guideposts have had
a comparable effect on particular price setting practices during the past few
years. To the extent— largely overlooked in public discussion— that the guideposts require price decreases where productivity goes up more than is true in the
economy generally, that they have been paid exceedingly little respect— virtually
none.
The hard problems are about the propriety and the effectiveness of the use
of the guideposts principle as a standard for the Government's influencing, in
one way or anothert the price or wage decisions in particular cases; and these
are the hardest problems that would arise under H.R. 11916 in its present form.
So far as the experience to date is concerned, it shows a variety of results
virtually defying generalization. On the wage side, the experience ranges from
the 1965 steel case (where the guideposts were an extremely important and con­
structive factor) to the 1966 airlines case (where they weren’
t). So far as
prices go, the Administration has been effective in preventing and even pushing
back certain increases, which couldn't be justified on guidepost principles; in
other areas (particularly where small unit industries are involved) there have
been no effective methods available to achieve these results; and here again i
t
has proved impracticable to attempt to get any price reductions— even where
this is what the guideposts indicated.
Consideration of the statutory formalizations of a process of “review” of
particular situations— as contemplated in H.R. 11916— warrants the clearest
thinking through of the implications of the Government’ assuming responsibility
s
in matters of this kind without establishing a basis for the exercise of authority.
The idea of “bringing to bear an informed public opinion . . . with respect
”
to “individual price and wage behavior’ i appealing. But i m a y exaggerate
’ s
t
both the public’ desire to be advised and its willingness (or ability) to do any­
s
thing if i i . The searing experience of years of representation of the public
t s
interest, especially in labor disputes, is that the public is an inconstant client
who wants most of all not to be bothered any more than i absolutely necessary.
s
There is another factor here: There is a strong strain in the practice of
government of caution about expressing official views in the absence of authority
to back them up. And for good reason— part of i that the effectiveness of
t
government is weakened whenever its expressed views are disregarded.
The judiciary has stayed almost completely away from this kind of practice,
for a combination of constitutional and practical reasons. Advisory opinions
are not issued, declaratory judgments resorted to sparingly, and obiter dicta
counted as probably causing as much trouble as they cure. There is proper
recognition that “the law” should speak authoritatively or not at all— for fear
of weakening its authority.
The tradition of executive pronouncement designed to guide voluntary private
action along the lines of the public interest i , on the other hand, more clearly
s
established. Indeed the ability to lead is as important an element in the execu­
tive function as is the power to command. In scores of situations, many of
them now so common-place as to go unnoticed, executive persuasion is relied
upon as a desirable alternative to legislation. Yet here, too, sharp issues
sometimes arise regarding the extent to which persuasion is appropriate with­
out the authority to back i up if i gets into trouble.
t
t
So far as legislative action is concerned, there is a less clearcut tradition of
either abstaining entirely from or entering freely into situations in which no
authoritative action is contemplated. The recognized difficulties are reflected
in the general rule of restricting legislative inquiry to situations in which such
action is envisaged, at least as a possibility. But there have clearly been ap­
plications of this principle which would provide at least tangential precedent
for the procedures suggested in H.R. 11916.




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19 67 ECONOMIC REPORT OF THE PRESIDENT

The question of legislative function i , however, more one of pragmatic than
s
of either philosophical or constitutional considerations, and a certain presump­
tuousness attends any testimony I might offer here on this point.
I commend to the Subcommittee for its consideration the August 18,1966 report
to the President by; his Advisory Committee on Laboi^Management Policy, and
attach i to this statement as Appendix I
t
.
This Advisory Committee report reflects the unanimous conclusions of this
tri-partite group regarding the validity of the wage-price guideposts as they
were originally enunciated. It makes clear the important implications of the
distinction between (i) guidepost statements of economic policy, and (ii) rules
to be applied in every case. It suggests the constructive possibilities of broader
participation in the further development of these policies. It also proposes
what I would consider a more effective procedure for review of particular situ­
ations than the legislative review proposed in H.R. 11916. Indeed, i would
t
perhaps be recognized generally that if the procedure outlined in the Advisory
Committee report became operative, the original purpose of H.R. 11916— so
far as the review of particular cases i concerned— would be substantially served.
s
In any event, the action of the President’ Advisory Committee confirms the
s
essential wisdom of the underlying proposal in H.R. 11916.
In short, I conclude that there is very real promise in the proposal in H.R.
11916 for the formulation of general guidepost policy as a basis for voluntary
private decision-making and as a means for the public to make up its mind
when i wants to; but that the provision for price-wage guideposts that “shall
t
take effect” misconstrues their real nature; and that the proposal for formal
determinations in specific situations warrants reconsideration.
I suggest, finally, that the future will testify to the foresight of the sponsor
of H.R. 11916 in his recognition that by declaring our independence of the
doctrines of economic determinism, and by asserting the human authority and
ability to control economic as well as physical forces, we have assumed a respon­
sibility to direct certain key economic actions on a much more rational basis
than before. Recognition of the importance of sound public fis a , monetary,
cl
and budgetary policy requires fuller realization than there is yet about the
related necessity of “guiding” such decisions as those regarding wages and
prices to some s i l undefined extent.
tl
H.R. 11916 is a pioneering proposal for making the free economy work.

Secretary W irtz. It had to do with the bills which were then before
the Congress involving the question of whether there should be estab­
lished by legislative action special review procedures. The proposal
at that time contemplated review procedures which would go into the
fact of particular cases and also into the general economic implica­
tions of what was going on. My testimony was to the effect that I
would oppose—would recommend against legislation which at this
stage would go into particular cases. But would support or would
recommend favorably with respect to a procedure which would in­
volve any1economic review of the situation. This is a reference to
that.
Senator Symington. I understand, and will read that testimony
with interest.
In your statement you also say that you believe we should do our
best, voluntarily, both business and labor, to conform to the concept
of the guidepost principle. Is that a correct interpretation?
Secretary W irtz. It would be.
Senator Symington. Your last point. In effect, you do not want
to develop specific guideposts as to prices and wages, for the future;
is that correct?
Secretary W irtz. That is right.
Senator Symington. That differs from what has been done in the
past; dofcsit not?
Secretary W irtz. A s a practical matter, yes; J think it is a fair in­
terpretation to be placed on the 1966 experiencer—
was that the country




THE

1967 ECONOMIC REPORT OF THE PRESIDENT

287

and the administration did translate those concepts into a quite spe­
cific figure and the Council’s report in the President’s Economic Mes­
sage did take a different approach.
Senator Symington. N o w , let me ask you this question. I f you in­
crease labor rates you increase the gross national product; is that
right?
Secretary Wirtz. That would be right. I think that is out of my
Department.
Senator Symington. I think it would be difficult to get you out of
any department because of your experience. Now, some people justify
the cost of the Vietnamese war on its percentage of the gross national
product?
Secretary Wirtz. Yes.
We got two gross national product measurements. We sometimes
talk about it in price terms and sometimes in real terms. If we talk
about it in price terms it would include all the factors to which you
refer.
Senator Symington. The reason I ask is that, to me, the increasing
cost of the Vietnamese war is a matter of grave concern- It is hard
to get these costs together. The staff of the Senate Appropriations
Military Committee estimates some $2.5 billion a month. But it is
defended constantly on the grounds that it is the same percentage, or
a less percentage, of the gross national product. If that is going to
be the gage, I have a suggestion to make, being distressed to note the
increasing fall in the private sector, of our excess of exports over
imports. When you do have increases in the GNP that do not neces­
sarily reflect increased productivity, you are liable to find yourself in
a competitive jam as far as competing against other countries, are
you not ?
Secretary Wirtz. Senator, you would understand by my previous
answer, I wouldn’t for a moment justify one single penny of expendi­
ture for war or for anything else on the basis of gross national prod­
uct permitting it by its gross. I think it is a matter of putting any
figure of this kind in its context, but I don’t think of that as a defense.
Senator Symington. I am delighted to hear you say that. When
this question came up in another committee about 2 weeks ago, I said:
“How long do you think this economy can stand the multi-billiondollar cost of this war, which is steadily increasing ?” The answer was,
“Forever.” It seems to me forever is a long time. This statement
worried me a great deal. The next thing, you know, you will find
people going back to the old Communist cliche, that capitalists pro­
mote war in order to have a more successful economy.
Secretary Wirtz. I do think the analysis carries over to any expendi­
ture which every simple purpose would like to see cut down as soon
as it can be.
Senator S y mington. I am glad to hear that.
This balance-of-payments problem. I have great respect for Dr.
Heller, have just read his thoughtful new book in which the word
“gold” in its relationship to currency reserves, does not appear. It
seems to me, gold is currently one of the basic aspects of any fiscal or
monetary consideration in government. I am not saying it is vital,
do not mow enough about it.




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1967 ECONOMIC REPORT OF THE PRESIDENT

What worries me a great deal is that we keep saying it is a serious
matter, and that we are going to correct it “next year.” But we never
do. In this balance-of-payments situation, we are getting to a point
where we have to make some major decisions incident to our position
with other countries, else we are going to have some real problems.
Would you agree ?
Secretary Wirtz. Yes.
Senator Symington. The way I have it figured out is that we now
have about 10 percent of free gold to pay off, if called our current
obligations in foreign countries. I do not want to get you into a
discussion of this very complicated subject.
Secretary Wirtz. I do not, sir.
Senator Symington. But it worries me, continuing to use the per­
centage of the gross national product as a defense of the increasing
cost of this war. I think the figure of the budget for defense this year
is about $74 billion, with a $12 billion supplemental, total about $80
billion. We could use a lot of that money in many other programs,
domestic programs you are vitally interested in. So I would hope
that if the administration continues to defend the growing cost of
this Vietnamese war on the grounds it is a lessening percentage of the
gross national product, therefore a justified expense, all that would be
looked at from a financial standpoint. I do not see, necessarily, any
direct connection between a country’s economic capacity, and its fiscal
and monetary international position. Is that a fair observation?
Secretary Wirtz. A s far as I know. Let me say again, I don’t be­
lieve anybody has every justified military expenditures on the basis
that you do not need to worry about it as long as it stays within a
certain percentage of the gross national product.
Senator Sy m i n g t o n . For that answer I am grateful.
Chairman Proxmire. Congressman Widnall ?
Representative W id n a ll. Mr. Chairman, Mr. Secretary. In your
statement you say among teenage girls the labor force increase was
about 230,000 more than the trend expectation of 190,000. To what
extent did Government employment contribute to that?
Secretary Wirtz. I don’t know. We are trying to find out what­
ever we can. It would be a very small figure. There are not many
teenage girls involved as far as Government employment is concerned.
We will see what we can do about it.
Representative W id n a ll. Are there not a great number of people
employed on an hourly basis in connection with some of the poverty
programs?
Secretary W irtz. Let’s see. I f we called Neighborhood Youth
Corps trainees Government employees, they would be a substantial
group there. That would be the only area that I can think of with
anv substantia] number. I just would have to check on that.
Representative W id n a ll. I would like to see the total figure of
those employed.
Secretary Wirtz. Y o u would like to have whatever identification
we can arrive at of the number of teenage girls and the increase in the
number of teenage girls whose employment is with the Federal Gov­
ernment ?
Representative W id n a ll. That is correct.




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289

(In answer to the above request the Department supplied the follow­
ing 0
Most of the young people participating in the Neighborhood Youth Corps’
In-School, Out-of-School, and Summer programs are teenagers. (Table, page
260.) Approximately 1,384,000 young people have participated in the N Y C pro­
grams since their inception, including the 355,000 projected in training during
the 1968 fiscal year.
The Civil Service Commission and other Federal Departments and Agencies
hire teenagers in conjunction with the President’ Youth Opportunity Campaign.
s
W e have been informed by the Commission that data on this program and on the
ajre and sex of teenagers hired by the Federal Government for the years 1965
and 1966 are not available.

Representative W i d n a l l . A s I understand you today, according to
the major problems, one of the major problems of unemployment lias
to do with teenagers ?
Secretary W iktz. Yes, sir.
Representative W i d n a l l . I have several questions in mind with re­
spect to that.
To what extent does the draft prevent employment of the teen­
ager ?
Secretary W iiitz. It doesn’t prevent it. It might reduce it some. I
am not sure of the direction of your question. It is an interesting
thing that we have still the largest unemployment in the age groups
which are subject to the military draft.
Representative W idn a l l . There are many employers who do not
want to employ a teenager with the hatchet hanging over his head,
so to speak.
Secretary Wiktz. We have paid considerable attention to that and
are concerned about it and feel it is very unfortunate and have won­
dered whether we can undertake some educational program to try
to diminish that effect but recognize it as exceedingly difficult.
Representative W i d nall. From my own observation that would
seem to be a great limiting factor and once we can firm up what a
teenager is supposed to do with respect to his military and nonmili­
tary commitment to the Government I think we could solve a great
deal of the problems within the teenage group, particularly with the
male.
Secretary Wirtz. It would help some and I did discuss that with
that Commission. It is a problem. I think it is not a large factor, but
it does contribute.
Representative W i d n a l l . Also in this respect, one of the real handi­
caps m employment of the teenager is the restrictive labor laws. There
are many that are thoroughly employable, thoroughly physically cap­
able, but because of age limits that have been written into the law it
is not possible to employ them when there are employment opportuni­
ties that go begging because no male adult will take the job. Do you
think it would be wise to have a good look at some of these to see
whether or not we could loosen up some of these labor laws ?
Secretary Wirtz. The first relates to your previous question.
The unemployment is higher among the girls than it is among the
boys which is one thing that makes us think it is not of great
magnitude.
The second one is—and February 1 the minimum wage law became
effective applicable for the first time to school bus drivers and we




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1967 ECONOMIC REPORT OF THE PRESIDENT

found that a very large number, some 10 States employ 16- and 17year-old boys as school bus drivers and we have that specific matter
under particular study at the moment.
I am impressed, too, Mr. Widnall, that compulsory education in this
country extends only to 16 and in some States below that, but we pro­
hibit a considerable number of kinds of employment below 18 and so
there is a kind of limbo period in there and I would agree. We are
just starting an analysis ot the relationship of those two.
Just one illustration* I suppose a good many years ago it was good
sense not to let a child run an elevator because it was a hard operation.
The same thing does not apply in elevator operation today. I agree
with your point.
Representative W i d n a l l . Another factor, too, you partly touched
on, when you spoke about the minimum wage increase. It seems to
me this has also been a limiting factor where people ought to pay the
limiting wage that was going into effect, they will do their utmost to
employ an adult rather than a teenager because they will feel they will
accept more responsibility in handling the job. I have found that
true locally in the metropolitan area, right as of today. Do you not
think that there should be consideration of the minimum wage as it
applies to teenagers ?
Secretary Wirtz. No, sir, I do not. I appreciate the problem. We
have a congressional direction study every year under Section 4(d)
of the Fair Labor Standards Act. This matter of whether the changes
in the minimum wage law has affected employment with respect to the
various industries, with respect to the various age groups—and we
have reported each year to the Congress those results. They have
never shown any evidence of the development to which you refer but
I should add this. Every time there has been a change it has been
on an upswing in the economy so there probably would have been an
increase in employment anyway. So I don’t know how to evaluate
those two factors, but we find no evidence of its increasing youth
unemployment.
Representative W i d n a l l . There is one other phase of that that I
would like to know more about.
It had to do with apprentice training programs of the unions. Does
the teenager have the same opportunity to get into the apprentice
training program as an adult does ?
Secretary Wirtz. I rather suspect that whatever problem there is
there is less on the apprenticeship side than it is on the employer’s
side. We find an increasing practice in some industries to stay away
from the young person, frankly, because of the education—the educa­
tion isn’t what it ought to be and we are talking very frequently about
a nonwhite situation.
I will make a check, but I don’t believe we have any evidence or
basis to believe that the apprenticeship programs have shown an age
bias. A good many of those programs have been on the father-son
basis in the past wliieh would neutralize that fact. I only testified to
the best of my present knowledge. I don’t believe the age factor to
which you referred was a material factor in the administration of the
apprenticeship program but I will ask our Bureau of Apprenticeship
people about it.




THE 1967 ECONOMIC REPORT OF THE PRESIDENT

291

Representative W id n a ll. Will you submit it for the record if you
find it ?
Secretary W irtz. Yes, sir.
(The information referred to follows.)
Teenagers have the same opportunity to enter apprenticeship programs as
adults, provided they meet the qualifications. In general, 18 years of age is
the minimum— in part because high school graduation is usually required
and because hazardous working conditions are relatively common.
Evidence of the acceptance of teenagers in apprenticeship is shown by the
average (median) age of apprentices already in training— 22.9 years. There­
fore, many of these apprentices would have started their training during their
teens. In addition, a recent check on the ages of 2,495 beginning apprentices
in the Washington, D.C. area showed 935 entrants under 20 years of age.
It is quite possible, however, that some employers might prefer older boys
as apprentices, particularly in the light of the fact that younger ones may be
subject to the draft at some time during their training.

Representative W id n a ll. The Council of Economic Advisers fore­
sees a 4 percent growth of real output this year. Louis Paradiso of
the Department of Commerce estimates the growth would have to
increase 4 percent to absorb all the new entrants into the labor
force. If this is correct what will be the anticipated unemploy­
ment rate by the end of this year?
Secretary W irtz. There were different statements as to what is
going to happen as far as productivity is concerned. We have all
done our homework on that. I think all we can say to you from
our various studies-JVIr. Ross and his people in the Bureau of Labor
Statistics have made the same approach. We all come out in a range
of 4, 414 percent for 1967 and I don’t think any of us can be sure of
the refined figures much more than that. Our own figure comes out
in between those two as to the percentage that would be involved.
I think the important thing, at least to me, is that whatever we
decide about 1967 that figure is going to have to be higher after 1967
and I would be very much concerned about the country settling back
into thinking that 4 percent or 4-plus percent increase in the gross
national product is going to carry us on through. There is doubt in
all of our minds about the precise answer to your question for 1967,
but we are all agreed that it is going to have to be higher than the
identifiable factors we can see for this year in order to Keep up with
the expandable work force. That I can say to you with considerable
certainty.
Representative W id n a ll. That is all, Mr. Chairman.
Chairman Proxmire. Thank you, Mr. Widnall; and since you leave
off exactly where I want to begin, I would like to follow up along the

same lines*
I understood when we were discussing this earlier, Mr. Secretary,
you said most of those not now employed would not—or perhaps
should not—be employed, that they ought to be either in school or
in training rather than at work, and at least they would not be em­
ployed without further training. That was the impression I got.
Was that correct or not ?
Secretary Wirtz. That would have been my thought with respect
to those under 20 years of age.
Chairman Proxmire. We now have 2.7 million out of work. Some
of them are teenagers and I am talking about the overall picture. I
want to press on you the notion that perhaps we should try to get



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1967 ECONOMIC REPORT OF THE PRESIDENT

unemployment down, and that we can do it without a risk of sub­
stantial inflation this year.
Secretary Wirtz. You would not need to press that, Mr. Chairman.
I agree completely with you on it and I want to make quite clear
there are a great many unemployed today who ought to be and can
be employed and that figure should go down below 4 percent to some­
place between 2i/2 to 3.
Chairman P r o x m i r e . That answer seems to me has great implica­
tions for our fiscal and monetary policy.
Secretary Wirtz. Yes, sir.
Chairman P r o x m i r e . It would means if you followed that through
that we should have a tax policy of probably no tax increase this
year, a policy of more expansionary fiscal policy generally and lower
interest rates.
Secretary Wirtz. No ; it is a much more complicated thing than
that. I am afraid I overstated it.
First, I cannot be talking in terms of a single year.
Second, I am talking in terms principally of what I think can be
done by training and educating, and qualifying the people who are
not today trained, educated, and qualified.
Chairman P r o x m i r e . Y o u know far better than I know, Mr. Sec­
retary, that most of the training is in private industry. You also
know that when private industry trains they have a demand for
manpower; when they can sell what they produce and they will go
out and make an effort, they will train teenagers, train minority
groups, train women, and they will do everything to get people into
the work force. They will do everything they can to get people who
are out of work at work; is that not correct ? Doesn’t demand pres­
sure step this up more than anything else ?
Secretary Wirtz. That is true down to a point, and I think w e are
about at that point. I don’t think that we will go any further into
the hard core area, absent the pressures that we had in 1940 to 1946,
which is the only time they did so.
I think that the next million will not be taken by private employers
except as we help out in the training of it.
Chairman P r o x m i r e . What is the difference between our situation
now and our situation in 1952 and 1953 after the Korean war, espe­
cially 1953, after we had eliminated price controls? At that time—I
am not talking about teenagers, experienced wage and salaried work­
ers—the unemployment rate was 3.3 and 3.2 and now it is 3.5. For
blue collar workers generally, it was then 3.6 and 3.4 and now it is 4.2.
It would seem to me that there has not been that much of a change
in the last 15 years in the nature of our economy, absent teenage prob­
lems which I am trying to separate out.
Secretary Wirtz. I believe there has been and I appreciate your
analogy. The point that you leave out is that the machines have had
an extra 15 years of education, and that now the machines are so
sophisticated that they can do more cheaply the work which was turned
over to individuals at a period of comparable pressure heretofore.




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1967 ECONOMIC REPORT OF THE PRESIDENT

293

Chairman Proxmire. Is there not—behind all this—an assumption
that because prices did rise sharply in the first part, first 7 or 8 months
of 1966, that the scarcity of labor had a lot to do with it ? And when
we analyze the nature of that price increase we find it was in food,
N 1, and in services. When you look at services increase, one-third
o*
of the rise in these prices was the very sharp increase in interest rates
which went up 12 percent. When you look at that and consider the
experience we had in 1952 and 1953, it does raise a question that we
could probably push unemployment down below 3 percent without
necessarily having a serious inflationary problem.
Secretary Wirtz. That is my view completely and that factor was
exaggerated quite seriously last year.
Chairman Proxmire. The CEA tells us that we are going to be at 4
percent at the end of the year, not 314 or 3.4 or 3.3 and there would be
no progress. That is the Council’s position. I take it you do not agree
with that.
Secretary Wirtz. I do not know where we will be and I think I have
more confidence in what can be done on the affirmative manpower side
than the Council does. They have the experience lessons to support
their pessimism. I think we can do a good deal more on that side. I
don’t know what unemployment will be at the end of this year.
But on the analysis that you made concerning the wage rate factor,
I couldn’t agree more.
Chairman Proxmire. I appreciate that a great deal.
Secretary Wirtz. May I add in fairness, we would both recognize
there was a wage factor that had to do with the very low wage indus­
tries—services, food, and some of those—in which for independent rea­
sons, because they were low wage industries there had been a slackening,
a lowness of wage which had to be corrected. That factor I think was
quite real and aid bear on the service and the food industries. But
I think the Nation, understanding that, would agree 100 percent that
we had better push those w^ages up.
Chairman Proxmire. What evidence is there to indicate or measure
the success of our manpower programs such as manpower develop­
ment and training, the Job Corps, the Neighborhood Youth Corps,
and work experience? Can we apply PPBS analysis to this?
Secretary Wirtz. Several ways, and none of them satisfactory. It
won’t surprise you that I have sometimes wondered whether the Key­
nesians haven’t taken too much credit for the gains we have made m
the unemployment situation. I rather think that the manpower pro­
grams, training programs of the Government as well as private train­
ing programs have contributed quite significantly to the reduction in
unemployment in this country.
The next set of evidence has to do with the numbers who have ac­
tually gone through these programs and with their subsequent em­
ployment record. Those figures are quite encouraging, but again it
is hard to settle because of the argument that things were going quite
'veil and they would have been employed anyway. I don’t know how
you prove that.

75—
314— 67— pt. 2-------5




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THE

1967 ECONOMIC REPORT OF THE PRESIDENT

I am more interested, and I know you are, too, in the problem re­
maining to be done rather than what we have already accomplished
and here the problem is painfully clear. We know a great deal more
than we did before about the people who needed this help; who they
are, where they are, and what the situation is. I could be quite specific
about that. It is an area in which it is hard to measure your gains
especially if you have to argue with the economists about whether it
was the economy or the program. It is very hard to measure your
gains but very easy to measure the jobs that are left.
Chairman Proxmire. I am not so sure the fiscal analysis is right.
One of the big reasons they point out for the rise in personal com­
pensation in 1966 is the movement of people off the farms, especially
marginal farms where income is low, into industry where wages are
high. I’m afraid this is too easily taken as evidence that wages are
pushing up prices. This is not true at all. This means that the jobs
were there and people left employment where they were not needed
and you could produce much more efficiently and move into an area
where they are producing more and earning more.
Secretary Wirtz. The figure on this line is, that is so often left out,
is the increase in the work force. We talk aoout unemplojranent----Chairman Proxmire. I ’m talking about people working on the
farm, leaving it and then working in a higher paid category.
Secretary Wirtz. Yes, and they are moved from the lower paid to
the higher paid category, the mix has changed, the number of people
who have come into it has changed. All these things could happen.
The standard of living in this country can go up substantially and the
unemployment rate stays the same. It is an incomplete index and so
often the answers to all these things we are talking about is that it
has been a combination of factors.
When you ask me how do we measure our activities, all I can say
is that it took both an expandable economy and a conscious manpower
program.
Chairman Proxmire. Because of the analysis and nature of price
increases and they are so important, I would like to ask Mr. Ross if
he could supply either now or for the record an analysis of the prooitions of the overall rise in the Consumer Price Index accounted for
y its major components, for example, services, particularly interest
rates, food, et cetera*
The table given by the Council is too big in my view to break it
down to determine what are wage sensitive and what are not. It is
difficult for the staff of this committee and for myself to make any
kind of an estimate as to how inflationary fiscal policy is unless we
have this kind of breakdown.
Mr. Ross. We will supply that, Senator.
Chairman Proxmire. Thank you very much, Mr. Ross.

K




THE 19 6 7 ECONOMIC REPORT OF THE PRESIDENT

295

(The information requested, later supplied, follows:)
Percent change and contribution to total change, selected Consumer Price Index
components , December 1965 to December 1966
Component

Percent Percent
change of total

Food...................
Food at h ome _________
Food away from home__
Housing.___ _____ _ _______
Shelter * __
______
Rent
- ______
Hotel and motel room
rates........ .....
Homeownership___ ___
Purchase ..__*
Mortgage interest
Taxes and insurance..
Maintenance and re­
pairs ___________
Commodities...
Services_______
Fuel and utilities..... ....
Fuel oil and coaL-----Gas and electricity_____
Telephone, water, and
sewer____
______
Household furnishings and
operation ______
Textile house furnishings.
Furniture
Floor coverings ___
Appliances
_
_
Other house furnishings _
Housekeeping supplies_. _
Housekeeping services_
_
Apparel and upkeep
~ _
Men's and boys'... .......
Women's and girls*... ....
Footwear............ _
Other apparel..... ..
_
Commodities *___ _
_______
Services ~Transportation . *
.
______
Private...... .......... .
N e w cars.............
Used cars__ _____ ___ .
Gasoline and motor o l—
i

3.3
3.8
3.4
5.3
3.3
4.1
1.6

100.0
25.8
18.4
7.3
32.0
24.7
2.7

5.6
5.0
1.2
13.8
4.2

.6
21.4
2.2
11.5
2.8

5.5
2.6
6.8
.3
1.5
-.1

5.0
.7
43
.4
.3
-.1

.3

.2

3.0
3.2
45
.
.6
-.3
2.7
2.2
5.9
3.9
3.0
3.6
6.3
3.7
1.3
4.9
2.0
1.5
“ .1
-3.4
3.4

6.8
.7
1.7
.l
-.1
.6
1.0
2.8
12.0
2.5
4.2
2.8
2.4
.3
2.1
7.9
5.6
-.1
-2.3
3.4

Component

Percent Percent
change of total

Transportation— Continued
Private— Continued
Tires... ...........
2.4
Auto repairs..........
2.4
Other auto expense____
4.1
Public... .... ......
6.4
Health and recreation ....... .
3.8
Medical care...... .......
6.6
.2
Drugs and prescriptions,.
Professional services....
6.3
16.5
Hospital services.... .
9.0
Health insurance____ _
Personal care......... ....
3.4
1.5
Toilet goods---------5.5
Barber and beauty shops.
Reading and recreation.....
2.6
.5
Recreation goods______
4.6
Recreational services___
Reading and education...
3.8
Other goods and services....
2.2
3.5
Tobacco products......
Alcoholic beverage.— *___
1.2
Personal expense.......
2.7
Financing charges . . *
3.4
Commodities....... .........
2.5
3.3
Nondurables...... .......
.7
Durables..... ...... ....
Services...... ..... ...... .
4.9
Commodities l food.........
ess
1.9
Nondurables less food..... _
2.8
Apparel commodities
3.7
Apparel less footwear._
_
3.1
Nondurables less food and
apparel....... ..... ...
2.3
N e w cars...____ -________
— .1
Used cars____ ___________
-3.4
Household durables_______
1.7
Housefumishings___ ______
2.2
Services less rent*________ ____
5.5
5.5
Household services less rent..
Transportation services.....
4.3
Medical care services....... |
8.1
Other services......... ...
4.6

.5
.7
3.4
2L4
21.9
11.4
.1
5.0
1.9
4.4
2.7
.6
2.1
4.5
.4
2.2
1.9
3.3
2.0
.9
.4
.4
49.7
46.3
3.4
50.3
23.9
20.5
9.9
7.0
10.6
— .1
-2.3
2.7
3.1
47.7
22.1
6.4
11.3
7.9

Chairman Proxmire. Now, I would like to ask this question before
I yield to Mr. CurtisI would like to ask Mr. Wirtz if it is not true that the Government
training programs, though very vital, are really very small in rela­
tionship to the proDlem ?
Secretary Wirtz. Yes, sir.
Chairman Proxmire. I think this is the one part of Government
expenditure that is deflationary in the best and most constructive sense.
You are taking people who are unemployable in some cases, people
who in some cases do not have the motivation, and give them the op­
portunity to work in a Job Corps camp, where they can develop mo­
tivation and skill. These will be producers and not consumers. I
cannot think of a better investment and the deflation effect is a matter
of months in many cases. It is not a matter of years. Are we not




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19 67 ECONOMIC REPORT OF THE PRESIDENT

really missing a good bet by not putting more into an area which seems
to be so rewarding for the national interest?
Secretary Wirtz. Senator, you know the easy answer for me to that
question and it is, “ Yes,” put more money in. I am sobered by the
realization of the extent to which this program has changed from
year to year in our own administration, sobered to the extent of realiz­
ing that I am not certain that we could have economically and effi­
ciently administered a larger program.
Chairman Proxmire. It is hard to get instructors and teachers?
Secretary Wirtz. It is very hard. That is the single worst shortage.
When I realize how rapidly we have shifted from institutional train­
ing to on-the-job training, I guess I would have to be cognizant of the
fact that one of the implications is getting further action rapidly on
institutional training. It has caught up with us so fast we might have
been training people for jobs at that point which did not need to be
filled.
There are expansions contemplated for this year. The biggest sin­
gle point that makes me reluctant about answering your question the
easy way is that I think as we move into this next period we are going
to be shifting more and more of the responsibility to employers and
picking up the marginal or submarginal costs. I have a strong feeling
we can direct more and more of our money to work out the relation­
ship between public training and private employment, so I cannot an­
swer unhesitatingly your request about whether we should have an
expansion now in terms of dollars.
Chairman Proxmire. I want to apologize, Congressman Curtis. I
said I would yield. I have one other question to ask.
This relates to guidelines.
Mr. Secretary, you are Vice Chairman, as I understand it, of the
President’s Advisory Committee on Labor-Manageraent Policy and
the Secretary of Commerce is the Chairman. The report on the guideposts recommended quarterly reports from the Council to identify
the nature and chief cause of major shortcomings and recommenda­
tions to correct any within the purview of the President’s Commission.
Now, in view of the fact that the administration has decided to drop
the figure which so many of us are concerned about, it would seem to
me that this kind of report should certainly be made and I am in­
formed by the staff that no report has been made, this recommenda­
tion was August 18, and this is February, 5 months later and not a
quarter, not 3 months, and this is exactly the kind of study which,
in the absence of a precise guideline figure would be most helpful.
Secretary Wirtz. That report was not made formally, but was made
by the Council on Economic Advisers to the Committee at its Decem­
ber 14 meeting. It was not a written report. It was an extensive fullday discussion on a sector-by-sector basis.
Chairman Proxmire. Would this not be invaluable to the members
of this committee and the Congress if we could get this on a quarterly
basis, absent the figures, the 5-percent figure or some other figure, to
have this kind of information publicized and made known?
Secretary Wirtz. I think so. That is what the position is some of
us took with respect to the proposed legislation before the Govern­
ment Operations Committee.




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1967 ECONOMIC REPORT OF THE PRESIDENT

297

My answer would be an unqualified “ Yes.” That kind of quarterly
reporting would seem to me all to the good to this committee, to tlie
country.
Chairman Proxmire. Is there any prospect we can get that l
i
Secretary Wirtz. It would lie within the province of the Council,
but those conversations have been sufficiently complete I think and
there would be great interest on the part of the Council in doing this.
I answer subject to that consultation.
Chairman Proxmire. Congresman Curtis?
Secretary Wirtz. We on our part, as far as the Bureau of Labor
Statistics are concerned, would be doing that kind of quarterly report­
ing from here on,
Representative Curtis. Let me commend you for that approach.
That is where I think the value of the wage cjuidepost lies, and as I
said, going back to 1962,1 want to be sure it is clear, I do not share
the view of Senator Javits or Mr. Reuss. Wien I was interrogating,
I said I was rather pleased that you had gotten away from the actuai
figure. But, to give productivity information, yes, t£is is an economic
exercise and it is the data that is needed. I might add, Mr. Chairman,
I am pleased to have your emphasis on getting the data out and
distributed widely.
As I understand your response, that is what you were responding
to; am I correct?
Secretary Wirtz. Yes.
Representative Curtis. I probably do want to direct written ques­
tions to you on job vacancy statistics. I think you are aware oi the
fact that our Subcommittee on Economic Statistics, under our present
committee chairman, went further into the job vacancy statistics, and
the testimony we heard showed that there was only one person, repre­
senting AFL-CIO, who was against it. What I am fearful of is that
the data you mentioned is not anywhere near what I thought we had
in mind when we were talking about job vacancy statistics and what
we were talking about in reference to the $2.5 million needed to get
this kind of data. It seems to me that for manpower training pro­
grams to work we need as much data as we can add in this area of
job vacancies. Would you care to comment on that ?
Secretary Wirtz. Yes, sir, my view would be the same as it was in
the previous testimony, we would like to do it on the basis that we
have been proposing over the years. I think it might be helpful if I
were to transmit to you on a personal basis the set of reports for 1966
which we have been able to assemble and which represent in my judg­
ment the best we can do with the material at hand.
Representative Curtis. I would appreciate it. I have asked our
staff to see if we could get those reports and possibly make an
analysis of them and then see what we might have to do' further on
this. I think it is very important.
I think I understood what Senator Miller was asking in regard to
the manpower utilization in the armed services, the civil service, as
well as in the munitions industry. I am interested in getting some
estimates of how much additional manpower utilization there is as
a result of the Vietnam war. Do you have that ? Have you attempted
to get statistics on that ?




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th e

1967 ECONOMIC REPORT OF THE PRESIDENT

Secretary Wirtz. We will identify that in that report which Senator
Miller has requested—we will identify it as far as we can, anything
allocable to the Vietnam situation.
Representative Curtis. Also, when the day comes when we end
the war, we have the other side of the coin of what our problem
might be in getting these people back into the labor market. I am
just trying to get some idea of tne size of the problem.
Secretary Wirtz. I think of that not only as a problem but as a
prospect.
Representative Curtis. It is a problem. When we shifted from the
Korean war, I recall all sorts of talk. Well, I identified a good deal
of the unemployment then as a shift from a war economy to a peace
economy, and we have now shifted to a degree from a clearly peace
economy to one that is partially war. I want to see through the labor
statistics, the extent of this.
During World War II we had a Manpower Utilization Board which,
partly considered deferment cases for munitions industries and so
forth. There is a similar board today or commission, is there not S
Secretary Wirtz. No, it is a function that I exercise as Secretary of
Labor with respect to occupations, and the Secretary of Commerce
with respect to industries. The function is carried out but it is carried
out in a line department basis. There is an interagency committee.
Representative Curtis. That is what I thought. Has that been ac­
tive in recent years—in the recent year and a half or two years?
Secretary Wirtz. I can tell you exactly. As far as the occupations
are concerned, and I answer because I am chairman of that committee,
there have come up from the interagency committee several recom­
mendations about deferments. I felt that the circumstances did not
warrant any additional deferments, so there has been in terms of
change—in the last 4 ¥ years there really has been no extension of that.
=2
Representative Curtis. In other words, what deferments there are
we might relate to peacetime kinds of deferments ?
Secretary Wirtz. Developed before 1963.
Representative Curtis. Thank you very much.
Chairman Proxmire. Congressman Scheuer ? Congressman Scheuer
is not a member of the committee but he has an interest in this.
Representative Scheuer. I am grateful to join you for a few mo­
ments. I have enjoyed your testimony very much, Mr. Secretary.
In your statement you emphasize tfie point that we are developing
manpower policy and programs and in your remarks you emphasize
the affirmative statement that you believe these are necessary.
What is your estimate of the total pool of unemployed persons in
the country, somewhere between 2% or 3 million that would make
sense for us to develop these special manpower training programs, for
training, educating, and qualifying these people, either in public or
in the private sector ?
Secretary Wirtz. I am afraid I missed the specific form of the
question, Mr. Scheuer.
In terms of occupations or in terms of areas ?
Representative Scheuer. Y o u mentioned in your testimony that
these programs to train, educate, and qualify people could be aimed
at developing their talents in the private sector primarily, but also in
the public sector, too. Of the pool of unemployed who presumably




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1967 ECONOMIC REPORT OF THE PRESIDENT

299

are structurally unemployed, what part of that polo or somewhere be­
tween 2y2 or 3 million persons do you think we ought to engage ?
Secretary W i r t z . I don’t believe it is that large. I suggest
merely—thinking in terms of a million who are clearly identifiable
and who warrant this kind of intensive approach—we are out in a
point where your monthly unemployment figure is about 2y2} 2%
percent. I think this is what you have in mind—I think of a million
and a half of that is being the so-called frictional employment, and
including part of the seasonal unemployment and in answer to your
question leaving about a mililon. That is a different million from
month to month so that that figure could perhaps be enlarged on that
basis, but just in round figures it is like that.
Representative Scheuer. Would you say we ought to be developing
programs to involve that ?
Secretary W irtz. Yes.
Representative Scheuer. How would you divide these programs
where the Government would be the trainer of last resort, but would
sluice or channel presumably a major portion of them into the private
sector and the rest into public service employment ?
Secretary W irtz. I would put into the area where there ought to be
coordinated public and private operation everybody except for those
who are without a basic education and some of those who have a
serious handicap^ an unusual handicap of one kind or another. And
again, in round figures, if we are talking about a million, I would put
three-quarters of that million into one category and a quarter of a
million in the other.
Representative Scheuer. Three-quarters ultimately in the private
sector ?
Secretary W irtz. In that area where we would be coordinating pub­
lic and private jobs.
Representative Scheuer. You would say three-quarters of a million
ought to be trained—ought to be undergoing? training, education, and
qualifying that would enable them to participate in the public sector
or private sector ?
Secretary W irtz. Yes.
Representative Scheuer. How would you define the three-quarters
of a million?
Secretary W irtz. Ultimate gainful participation in the private sec­
tor. I do my thinking in terms of ultimate private employment.
There was some discussion of that—that is an operational principle
instead of a total principle because I know that if we got all of the
rest of it done we would end up with a group which did not lend itself
to that approach. I used the figure of half a million before. I am
talking about a million with whom we can do something here—but. to
clarify the situation I work on the basis that there probably are close
to half a million whom we are kidding ourselves about ever putting
into private employment.
Representative Scheuer. Even with training, educating, and quali­
fying them, they would probably never be appropriate for unassisted
employment?
Secretary W irtz. That is right. That is not an idle figure. That
arose during: the war when there was pressure to use every person we
could possibly move. It ended up with a half of 1 percent. In the




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19 67 ECONOMIC REPORT OF THE PRESIDENT

other foreign countries, Western European countries and others where
they have what they think of as full employment situations, it points
in the same direction. So that you will get a figure some place around
a half of 1 percent.
Representative S c h e u e r . S o of this million, roughly half of them
could be trained and qualified and educated so that they could make
it in the private sector ?
Secretary W i r t z . The figures got confused because you and I started
talking about the unemployed. Now, another part of the group that
we are both thinking about is not technically unemployed because
they are not looking for work.
Representative S c h e u e r . They are out of the statistical universe?
Secretary W i r t z . That is right. That is why my last figures goes
up again a naif million.
Representative S c h e u e r . I take it there would not be any doubt in
your mind that as to the million who have—who could be constrained
and qualified for private sector employment that our private enter­
prise economy could absorb them ?
Secretary W i r t z . Yes, sir; there is no doubt in my mind about that.
Representative S c h e u e r . D o you have any doubt that as to the other
half million who presumably would be trained for some kind of sub­
professional or service job, that there is the need for them in public
services?
Secretary W i r t z . I have no doubt about that.
Representative S c h e u e r . D o you feel that our economy at the pres­
ent could afford the cost of educating and training and qualifying
these million people?
Secretary Wirtz. It will cost us less to do it than the cost after the
second year if we don’t do it.
Representative S c h e u e r . How much do you feel ?
Secretary W i r t z . I f I make my point clear-----Chairman P rox m ire. Will you yield a moment? You are telling us
that it will cost us less to do it than it would within 2 years in welfare
costs, and so forth, if we do not do it ?
Secretary W i r t z . That is right. These are not idle figures.
Chairman P rox m ire. You make that estimate based on a study ?
Secretary W i r t z . Yes ; and one other thing------Chairman P rox m ire. Will you supply us with the data ?
Secretary W i r t z . Yes, sir. It is not exact or precise.
(The information requested follows:)
O n - t h e -J ob T r a i n i n g P r o g r a m s
MEMORANDUM FOB TH E PRESIDENT

You have stated that a major purpose of your Administration i to make the
s
poor, the unemployed, and the disadvantaged taxpayers rather than tax eaters.
I a m happy to report that Manpower Development and Training Act on-thejob training programs are doing just that.
These programs will repay their cost to the U.S. Treasury many times over.
The average trainee repays in taxes the cost of his training in less than two
years.
The programs are sound investments for the Nation, both in human and in
fiscal terms.




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196 7 ECONOMIC REPORT OF THE PRESIDENT

301

The facts are these :
The average M D T A on-the-job trainee earns $57 a week during 14 weeks
of training, and $73 a week as a fulltime worker after his training. Thus
the average trainee earns $3,572 the first year.
The cost to the Government of regular on-tbe-job training averages about
$500 a trainee. Some cost more, some less.
According to the Internal Revenue Service, income taxes on earnings of
$3,572 range from $419 for the trainee with no dependents to $74 for trainees
with three dependents.
More than 45 percent of the trainees are single; another 15 percent claim
only one dependent; 14 percent have two dependents; 12 percent have three,
and the remaining trainees have four or more.
Of the 182,000 on-the-job trainees approved since the program began in
1963, the incomes of nearly 163,000 are taxable, after deductions.
Of the 182,000 men and women who have had or are now being given onthe-job training, 163,000 are taxable, after deductions.
The Federal Government allocated $95.8 million for their training.
The Federal treasury has so far received back $50.5 million in taxes from
these trainees, or better than 53 percent of what was spent on them.
An average on-the-job trainee in his first year repays the Federal Government
over one-half of its total investment in him. Before the second year is over, the
Government has been repaid in ful .
l
And the Nation will continue to profit thereafter because the trainee becomes
a productive citizen and a taxpayer who can carry his fair load.
On-the-job training programs are one of the soundest investments we can
make. Trainees not only pay back the cost of their training, they add to the
production and prosperity of the Nation.
These programs have been warmly received by American employers, who, in
the long run, must provide the jobs for American workers. The business com­
munity along with American labor has cooperated in making M D T A on-the-job
training one of the most exciting and successful aspects of our Manpower policy.
W. W

il l a r d

W

ir t z ,

Secretary of Labor.
September 2,1966.

Chairman Proxmire. It does not matter if you can supply us with
the general data.
Secretary W irtz. In 4 years it will be paid back in taxes.
Representative Scheuer. In 4 years after employment, after
training?
Secretary W irtz. Yes, sir.
Representative Scheuer. Could you give us the approximate cost
of training involved ?
Secretary W irtz. Yes, sir; we work on the rules of thumb. The
figure, and it cannot be precise, but it is this, if we are talking of a
Neighborhood Youth Corps in a school situation, we are talking about
$500 in round figures. If we are talking about on-the-job training,
our experience pinpoints that to $800 and $1,000. This is to pull a
person back to the point of where he can be self-supporting. On
institutional training it is about $1,500 to $2,000. Until we get to the
cases where there is a lack of basic education, at which point again,
the need for greater support of services, it goes up to $3,500.
Representative Scheuer. What is the cost of your jobs?
Secretary W irtz. That is only a 2-week brushup program.
Chairman Proxmire. There is a vote on the floor. Congressman
Scheuer. will you take over until I return ?
Representative Scheuer. Yes, Mr. Chairman; I would be happy
to preside.




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THE 1967 ECONOMIC REPORT OF THE PRESIDENT

(At this point Representative Scheuer assumed the chair.)
Secretary W jrtz . T o answer your question, we are using present
day figures of $400 and I think that has been lower, no doubt, and
it would be a lot lower.
Representative S c h e u e r . It might be helpful in the committee if
you would submit some of the experiences that you have had with the
on-the-job propram.
(The material below was subsequently submitted for inclusion in
the record:)
It is difficult to provide the average illustration. Programs vary from the
most expensive, during which 52 weeks of training is provided, to those lasting
only 3 weeks.
Some widely varied types of on-the-job training programs, illustrate, however,
how they pay for themselves:
Tidewater Oil Company estimated that $567,000 will be paid in income
taxes by 1,080 service station manager trainees while they are earning ap­
proximately $5,400,000 during 44 weeks of training. This program w ill pay
for itself the first year.
Forsyth Memorial Hospital in Winston-Salem, North Carolina, said
$22,353 will be paid in income taxes by 353 health care trainees who will
receive a total of $159,665 in annual wages. Federal funds totalling $44,611
have been allocated. This is 50 percent repayment the first year.
Leverecz Shoe Company in Sheboygan, Wisconsin, estimated that $22,477
will be paid in income tax by 70 trainees who will earn $236,600 in annual
wages. Federal costs of the program were $33,135. The first year’s return
on this program is about 68 percent.
Winzen Research, Inc., of Mount Vernon, Texas, said $10,374 will be
paid in income tax by 42 trainees who will be paid $109,200 in annual
wages. Federal funds of $3,970 were approved for the six-week OJT project.
This program is making a 260 percent return in its first year.
Sixteen Fiberglass layup trainees at Ramco Manufacturing Company
in Gainesville, Texas, will pay $4,446 in income taxes from their annual
earnings of $46,800. Total Federal cost of the program was $3,836. The
return on this program the first year will be more than 115 percent.
While these illustrations cover only some 1,500 trainees, they also would
apply to the more than 63,000 on-the-job trainees approved during 1965.

Representative S c h e u e r . It is a million and a quarter we are talk­
ing about, and three quarters of a million can probably end up in
private sectors, and a half million will end up in the public sector
if they get the training, education, and qualifying that you are talking
about ?
Secretary W i r t z . Yes: we both realize we are using the best figure
available for discussion purposes, and they are not statistically refined at all.
Representative S c h e u e r . I am most impressed by the judgement
that you gave that these costs would be returned in 2 years from,
say, the welfare expenditures and 4 years out of tax revenues that
these people would produce.
Secretary W ir t z . Yes.
Representative S chetter . If that is true, and I am sure it is, is
there any reason—and I think that is a rate of return that any cor­
poration would feel is an extremely satisfactory rate of return on
capital investment on its plant and equipment over the years or even
workers.
Is there any reason why we should not gear up to such a national
program right now?




THE 1967 ECONOMIC REPORT OF THE PRESIDENT

303

Secretary W ir t z . I think the limiting factor is personnel and the
building up of experience with these programs. So there is a limiting
factor of know-how and personnel.
Representative S c h e u e r . No limiting factor as to ability of the
factor to support these training and orientation programs or the
ability of a need of the private and public sector to absorb these?
Secretary W ir t z . To any extent—this is manpower. To the extent
it has come from manpower agencies, it should alleviate this. There
is no limitation.
Representative S c iie u e r . From the point of view of general eco­
nomic policy, the economy needs them, the economy can absorb them,
and the cost of such a program would be paid in perhaps 2 years
out of welfare expenditures; and, again, in the first 3 or 4 years of
tax payments.
Secretary W i r t z . Yes, sir.
Representative S c h e u e r . Thank y o u .
(At this point Senator Proxmire resumed the chair.)
Chairman P r o x m ir e . A very interesting line of questioning. You
say the limiting factors are personnel and what else ?
Secretary W i r t z . Know-how.
Chairman P r o x m ir e . Whq-t can we do to start moving as fast as
we can in that area? What can we do about personnel in this tight
market ?
Secretary W ir t z . That is very hard to answer, Mr. Chairman. I
wish it could be answered more easily. The testimony this morning
before the Government Operations Committee concerned social
science research; and we ran into the same question there, with the
same difficulty there. There just are shortages right now. We are
trying to develop training programs of one kind or another. We
tried, Mr. Chairman, 2 years ago, and the year before, to develop a
summer training program of personnel; and it was called CAUSE.
It was a program in which we took college graduates and put them
through an intensive 12-week on-the-job training program. It didn’t
work too well. One, we were just that much ahead of the develop­
ment of this program that we got them trained before the programs
were ready to pick them up.
It was the year the Poverty Act passed, and so forth.
The other mistake we made was putting some questions on reactions
and attitudes into a test which got us into all kinds of trouble.
We are trying very hard to present to the Congress an employment
service bill which meets this problem where it is most serious, which
is not in Washington, but in the State agencies of one kind or another.
I do not believe there is any one single answer.
Chairman P r o x m ir e . We also need some kind of priority system for
training manpower, for the manpower that is capaole of doing train­
ing, for teaching, who have been able to move in here so we can use
at least the discretion of the Federal Government to make and break
the bottleneck that way.
Secretary W ir t z . Y e s, sir. We are trying all varieties of ways.
You have given us authority to authorize research in the colleges and
universities and we are doing it frankly where they are not only getting
research, but researchers.




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THE 1967 ECONOMIC REPORT OF THE PRESIDENT

Chairman P r o x m ir e . All these programs are good, the Teacher
Corps and so forth, and my colleague, Gaylord Nelson is one of the
principal sponsors on thin. It is a fine program, but it runs into this
terrific shortage of teachers; and it would seem to me that some kind
of priority system—do we, have the available data on who are where,
or where are the teachers, or who can be brought into the teaching pic­
ture, that kind of thing. Do we know that ?
Secretary W i r t z . I don’t believe we do. Mr. Ross could respond to
this. We can manufacture an answer to that in the affirmative but the
real answer is no, there has not been a good job done.
Chairman P r o x m i r e . Why would this not be desirable to do ?
Secretary W i r t z . It would. We have tried an approach to that
in the establishment of the President’s Committee on Manpower. We
have that as a committee covering all of the agencies. It is a com­
mittee which has worked extraordinarily well together but which has
had a good many energies directed toward the immediate problems but
the committee hasn’t functioned very well on the development of per­
sonnel in this field. I say this critically of the President’s Committee
on Manpower. There is a forum there, a forum for doing this. It
also gets into the competition between this area and the whole area
of the physical researchers. I suppose one of the things that has put
as much push on this area is the development of the Medicare program.
Chairman P r o x m i r e . If we cut a billion dollars out of the Space
Program, say, let the Apollo program stand but cut a billion out of
the non-Apollo space requests of a billion and a half dollars this
would ease a lot of pressure on extremely able instructors in universi­
ties around the country not engaged in teaching, but engaged in
space research. Would this kind of thing be helpful ?
Secretary W i r t z . You will understand my answering only that I
would expect it would have some effect in loosening up that kind of
personnel. I think that in order to answer your last question, we
ought to pursue the preceding question. There ought to be some clear­
inghouse for information within the country—not just within the
Government—and there ought to be some opportunity to analyze ways
for making use of limited personnel.
Chairman P r o x m ir e . One closing question. Gerhard Colm recom­
mended the establishment of what he calls a high level unit in the
Executive Office to assemble and analyze data concerning prices, pro­
ductivity, inputs, and incomes. This is something that I understand
Mr. Ross does now, does a very fine job and makes the information
available to the Council of Economic Advisers. The staff of this
committee wants it, but does not get it, the public in general does not
get this information.
What prospects would there be that this could be opened up to the
public ?
Secretary W i r t z . Information which is available to the Council
and is within the Department but not available to this committee %
Chairman P r o x m ir e . That is my understanding. Maybe I mis­
understood my staff.
I am told that we had excellent cooperation from the Council. They
give us whatever we ask for. But we think it would be helpful if the
whole academic community throughout the country could get this and
get it on a regular basis.




THE 1967 ECONOMIC REPORT OF THE PRESIDENT

305

Mr. Ross. Senator, we have always tried to give the Congress every­
thing we have been asked for and I am sure we will do that in the
future. I don’t know of any large body of information we give the
Council that is not available to the Congress on the matter of prices.
We have tried to set this out.
Chairman P ro x m ir e . Prices, productivity, outputs, inputs.
Secretary W ir t z . Is it the projections or information on present
data?
Chairman P ro x m ir e . T o assemble, analyze data concerning these
things.
Secretary W ir t z . The only thing I can think of is, when we get
into this business of the basis of projections which we make in a variety
of ways and the predictions that are involved, I can see some sense
there. Aside from that I do not see any reason that I could not ex­
plore any matter with you and with Commissioner Ross and with your
staff.
That is the only exception I can think of offhand.
Chairman P ro x m ir e . Well, Mr. Ross has been extremely coopera­
tive.
I want to thank you gentlemen, very much.
This has been a wonderful afternoon for all of us.
Secretary W ir t z . I appreciate it.
Chairman P ro x m ir e . We will convene tomorrow morning at 10
o’clock, weather permitting, to hear Wilbur J. Cohen, Under Secre­
tary of the Department of Health, Education, and Welfare.
(Whereupon, at 4:55 p.m. the committee adjourned to reconvene at
10 o’clock, February 8,1967.)
by

(The following material is made part of the record at this point
order of the chairman:)
C o m m it t e e

on

t '. S . S e n a t e ,
B a n k in g a n d C u r r en cy

February IS, 2.967.
Hon. W . W i l l a r d W i r t z ,
Secretary of Labor, Department of Labor,
Washington, D.C.
Dear Mr. S e c r e t a r y : I am very sorry that I was called away from the Joint
Economic Committee’s hearing on Tuesday afternoon, February 7, to answer a
rollcall vote on the floor of the Senate. Because I was unable to ask you about
a subject of interest to me, I would appreciate your answering the attached
questions for inclusion in the hearings record.
Thanking you for your assistance in this matter, I am
Sincerely yours.
C harles H. Percy,
U.S. Senator.
Enclosure
QUESTIONS
1. (a) H o w m a n y j o b v a c a n c i e s n o w e x i s t i n o u r e c o n o m y ?
(&) How many persons are now participating in Federal job training
programs?
(c) How many persons need job training or retraining and are not now in a
private or public training program?
2. I am fully aware o f the stress that you put on training programs and have
noted that in your testimony before this Committee last year, you said, “ train­
ing programs have become increasingly important.”
I certainly agree with vou* for I feel that our nation has a commitment to
continuaUy upgrade the skills of its workers. Therefore, I have cosponsored
a bill to give private employers a tax credit to cover employee training expenses.
Feeling as I do that the tax credit approach is a good one, I was happy to see



306

THE 1967 ECONOMIC REPORT OF THE PRESIDENT

that in an address at Catholic University on November 29, 1966 you stated that
essential to expanding job opportunities will be “ social invention more than
increased appropriations.” And you went further in suggesting the use of tax
credits to encourage enlarged employee training programs.
Secretary Wirtz, I assumed from this statement that this year you will lend
your support to legislation such as the Human Investment Act which would
provide tax credits for private employer training programs; and therefore, I
would like to ask you :
(a)
What caused you to reconsider yo/ur negative opinion on the tax credit
approach as stated in February 1966 before the Subcommittee on Employment
and Manpower of the Senate Labor and Public Welfare Committee?
(ft) What is the Department of Labor doing to pursue the idea of a tax credit
approach?
(c) Will you propose legislation?
3.
I do not wish to suggest that the present Federal training programs should
be replaced. In last year’s hearings you stated that about half of the reduction
in unemployment during 1965 was due to the effect of these programs. However,
I also noted that you went into great detail (in response to a question from
Congressman Curtis) to explain what the Department of Labor has done to
attempt to coordinate the many existing federal training programs.
From the point of view of economy and efficiency would you not think it wise
to begin to think in terms of a block grant program to the states for training
programs? Do you think that a State administered program (funded with
“ no strings attached” Federal money) would be far more efficient and far more
flexible in meeting the individual needs of each community?
U.S. D epartment
Office

op
op the

L abob,
Secretary,

Washington, March 29, 1967.
Hon. Wi l l ia m P roxmire,

Chairman, Joint Economic Committee,
Washington, D.C.
D ear M r. C hairm an : Enclosed for the Committee’s information is a copy of a
letter which I have sent today to Senator Percy replying to certain questions
to be forwarded to me after the February 7 hearing of tfie Joint Economic
Committee.
Sincerely,
W . W illard W irtz,

Secretary of Labor.
[Enclosure]
U.S. D epartment
Office

of
of the

L abor,
Secretary,

Washingtonf March 29, 1967.
Hon. C harles H. Percy,
U.S. Senate,
Washington, D.C.
D ear Senator P ercy : I am glad to make further response to your letter re­
questing information for the record in the recent hearings on the Joint Economic
Report. Your questions and my answers follow.
Sincerely,
W . W illard W irtz,

Secretary of Labor.
[Enclosure]

1. ( a) How many job vacancies now exist in our economy f
W e do not at present have any figures on total job vacancies in the United
States. Such information is now available only for about fifteen metropolitan
areas, as part of a Department of Labor experimental program initiated several
years ago. This pilot program, operated by the United States Employment Serv­
ice and the affiliated State Employment Services in cooperation with the Bureau
of Labor Statistics, provided one time job vacancy estimates for each of these
areas for the fall o f 1964, for April 1965, and for April 1966. Another such
survey will be conducted in these area* later this spring.
The best available indication of vacancies now at hand is the monthly listings
of unfilled job openings held by public employment offices throughout the country.




THE 1967 ECONOMIC REPORT OF THE PRESIDENT

307

These total about 322,500 at the end of February (slightly less than the year-ago
level of 344,400). Unfilled job openings generally range between a quarter and a
third of the total vacancies in the areas included in our pilot program.
(b) How many persons are now participating in Federal job training programs?
In 1966 the number of trainees, in thousands, were as follows:
Manpower Development and Training Act program_____________________
273
Institutional training.— -------------------------------------------------------------On-the-job training and other--------------------------------------------------------

160
113

Job Corps-----------------------------------------------------------------------------------------Neighborhood Youth Corps:
In school________________________________________________________
Out of school____________________________________________________
Summer ________________________________________________________
Work experience---------------------------------------------------------------------------------

10
106
55
209
64

Total------------------- -------------------------------------------------------------------771
(c) How many persons need job training or retraining and are not now partici­
pating in a private or public training programt
Any estimates we could make on this point would be highly tentative and
speculative. We have requested $500,000 in our fiscal year 1968 manpower
research budget to collect information about the adequacy, extent, and quality of
training in the United States. With these funds we hope to find more statis­
tically reliable answers to the kind of question you have raised.
2. What are your views on the tax credit approach as a means for inducing
private employers to increase their training efforts?
It is clear that we are both very much interested in new methods which will
induce private employers to increase the training efforts they now undertake.
The problem is one of finding suitable means. I have not given up the search
for a suitable proposal which can operate through the tax system and would be
very much in favor of one if we could find a practical approach.
Although we have examined carefully and sympathetically the bills which have
been introduced by members of the Congress, we have not yet seen one which is
not deficient in one respect or another. Some might involve great windfalls.
Others would probably not reach the people who are the primary objectives of our
manpower program or our public concern, or are deficient for other technical
reasons that affect both the Nation’s tax and manpower policies.
I do want to assure you, however, that we have not given up the search for an
appropriate method. Members of our staff are in active consultation with rep­
resentatives of the Treasury Department and are exploring a number of avenues
involving both the tax system and other methods which can increase training.
I am confident that we will be able to find a method which we can recommend
to the Congress.
S. From the point of view of economy and efficiency would you not think it wise
to begin to think in terms of a block grant program to the States for training
programs?
The Labor Department has explored block grant programs thoroughly. Our
present grants to the States are based on their budgeted needs, subject to review
by the Secretary of Labor for administrative efficiency. The States present to us
their broad program requirements broken down by functions, and the grants are
made on the basis of function. The Department is additionally moving in the
direction of greater delegation of responsibility, to give the States greater author­
ity to shift funds from program to program within the broad functional allocation
within which they have evaluated their needs, and within which funds have
been allocated.
The chief objection to the block grant is that it does not give the Department
enough discretion to allocate among States by need, to assure efficient adminis­
tration, and above all, to move in the direction of national (as compared with
State) goals. The executive branch of the Government would be less than re­
sponsible if it did not maintain some flexibility in fund allocation to enable it to
be most effective in meeting national needs and objectives, as well as sufficient
control to protect the Federal purse.







THE 1967 ECONOMIC REPORT OF THE PRESIDENT
WEDNESDAY, FEBRUARY 8, 1967
CONGRESS OF THE U xiTED STATES,
J o i n t E c o n o m ic C o m m i t t e e ,

W ashington , D.C.
The joint committee met at 10:05 a.m., pursuant to recess, in room
S-228, the Capitol, Hon. William Proxmire (chairman of the joint
committee) presiding.
Present: Senators Proxmire, Talmadge, Ribicoff, and Javits; and
Representatives Reuss, Griffiths, Curtis, Widnall, Rumsfeld, Brock,
and Scheuer (visitor).
Also present: John R. Stark, executive director; James W. Knowles,
director of research; and Donald A. Webster, minority economist.
Chairman P r o x m ib e . The committee will come to order.
Our witness this morning is the distinguished Under Secretary of
Health, Education, and Welfare, Wilbur Cohen, an old friend of the
committee, and he is accompanied by Robert Myers, who is the Actu­
ary for the Social Security Administration.
The Department of Health, Education, and Welfare is responsible
for the operation of the social security programs in addition to includ­
ing the old-age and survivors insurance. It also contains a substantial
portion of what we know as the “Great Society*’ programs. In addi­
tion, that agency has a major responsibility for the education and
health programs of the U.S. Government, both of which represent
very import ant sectors of the Great Society program.
I should say that from the standpoint of economic policy, this is
an operation which can only be compared with the Defense Depart­
ment. The figures that have just been given me by the staff is that
altogether, counting HEW funds of $13 billion and trust funds of
$27 billion, the total amount involved here is $40 billion. I might
also add that we are always hopeful that the Defense Department ex­
penditures decline; we want those to decline as rapidly as possible.
We certainly expect them to be lower in the future. On the other
hand, it is anticipated HEW-supervised expenditures will be con­
stantly increasing, and the impact on economic policy is conspicuous
and definite.
For this reason, the testimony this morning of the very able Mr.
Cohen will be most useful to us. Mr. Cohen, you may begin.
309

75-314— 67— pt. 2------ 6




310

THE 1967 ECONOMIC REPORT OF THE PRESIDENT

STATEMENT OF HON. WILBUR J. COHEN, UNDER SECRETARY, DE­
PARTMENT OF HEALTH, EDUCATION, AND WELFARE; ACCOM­
PANIED BY ROBERT J. MYERS, CHIEF ACTUARY, OFFICE OF THE
ACTUARY, SOCIAL SECURITY ADMINISTRATION; AND MRS. IDA
C. MERRIAM, ASSISTANT COMMISSIONER, OFFICE OF RESEARCH
AND STATISTICS, SOCIAL SECURITY ADMINISTRATION

Mr. C o h e x . Thank you, Senator. I am also accompanied by Mrs.
Ida Merriam, who is the Assistant Commissioner for Research of the
Social Security Administration.
I would like to add that in the difficulties yesterday of getting the
statement prepared, I inadvertently left off one table, which I would
like to have included in the record. It includes the monthly social
security cash benefits under the present law and under the President’s
proposal, which supplements the tables I have in the testimony.
Chairman P ro x m ir e . That will be done. Do you have duplicates
of that table?
Mr. C o h e x . No; I don’t. I will be glad to give you that one copy.
Chairman P ro x m ire . Why don’t you keep it with you for now,
since you may need it for reference during questioning ?
Mr. C o h e x . All right.
(Table 8, referred to, appears on p. 333.)
Chairman P r o x m ir e . In other words, you have given us the bad
news here in the presentation, but not what we get for it.
Mr. C o h e x . That is correct; and I don’t know whether that was in­
advertent or intentional, but when I looked at it this morning, I saw
that it should have been the last table, which was left off.
Mr. Chairman and members of the Joint Economic Committee, it is
a pleasure to participate in your consideration of the Economic Report
of the President.
The health, education, and welfare of the American people are the
Nation’s greatest resources. Investment in these resources yields bene­
fits to the individual and to the society. They are essential to indi­
vidual fulfillment and to the economic growth and stability of the
society. In turn, economic development also contributes to the devel­
opment of these resources. Thus, the Department that I represent
shares with you a deep interest in a healthy economy, with its resulting
full employment and economic growth.
The singular objective of all the Department of Health, Education,
and Welfare’s programs is the development of the individual’s capaci­
ties to their fullest extent. Programs are, designed to prevent disease
and improve health, to support and encourage education, to provide a'
strong social insurance system, and to seek ways through welfare pro­
grams to reduce dependency as well as reduce the causes and meet
demonstrated need. Legislation enacted by the last several Congresses
has reinforced the Department’s efforts in carrying out its objectives.




THE 1967 ECONOMIC REPORT OF THE PRESIDENT

311

President Johnson noted in his state of the Union message on Jan­
uary 10, that:
We tried to meet the needs of our people. And we have succeeded in creating
a better way of life for the many as well as the few. And now we must answer
whether our gains shaU be the foundations of further progress or whether they
shall be only monuments to what might have been—abandoned now by a people
who lacked the wiU to see their work through.
I believe that our people do not want to quit

In my testimony today I will discuss the Department’s concern for
reinforcing the gains that have already been achieved from the Na­
tion’s investment in human resources and some of the problems and
needs in the years to come. In this respect I would like to review the
areas in which we are developing proposals to expand the oppor­
tunities of the American people and to bolster the growth of the
economy.
TOTAL

P U B L IC

AND

P R IV A T E

E X P E N D IT U R E S
AND

FO R

H EALTH,

E D U C A T IO N ,

W ELFARE

At this point I would like to discuss the totality of public and
private expenditures for health, education, and welfare, no matter
what their source or what their method of payment, to give you a full
picture of their impact on the Nation’s economy as related to the gross
national product.
The extent of the Nation’s commitment to programs for strengthen­
ing human resources is clearly evident in the amounts spent in fiscal
year 11)66 on health, education, and welfare from both public and
private funds. The combined expenditures amounted to $131 bil­
lion—or 18.4 percent of gross national product*
I might add at this point that the $131 billion is the unduplicated
count of expenditures—that is the total amounts are adjusted to elimi­
nate duplication resulting from use of cash insurance benefits to pur­
chase medical care and educational services. The individual areas will
add up to a couple of billion dollars more when you look at them
separately, but this is the attempt to appraise an unduplicated ex­
penditure of organized funds in this area. It doesn’t include every
single type of personal expenditure that might be involved, but rather
broadly, organized public or private expenditures of funds for health,
education, and welfare. This comes, as I said, to 18.4 percent of the
GNP.
In fiscal year 1962, expenditures were $93 billion or 17.2 percent of
GNP. The growth rate in expenditures between these 4 years ex­
ceeded that in GNP.
Total expenditures for these functions under public programs—
Federal, State, or local—reached $88 billion: Federal expenditures
accounted for $47 billion, and State and local expenditures for $41
billion. In recent years, total public expenditures for health* educa­
tion, and welfare have also been increasing faster than the GNP and
the share of GNP devoted to these areas has risen from 11.5 percent
in fiscal year 1962 to 12.3 percent in fiscal year 1966.
As President Johnson pointed out in his Economic Report: “ * * *
Americans have insatiable appetities for more education and better
health.” This is reflected in the rapid rate of increase in public funds
that are devoted to these programs.




312

THE 196 7 ECONOMIC REPORT OF THE PRESIDENT

For example, between fiscal year 1962 and fiscal year 1966, total
public expenditures for these programs rose by 41 percent while GNP
rose only 31 percent—with a 54 percent increase in educational ex­
penditures and a 61-percent increase in spending on public housing
leading the way among traditional programs. In addition, the new
programs authorized under the Economic Opportunity Act of 1964
have grown rapidly.
The figures on public expenditures that I am discussing, if you
wish to go into the details, are in table 1, following. The table shows
the total public expenditures, expenditures from State and local funds
and from Federal funds since 1934-35.
Expenditures for the Federal programs rose more rapidly than
did State and local government spending—in total amount and in
almost every major category. By the end of fiscal year 1966 the total
Federal expenditures of $46.8 billion exceeded the State-local total
by $6 billion as compared with 1961-62 when State-local expenditures
exceeded Federal expenditures by almost $1 billion.
D e p a r tm en t of H e a l t h , E d u ca tio n , an d W elfare P rograms

The President’s 1968 budget for the Department of Health, Educa­
tion, and Welfare calls for expenditures of $11.7 billion—an increase
of $1 billion over the previous year—in addition to social security trust
fund payments in the neighborhood of $31 billion. Assuming the
President’s recommendations are carried out, the budget as you said,
Senator Proxmire, will total $44 billion.
These expenditures will be made through programs, most of which
are carried out through the active cooperation and active participation
of State and local governments, nongovernmental institutions and in­
dividual citizens. About 90 percent of Department of Health, Edu­
cation, and Welfare funds derived from general revenues are allocated
to State and local governments^ other non-Federal institutions and in­
dividuals. This is how “creative federalism” works and it has been
through this venturesome partnership that we have made great eco­
nomic and social gains.
We can expect in the future, as in the past, that increasing shams
of the Nation’s output will be devoted to the development of human
resources. By strengthening the programs of the Department of
Health, Education, and Welfare, we seek to strengthen the entire sys­
tem for providing services at every level. Through better manage­
ment and more careful evaluation of the effectiveness of programs, we
can insure more effective use of all of our resources.
T

rends

in

P

o verty

Now I would like to turn to another aspect that I think the Members
of Congress will be interested in, how our particular programs relate
to the national objective of
and reducing the extent of pov­
erty in the United States.
Rapid economic growth combined with increasing expenditures for
health, education and welfare and related areas have had a significant
impact on poverty. Over the past several years, as GNP grew rapidly,
unemployment rates declined and public expenditures for health, edu­
cation, and welfare, and related activities increased, the incidence of




minimizing

THE 1967 ECONOMIC REPORT OF THE PRESIDENT

313

poverty declined. In 1959 some 38.9 million individuals—or 22.1 per­
cent ot the total population lived in households falling below the pov­
erty levels of income developed by the Social Security Administra­
tion; by 1965 the number had declined to 32.7 million individuals—
or 17.1 percent of the population. The sharpest declines have been
among families with a male nonaged head of household, and the de­
clines have been greater for whites than nonwhites. Increasingly,
the poverty roster is becoming the hard-core groups: Aged persons,
families headed by a woman and the disabled. Thus, we cannot rely
on economic growth alone to pull households out of poverty as heavily
in the future as in the past. This is a major reason why we must
continue to improve our social security and other income maintenance
programs—particularly for those not in the labor force.
Some of the worst pockets of poverty are in those parts of the cen­
tral cities where living costs are highest and where resources for aiding
the poor are inadequate. As compared with surrounding suburbs,
central cities of our metropolitan areas have disproportionate num­
bers of the aged poor and of children in poor families. For example,
within the central cities, 17 percent of the total population is poor, by
the standards I previously stated.
Twenty-seven percent of the aged are living in poverty and 66 per­
cent of the individuals in nonwhite families headed by a woman are
living in poverty. In metropolitan areas, there are 10 million poor
persons in the central cities while 6 million poor live in the surrounding
suburbs. It is more likely that the head of a family living in the city
will be out of the labor force than the head of the family in the sub­
urbs. If he is working the chances are greater that he will have a lowskilled, low-paid job.
The increasing demand for health, education, and welfare services
for the groups who remain in poverty in the city is growing, particu­
larly as our awareness of their special needs grows—but the resources
for meeting these demands are not growing at a fast enough pace.
I ncome M a in te n a n c e

A reasonable level of living for all Americans is the ultimate objec­
tive of our income maintenance programs. Putting a floor under in­
come through income support programs so that no one falls below a
minimum of need, is an intermediate step in achieving this objective.
Although the objective of social security is not solely the reduction of
poverty it is a major instrument in reducing the extent of poverty in
this country. Public assistance programs are directed to the poor and
have provided a basic income for several millions of persons. Without
these programs many more persons would be in poverty and the dis­
parity in income much greater. It is estimated that—
Without social security payments a much larger fraction of
the aged would be poor. We estimate that about 37 percent of
the aged beneficiaries under social security have been brought out
of poverty as a result of the social security benefits that were added
to whatever other income they might have had.
Of the $3.5 billion of public assistance payments to noninstitutional recipients in 1965, virtually all went to the poor.




314

THE 1967 ECONOMIC REPORT OF THE PRESIDENT

The income deficiency of the poor, that is the gap in the amount
of income between what they actually have and the social security
standard of poverty in 1965 was $11 billion; this is the total amount
by which their incomes fell short of the poverty line. Without the
social security and public assistance programs the deficiency would
have approached $20 billion. The impact of the present programs
is very substantial, but of course a substantial gap remains as well.
Despite the improvements that have been made in these programs in
recent years many persons still remain poor. Legislation proposed this
year, both for social security and public assistance will further improve
these programs—but we will still be short of filling the basic income
needs of the poor—even of the poor who could not be considered
potential labor force members.
S O C IA L

S E C U R IT Y

PROPOSALS

The President has proposed a number of significant improvements
in the social security program. They are designed primarily to raise
benefits from their present inadequate levels, but there are other
objectives as well; to permit greater work force participation of bene­
ficiaries who are able to work; to provide health insurance benefits to
disabled beneficiaries; to seek better coverage of farmworkers who
are presently severely disadvantaged because of the transitory nature
of their employment; to provide benefits for disabled widows; and to
guarantee at least $100-per-month benefit for anyone who has worked
substantially in covered employment, under the social security pro­
gram, for 25 years. There are other significant but less general
changes proposed. These revisions will increase old-age, survivors,
and disability insurance (OASDI) outlays by about 20 percent—by
$4.1 billion—in the first year after they take effect in July 1, 1967.
Many people not only have been but are disturbed when they learn
that almost 2.5 million OASDI beneficiaries have benefits of $44 or less
per month; that 2 million aged persons are receiving public assist­
ance; and that one-half of the OAA recipients are OASDI bene­
ficiaries whose incomes are below destitution level even though they
earned social security eligibility. It is an uncomfortable fact that
despite OASDI over 5 million of the aged have incomes below the
poverty level at the present time.
Some persons are convinced that we should not spend additional
amounts for social programs at the present time. The administration
has taken the view that although some types of expenditure should be
postponed; others should not. There is a vast difference between
rescheduling the completion of public works such as superhighways
and putting off action on the plight of elderly citizens. Similarly,
action must be taken promptly for widows and children who are
trying to subsist on lagging survivor benefits.
The administration seeks in its proposals:
(1)
To make some adjustments which improve protection for cur­
rently active workers. For most of them the social security system
is their major bulwark against income loss when they retire, are dis­
abled, or die leaving dependents.
I want to emphasize, Mr. Chairman, and members of the Joint
Economic Committee that the social security system is not solely a




THE 1967 ECONOMIC REPORT OF THE PRESIDENT

315

retirement system. It also provides disability insurance and sur­
vivors benefits—what you might call a form of monthly life insurance
protection. Survivors’ benefits for the widow and children are really
a form of monthly payments of a life insurance character. There are
three types of benefit provisions.
The proposed revisions increase coverage for some new workers and
in a series of steps broaden the base upon which benefits are calculated.
The base will increase by steps from the current $6,600 a year to
$10,800 in 1974. The change will increase the value of survivor's
insurance for the worker’s family. It will do that, of course, reason­
ably promptly.
It also raises the size of the disability and retirement benefit which
the average worker may utlimately receive. As a result he may look
forward to a more satisfactory level of income replacement when he
becomes disabled or retires.
(2)
To raise benefits for the 23 million beneficiaries already on the
rolls who have been experiencing loss of real purchasing power be­
cause of price increases and whose benefits even before such deteriora­
tion were lower than I think this country should accept. At the pres­
ent time a man who had earnings at about the average for male work­
ers today will get a retirement benefit that replaces only about 30 per­
cent (the man and wife both of whom are 65 and over, about 45 per­
cent) of his previous earnings. Each of the 23 million social security
beneficiaries will gain as a result of the changes but gains will be rela­
tively greatest for those currently receiving minimum benefits.
The proposed changes are designed to improve protection for both
covered workers (roughly, 86 million if you take into account people
who come in and out of the labor market and not just the ones who are
just working at the given moment), and current beneficiaries (rough­
ly, 23 million) .
The new benefit formula provides that persons currently receiving
minimum benefits will have their benefits increased by 59 percent.
More than 1 million persons over 72 years of age who receive benefits
although they do not meet the insurecl status requirements will receive
sharply increased benefits. These changes, which seen modest in ab­
solute terms (the minimum primal^ insurance amount will go up from
$44 to $70; payments to the special group over 72 increases from $35
to $50 for an individual) should have a substantial impact on poverty
among the aged.
New provisions extending coverage to an additional 500,000 farm­
workers would increase protection for a group among whom the in­
cidence of poverty is high. ^
The combined changes in social security suggested by the President
would reduce by more than 1.5 million tlie number of persons in the
United States living in poverty, and I think that is a rather striking
and important aspect of these recommendations. It would reduce
the number of aged poor as well as the number of disabled and survi­
vors, who are living in poverty.
Proposals that would provide only an 8-percent-benefit increase, a
number of which have been introduced in Congress, would reduce the
numbers of persons in poverty by only one-half million.

The proposals, made by the President, also include liberalization
of the retirement test. Beneficiaries who are in a position to earn will




316

THE 1967 ECONOMIC REPORT OF THE PRESIDENT

be permitted somewhat more earnings than at present and still receive
their full benefits.
Because of the pressure of time, it is necessary to pass over some of
the other detailed proposals. The addition or benefits for disabled
widows and the extension of health insurance to disabled beneficiaries
are critical for the disabled persons involved and represent another
adanee in social awareness. Provisions to insure areas access to some
type of protection through the social security program for workers
who work for the Government for less than 5 years is no less vital to
the large groups affected.
F in a n c in g

the

P roposals

Now I would like to discuss some of the broad financing implica­
tions of these recommendations.
The 1967 legislative proposals continue well-defined financing poli­
cies of the past. There has been a careful weighing of costs and pro­
vision of revenues to cover them. The benefit and contribution bases
have been raised to reflect more nearly than at present the original
relationship of taxable to total wages and salaries.
Emphasis upon full discussion of eventual costs and explicit pro­
vision of revenues required is a tradition of the social security pro­
gram. For this reason Congress has, from the beginning, considered
carefully the current and long-range level of costs and has made ap­
propriate provisions for both short-range and longer range income
to the system. From time to time Congress has created advisory
councils composed of distinguished citizens to review the financing of
the system.
The Chief Actuary of the Social Security Administration, Mr. Rob­
ert J. Myers, estimates that the combined changes in OASDI involve
increases in level costs of 1.5 percent of taxable payroll. Part of this
increased cost can be financed without changing the contributions be­
cause long-range income is now estimated to exceed long-range costs
of present benefits. (Table 5, p. 331, shows that the present system
has a positive actuarial balance, or actuarial surplus of 0.74 percent
of payroll. That is roughly, three-fourths of 1 percent of payroll.)
Adequate financing for the other added costs in the O A S D I pro­
gram will be provided partly by the gradual increase in the contribu­
tion base; partly by an increase in contribution rates. Table 5 shows
that the O A S D l contribution rate increases proposed is equivalent
to only 0.25 percent of payroll while the recommended contribution
base increase is the equivalent of 0.50 percent of payroll.

In other words, when I said originally that the total benefit increase
that we are recommending is 1y2 percent of payroll, roughly half of
that, 0.75—the actual figure is 0.74—is made up of the favorable ac­
tuarial balance. Then a half of a percent of payroll is made up
through the base increases, and a quarter percent is made up through
the rate increases. That is why I said earlier the benefits proposed
by the President are fully financed through these three sources.
The rates are altered (table 6) and the total contributions of indi­
viduals, particularly those with higher incomes are increased (table
7). Both aspects are fully presented in order to avoid any suggestion
that the significant improvements sought are costless, or nearly so.
They involve acceptance of higher long-term commitments.



THE 1967 ECONOMIC REPORT OF THE PRESIDENT

317

Although the contribution rates recommended do not change in
1967-68, there will be an immediate fiscal impact.
Both income and outlays of the trust iunds will be higher than
they otherwise would be. In both calendar 1967 and calendar 1968
the excess of income over outgo will be less if the changes are made
than if no benefit increases are made. This decrease, unless other
offsetting actions are taken, will have a stimulating effect upon the
economy. The Actuary estimates that, if the 1967 proposals are
adopted, the OASDI trust funds will sustain a $1.7 billion excess of
income over outgo in calendar 1967; or about $600 million in calendar
1968. If no changes are made, the excess would be $3.8 billion in
calendar 1967 and $4.2 billion in calendar 1968.
Representative R eu ss. May I interrupt you there to do a little
arithmetic ?
What is the difference between adopting the proposal and not
adopting it?
Mr. C o h e n . If the proposals are adopted, the buildup in the re­
serves in those 2 years would be $2.1 billion less in calendar year 1967
and $3.6 billion in calendar 1968.
We believe that the policy which has been pursued by Congress
since 1950—a policy of virtual pay-as-you-go financing accompanied
by frequent examinations of longer range actuarial needs—has proven
it merit and should be continued.
The President’s proposals would make important improvements in
the social security program that would help to meet the needs of the
aged and reduce the extent of poverty. There is no reason, in my
opinion, in a country as prosperous as the United States why social
security beneficiaries—the retired* widowed, orphaned, and disabled—
should be denied a measure of dignity and self-sufficiency in our
society. They have contributed a share in the growth of this Nation
and I believe that the social security system is a mechanism by which
they should and can share in our expanding prosperity.
H ea lth an d E ducation

Now, turning very briefly to some of the education and health as­
pects of our Department, which are, of course, among the Nation's
overriding concerns. They are essential to human development and
fulfillment. Unnecessary suffering and ilness, illiteracy and inferior
education hold men in bondage.
While great strides have been made in recent years in both health
and education, there are still many unfilled needs and our task is not
vet complete. Thus, the President has proposed major improvements
in education and health programs. These include—
Additional funds tor the Elementary and Secondary Education
Act so that we may reach an additional 1 million culturally de­
prived children.
An increase in the amount of aid provided or guaranteed to
college students of $200 million allowing an increase of over
300,000 in the number of students aided or a total exceeding 2
million individuals.
Additional funds to increase the number of community mental
health centers, the number of medical schools, and the number of
students enrolled in the health and allied health professional fields.



318

THE 1967 ECONOMIC REPORT OF THE PRESIDENT

Funds to develop improved methods of child health care and ex­
panded efforts in early case finding and treatment of children in lowmcome areas. As a matter of fact, Mr. Chairman, and members of
the committee, the President is sending his message on children and
the youth to the Congress today which will, of course, discuss in sub­
stantially more detail recommendations in this area.
C onclusion

In conclusion, I believe that great opportunities are being realized
through the Departments programs. The advances that can be made
in the well-being of our citizens are closely related to the Nation’s eco­
nomic progress. Each benefits from the other. There is a distinct
correlation between a healthy, educated citizenry and national produc­
tivity. Better qualified workers produce more. Healthier workers
also produce more, and so on, in other aspects of the security of the
people. Thus, the Department shares your concern for a healthy,
stable, and growing economy and through its programs attempts to
reinforce other efforts in this direction.
Chairman P r o x m ir e . Thank you, Mr. Cohen. I take it that your
supplementary statement is part of your presentation.
Mr. C o h e n . Yes.
Chairman P r o x m ir e . Without objection that will be printed in
the record, and the following tables, which are very, very useful, will
also be printed in the record in full.
(The material referred to follows:)
S u p ple m e n t to S t a te m e n t of U nder S ecretary C o hen
1 9 6 7 SO C IA L S E C U R IT Y

R E C O M M E N D A T IO N S : S U M M A R Y OF M A J O R
PR OPOSALS

The President has recommended improvements in the social secu­
rity program that would result, in calendar year 1968, when all of the
proposals will have gone into effect, in an overall 20-percent increase in
benefit disbursements.
The increase, in terms of additional cash payments, would be the
largest increase in benefit payments ever enacted; it would result in
additional cash benefit payments of $4.5 billion in calendar year 1968.




THE 1967 ECONOMIC REPORT OF THE PRESIDENT

319

The level of living of the 23 million people who are now getting
social security benefits would be greatly improved, and 1.4 million aged
people among them would be moved out of poverty. In addition, the
protection of current workers and their families—about 86 million
will work under social security in 1967—would be very significantly
improved.
Following is a list of the major proposals that the President has
recommended:
1. A benefit increase amounting to at least 15 percent for all bene­
ficiaries now on the rolls, with a minimum benefit of $70.
This provision would result in additional payments of $3.9 billion
in the first 12 months of operation.
2. A special minimum benefit of $100 for workers with at least
25 years of coverage under social security; the special minimum would
be equal to $4 multiplied by the number of years of coverage up to 25.
About 100,000 people would benefit under this provision. About
$7 million in additional benefits would be paid in the first 12 months
of operation.
3. An increase from $1,500 to $1,680 in the amount of annual earn­
ings a beneficiary under age 72 can have without having any benefits
withheld, and an increase from $125 to $140 in the amount or monthly
earnings a person can have and still get a benefit for the month.
Under the proposal, as under present law, $1 in benefits would be with­
held for each $2 of the first $1,200 of earnings above the annual exempt
amount, and $1 in benefits would be withheld for each $1 in earnings
thereafter.
About 750,000 people would get additional benefits under the pro­
vision. An estimated $185 million would be paid out in additional
benefits in the first full year of operation.
4. Monthly cash benefits for the disabled widow of an insured
worker where the widow becomes disabled before 7 years after the
worker’s death or before 7 years after termination of her entitlement
to benefits as a mother.
About 70,000 widows would benefit immediately and about $75 mil­
lion in additional benefits would be paid out in the first 12 months of
operation.
5. Health insurance benefits for disabled beneficiaries—disabled
workers, disabled adults getting benefits on the basis of disabilities
that have continued since childhood, and disabled widows under
age 65.




320

th e

1967 ECONOMIC REPORT OF THE PRESIDENT

An estimated additional 1.5 million social security beneficiaries—
1.2 million disabled workers, 200,000 people getting* disabled child's
benefits, 100,000 disabled widows under 65—would be eligible for
health insurance benefits. Benefit payments under this proposal in
the first year are expected to be $225 million under the hospital insur­
ance program and $100 million under the medical insurance program.
(Similar protection would be provided for qualified disabled railroad
retirement annuitants.)
6.
Social security credit, through transfers of credit, for Federal
employment of workers whose Federal service is subject to the civil
service or the foreign service retirement system if benefits are not
payable to the workers or their families under such system at the time
they retire, become disabled or die.
Adoption of this proposal would prevent losses of protection by
employees who leave Federal service in the future.
T An increase from $35 to $50 (from $52.50 to $75 for a couple)
.
in the special payments that were provided under the 1065 amend­
ments and the Tax Adjustment Act of 1966 for certain people age 72
and over who cannot meet the regular insured status requirements of
the program.
The increase in these payments would amount to about $240 million
in additional benefit payments during the first 12 months of operation.
Of this amount, $215 million would be met from general revenues.
(The old-age and survivors insurance trust fund pays for the cost of
benefits only for those who have worked for more than half a year
nnder the program.) About 1.2 million people would qualify for
some payments or higher payments as a result of this proposal.
8. A change in the present coverage requirements for agricultural
workers which would provide coverage for the farmworker if he was
paid at least $50 (instead of the present requirement of $150) in a
year for farmwork by an employer or if he worked at least 10 days
(instead of the present requirement of 20 days) in a year for that
employer.
Tliis proposal would improve the social security coverage of 500,000
agricultural workers, including migratory workers, who in many
instances do not meet the coverage requirements in present law.
9. Coverage of podiatrists' services under the supplementary medi­
cal insurance program where the services are of the type now covered
if performed by a physician.




THE 1967 ECONOMIC REPORT OF THE PRESIDENT

321

10. An increase in the contribution and benefit base to $10,800, to be
reached in 3 steps—$7,800 in 1968, $9,000 in 1971, and $10,800 in 1974.
11. Increases in the contribution rates for the cash benefits part of
the program. The change scheduled in the employer-employee rate
for 1969 under present law (from 3.9 percent each to 4.4 percent each)
would be raised by 0.1 percent, to 4.5 percent each. The change sched­
uled under present law for 1973 and thereafter (to 4.85 percent each)
would be raised by 0.15 percent each, to 5.0 percent each.
For the self-employed, the increased scheduled under present law
for 1969 (from the present 5.9 percent to 6.6 percent) would be raised
by 0.2 percent and thus would come to 6.8 percent. This rate would
remain in effect until 1973, at which time the increase to 7.0 percent
scheduled under present law would go into effect.
At the present time, the social security program has a significantly
favorable actuarial balance; that is, it is expected that over the longrange future the income to the program will considerably exceed the
costs of the program. The benefit improvements recommended by the
President will cost about 1y2 percent of covered payroll. It is possi­
ble to meet about half of the cost of the recommended benefit improve­
ments from the present favorable balance. The remainder of the cost
of the proposed changes would be met through the increases in the con­
tribution rates for the cash benefits part of the program and in the
maximum amount of annual earnings subject to the tax and used in
computing benefits.
The rate increase averaged over the long run would be equivalent to
one-fourth of 1 percent o f payroll; the earnings base increase is equiv­
alent to one-half of 1 percent of payroll. These two financing rec­
ommendations would yield income equal to three-fourths of 1 percent
of payroll, which, when combined with the actuarial balance of the
present system, would fully meet the cost of the recommendations.
Hospital insurance protection for the disabled could be made avail­
able without any increase in the hospital insurance contribution rate
because of the additional income that would result from the increased
contribution base. Supplementary medical insurance protection
would also be made available on the same basis as it is for the aged—
that is, on a voluntary basis, with the beneficiary paying a monthly
premium of $3 and the Federal Government paying a matching
amount.




T a b l e 1.— Social

welfare expenditures under public programs, selected fiscal years, 1934-35 through 1965-66 1
[In millions; revised estimates]

Program

1934-35

1039-40

1944-46

1949-50

1954-55

1959-60

1961-62

1962-63

1963-64

1964-65

1965-66*

Total expenditures
Total.
Social Insurance.................. ...................................... .......
Old-age, survivors, and disability Insurance *...........
Railroad retirement___________ ________________
Public employee retirement4............................. ......
Unemployment Insurance and employment service *
Railroad unemployment insurance...........................
Railroad temporary disability insurance...................
State temporary disability insurance, total *............
Hospital and medical benefits7
......................... .
Workmen’s compensation, total *..............................
Hospital and medical benefits7...........................
Public aid.......................................................................
Public assistance« . . . ............. ............. ....................
Vendor medical payments T
_..............................
Other »•_............................. ........... .................... ........
Health and medical programs u......................................
Hospital and medical care................................ ........
Civilian programs......... .......... ..........................
Defense Department and medicare.....................
Maternal and child health services > ....... ................
*
Medical research n.....................................................
School health (educational agencies). . .........-...........
Other public health activities 1 _............. .................
4
Medical-facilitles construction..................................
Defense Department......................... .................
Other......................... ............... ........................
Other welfare services______ ________ _______________
Vocational rehabilitation, total.................................
Medical rehabilitation f......................... ..............
Institutional and other care « _____________ ______
School lunch w............................. ......... .................
Child welfare w.................................................. .......
Special programs « ........ ................................... .........
Veterans' programs i*....... ..............................................
Pensions and compensation * ________ ____ _______
Health and medical services________ _____ _______
Hospital and medical care......... .......................
Hospital construction.......... ............................ .
Medical and prosthetic research.......................
Education....... ..........................................................
Welfare and other » _______ _____________________




*6,417.0 $8,761.7 $8,869.0 $22,972.6
1,217.7 1,418.5 4.873.0
784.1
28.1
266.8
115.7
304.4
143.7
254.5
743.4
210.0
382.8
216.7 2,191.9
553.0
4.3
119.6
18.9
31.1
5.1
72.3
2
.2
173.9
626.2
247.5
399.1
122.0
65.0
90.0
193.0
2,997.6 3,598.7 1,030.5 2.496.2
623.9 1,124.3 1,028.8 2.490.2
51.3
2,373.7 2,474.4
1.7
6
.0
434.4
681.7 2.331.0 2.087.1
259.8
440.0 1,985.7 1.230.1
231.8
354.7
340.5
914.5
28.0
99.5 1.631.0
315.6
6.7
62.1
13.8
29.8
15.0
3.0
69.2
9.9
23.3
30.6
17.9
195.0
119.7
166.6
358.6
50.0
368.8
40.4
38.3
50.0
40.4
368.8
53.0
159.0
422.7
77.0
30.0
2
.2
10.2
4.1
7.4
.2
1.4
.4
45.9
96.1
24.8
27.9
47.4
191.7
26.0
55.5
1019
45.0
892.1 6.380.8
449.8
535.1
755.9 2.092.8
390.2
447.8
116.5
58.9
745.8
86.3
98.3
585.9
56.0
72.1
150.2
16.2
2.9
14.1
2
.0
3.7
.1
0.7 2,689.1
10.0
853.1
1
.0

$32,243.9
9.854.2
3.436.3
575.6
1,388.5
2,080.8
158.6
54.2
217.5
20.0
942.6
315.0
3.003.0
2.941.1
211.9
61.9
3.054.4
1,980.7
1,217.3
763.4
92.9
132.8
65.9
404.6
377.5
33.0
344.5
573.4
41.4
9.2
103.3
293.6
135.1
4.369.5
2.712.5
761.1
722.6
33.0
5
.5
690.9
196.0

$52,154.4 $62,203.9 $66,542.9 $71,081.7 $77,505.4 $87,578.2
19,297.4 24,199.9 25,592.0
28.078.2 31,905.8
11,032.3 13,984.6 15,344.3 16,200.8 16.997.2 20,292.3
925.4 1,033.2 1.073.8 1.103.5 1.126.7
1,204.9
5.150.8
2,569.9 3( 189.7 3.569.3 4,056.7 4.520.6
2.829.6 3.863.8 3,373.0 3.270.2 2.976.3
2,608.0
215.2
163.3
92.6
54.4
122.8
76.7
68.6
56.8
53.4
52.8
46.5
50.1
467.9
407.1
444.2
347.9
486.9
502.0
45.5
50.4
40.3
48.4
56.0
50.7
1,308.5 1,505.4 1.611.8 1.725.0 1.847.3
2.050.0
475.0
420.0
510.0
545.0
585.0
625.0
6.824.1
4.101.1 4,945.1 5.295.4 5.642.0 6.177.6
6.455.9
4.041.7 4.675.0 5.028.7 5.381.3 5.873.8
812.4 1,000.7 1.147.6 1.367.1
492.5
1,620.0
266.7
303.8
270.1
260.7
59.4
368.2
,0 0
7.179.8
4.454.8 5.225.8 5.608.7 6 1 .5 6.429.8
2.817.0 3.115.1 3.248.8 3.504.7 3.607.1
3.989.6
2.593.9
1.952.2 2.132.0 2.274.5 2.446.8 2.511.8
864.8
974.3 1.057.9 1.095.3
983.1
1.395.7
174.1
186.2
201.0
222.5
258.2
139.4
780.5
1.347.5
448.9
920.3 1,042. 5 1.166.6
129.0
128.4
127.7
132.0
101.0
135.0
506.0
576.5
713.2
602.3
843.5
431.6
548.5
521.1
588.4
532.2
606.0
516.9
24.0
34.8
28.6
40.0
23.0
42.4
553.6
497.1
577.4
525.5
489.8
476.9
2.739.2
1.014.1 1.304.0 1,448.4 1 f.9 1.948.9
,'194.3
135.3
222.5
328.2
156.6
100.4
54.3
22.5
26.0
31.2
34.2
17.7
306.5
386.9
366.4
398.5
419.5
176.0
615.8
638.7
752.0
636.6
797.1
526.2
246.4
352.4
381.6
268.3
313.4
211.5
178.4
858.0
6.333.5
5,106.4 5.389.8 5.584.6 5,749.2 5.965.1
4,465.1
3,425.7 3.774.8 3,947.4 4,033.1 4.186.1
1.330.8
.1 1
957.1 1,047.0 1 2 .7 1,179. 4 1,250.6
968.0 1 2 .0 1,069.9 1,132.8
1,205.4
,0 2
884.5
52.1
83. 2
69.8
80.9
76.4
57.5
26.8
42. 2
29.9
33.2
30. U
1 .1 1.53.3
5
35.4
97.5
41. 4
6 .1
6
404.7
414.6
470.6
4H7.0
502.2
318.7
418.1

Education....................................... .
Elementary and secondary, total..
Construction7
.........................
Higher and other, total.................
Construction7.......... ..............
P u b lic housing *»........................................

2,008.3
1,890.1
157.3
206.2
»3 0.0

2,647.3
2,360.5
289.0
286.8
32.6
4.2

3,017.5
2,656.4
83.7
361.1
a 9.1
10.4

6, tm. a 11,299.2 18,003.9 20,949.9 22,766.» 24, S78. 4 28, 691. 5
5, 724.3 10,006.8 15,598.6 18,028.8 19,369.7 20,805.9 23,105.1
1,018.7 2,362.4 2,868.7 3,071.6 3,227.7 3,203.7 3, 510. 0
974.0 1,292.4 2,405.4 2,921.2 3,397.2 4,072.5 5,486.4
315.5
198.8
395.0
409.8
519.8
550.4 1,158.1
14.5
271.9
176.7
216.4
246.9
89.3
314.3

32,248.4

25,805.3
3.796.0
6.443.1
1,392.8
347. 5

From Federal funds
Total.
Social insurance...................................................................
Old-age, survivors, and disability insurance *........... .
Railroad retirement................... ................................. .
Public employee retirement *..................................
Unemployment insurance and employment service ®.
_
Railroad unemployment insurance......... ..................
Railroad temporary disability insurance....................
Workmen's compensation total <.......... .....................
Hospitalization and medical benefits7
...................
Public aid...........................................................................
Public assistance •
............ ...... .....................................
Vendor medical payments7............................ .....
Other »•
_............................... ....................................... .
Health and medical programs 1 ........................................
1
Hospital and medical care.........................-.................
Civilian programs................. — ......................... .
Defense Department and medicare...................... .
Maternal and child health services1 ............................
1
Medical research7
.................................................. .
Medical research » ....................................................... .
Other public health a ctivities............................. .
Medlcal-facillties construction....................... ............. .
Defense Department........... .................................
Other.................................................................... .
Other welfare services........................................................
Vocational rehabilitation, total........ .......................... .
Medical rehabilitationT
....... .................. -..................................................... ........
Medical research 7
Institutional and other care **..................................... .
School lunch 1 ..............................................................
6
Child welfare1 ......................................................... —.
7
Special programs 1 .............. ....................................... .
1
Veterans' program **....................... .................. —..............
Pensions and compensation » ..... .................................
Health and medical services.................................. —
Hospital and medical care......... - ....................... —
Hospital construction.......................... ..................
Medical and prosthetic research.............................
Education.....................................................................
Welfare and otheril......................................................

See footnotes at end of table.




08.9
90.0
8.9
3.0
2,373.7

3,466.8
354.9
28.1
115.7
107.5
70.5
18.9
14.2
5 .2

1.8

2,245.9
281.1
1,964.8
159.9
124.4
24.9
99.5
7.8
3.0
24.3
,4
.4
4.5

.1

.2

2,373.7
60.1
30.6
11.6
28.0
7 .2

3.3
3.3

1.0

2
.0

.8

1.6
449.8
390.2
68.9
60.0
2.9

535.1
447.8
86.3
72.1
14.1

.7

1.0

.1

4,083.2
759.8
266.8
143.7
184.8
145.5
4.3
14.7
4.7
420.1
418.4
1.7
1.775.6
1.660.6
29.6
1,631.0
55.2
15.0
44.8

8 14,230.9 24,724.3
.1
2,028.1
784.1
304.4
433.4
330.4
119.6
31.1
25.1
5.2
3.2
1.103.2
1.097.2

6,404.7
4,436.3
575.6
808.5
321.0
158.6
54.2
50.5
6.9
1.504.2
1.442.3
23.3
6
.0
61.9
586.0 1.174.4
362.0
829.8
46.4
66.4
315.6
763.4
20.1
23.7
.2
69.2
132.8
67.9
70.6
(M
)
66.8
117.5
33.0
(21)
66.8
84.5
64.2
166.7
243.4
21.0
7.5
26.4
.7
3.7
6.7
.3
20.3
7.9
39.2
47.4
121.2
170.7
1.4
4.2
7.1
892.1 5.918.8 4,307.9
755.9 2 0 .8 2,712.5
.0 2
745.8
116.5
761.1
98.3
722.6
585.9
16.2
33.0
156.2
2
.0
3.7
5
.5
9.7 2,689.1
699.9
391.1
10.0
134.4

30,630.4
32,967.1
14,298.0 18.295.6 19,395.6
11,032.3 13.984.6 15,344.3
925.4 1.033.2 1,073.8
1,519.9 1,903.7 2,145.3
473.5 1.086.2
584.4
163.3
215.2
122.8
68.6
52.8
56.8
67.8
63.1
72.2
8.4
9.0
10.2
2.116.9 2.741.0 2,999.1
2,057.5 2,470.9 2,732.4
394.8
199.6
510.0
270.1
59.4
266.7
1.748.9 2,237.8 2,456.3
967.9 1.086.1 1,093.8
113.0
119.5
103.1
983.1
074.3
864.8
50.8
50.1
.8
1
.0
743.5
425.9
875.3
176.9
11 2. 0
87.9
236.1
233.9
259.5
24.0
40.0
23.0
212.1
236.5
193.9
509.3
407.9
548.2
86.7
100.9
64.3
14.2
16.1
11.2
12.8
6
.6
1 .0
1
34.0
24.1
37.5
370.4
383.2
306.1
18.2
26.6
13.4
4,994.3 5,294.6 5.564.6
3,425.7 3,774.8 3,947.4
957.1 1,047.0 1 2 .7
.1 1
968.0 1 2 .0
,0 2
884.5
52.1
69.8
57.5
26.8
29.9
15.1
15.33
97.5
404.7
319.4
206.8
398.1

35,591.4 38,786.9 46,804.5
20,638.3 21,778.8 25.608.3
16,200.8 16,997.2 20.292.3
1,204.9
1,103.5 1,126.7
3,225.8
2,486.7 2,780.6
673.5
707.5
628.3
76.7
54.4
92.6
43.4
46.5
50.1
80.0
77.6
76.3
12.0
11.3
10.4
3,854.9
3.207.1 3.488.1
2,946.4 3.184.3
3.486.7
743.0
703.4
593.0
368.2
303.8
260.7
3.517.8
2.751.1 2.951.5
1.539.6
1,188.7 1.231.1
143.9
130.8
135.8
1.395.7
1,057.9 1.005.3
82.2
59.1
69.6
5
.8
2.7
4.3
.1 1
992.5 1 1 .6 1.286.5
293.5
223.6
239.8
316./
299.4
287.2
28.6
42.4
34.8
287.4
264.6
244.8
1.519.5
876.8
619.8
231.9
127.1
145.7
33.7
19.3
21.2
29.9
22.4
20.3
39.4
35.8
44.3
428.0
419.1
504.7
40.2
34.4
780.0
156.2
5.730.3 5.944.7 6.312.5
4,465.1
4,033.1 4.186.1
1.330.8
1.179.4 1,250.6
1,205.4
1,069.9 1.132.8
83.2
80.9
76.4
42.2
33.2
36.9
35.4
41.4
66.1
481.2
451.7
466.6

CD

05

H
O
O
1!
2
o
g
w
M
O
Ed

H

0

1
*
W
M

0
0
«

oo
to

CO

324

T a b l e 1.— Social welfare expenditures under public programs, selected fiscal years, 103/f-:>5 through 1965-66 1— C o n tin u e d
[I n m illio n s ; re v ise d e stim a tes]

1934-35

1939-40

1944-45

1949-50

1954-55

1959-60

1961-62

1962-63

1963-64

1964-65 1965-66 2

From Federal funds
$162.3
74.2
31.0
88.1
12.0
4.2

$161.0
48.2
7.0
112.8
9.1
10.4

$180.8
73.1
5.2
107.7
10.9
14.5

$521.6 $1,014.8 $1,378.9 $1,811.9 $2,438.4 $3,512.6
341.8
507.2
537.8
665.9
880.6
614.7
79.8
139.3
71.6
59.4
23.9
67.7
179.8
821.2 1,197.2 1,772.5 2,632.0
507.7
5.4
59.8
38.3
200.4
678.1
169.8
173.2
234.4
143.5
74.7
191.4
206.4

$5,742.3
2,253.3
63.0
3,489.0
882.8
249.3

From State and local funds M

P R E S ID E N T

384.3
220.2
6.7
9.9
112.5
35.0
51.2
1.2
.1
24.0
26.0

THE




623.9
623.9

4,775.8 12,974.6 18,012.1 27,429.9 31,600.4 33, 575.8 35,490.4 38,718.6 40,773.7
6,297. 5
658.7 2,844.9 3,449. 5 4,999.4 5,904.3 6,196.3 6,328.5 6,299.4
198.0
310.0
580.0 1.050.0 1,286.0 1,424.0 1,570.0 1,740.0
1,925.0
71.2 1,861.5 1,759.9 2.356.1 2,777.6 2,788.5 2,641.9 2,302.8
1,900.5
72.3
407.1
6.1
217.5
486.9
444.2
502.0
467.9
347.9
2.2
45.5
50.4
50.7
48.4
56.0
20.0
40.3
233.3
384.4
601.1
892.1 1,245.4 1,433.6 1, 539.6 1, 648.7 1,769.7
1,970.0
466.6 62.0
573.7 187.8 613.0
Hospital ana medical benefits7...............................................
534.6 117.3
411.0
499.8 84.8
308.1
2.969.2
1,352.8
610.4 1.393.0 1.498.8 1.984.2 2.204.1 2.296.3 2.434.9 2.689.5
2.969.2
843.2
610.4 1.393.0 1.498.8 1.984.2 2.204.1 2.296.3 2.434.9 2.689.5
417.7
877.0
51.3
292.9
490.7
663.8
188.6
554.6
€09.6
3,662.0
555.4 1,501.1 1,880.0 2,705.9 2.988.0 3,152.4 3,259.4 3,478.3
521.8
325.1
868.1 1,150.9 1,849.1 2.019.0 2,155.0 2,316.0 2,376.0
2,450.0
315.6
142.0
152.9
176.0
124.0
106.1
135.4
6.8
9.7
6.0
69.2
55.0
37.0
45.0
50.0
61.0
23.0
132.0
135.0
129.0
128.4
127.7
30.6
65.9
101.0
23.3
17.9
550.0
473.4
394.0
378.7
290.7
399.6
334.0
343.7
150.2
142.3
285.0
245.0
289.0
290.0
302.0
289.0
283.0
40.0
50.0
260.0
1,219.7
794.6
900.3
943.1 1,072.1
256.1
330.0
606.2
72.5
94.8
96.3
76.8
9.0
36.1
48.6
55.7
67.2
2.7
15.0
2.1
13.0
20.6
8.3
9.9
.7
3.7
3.5
6.5
11.9
.2
362.7
380.0
272.5
349.4
322.1
27.0
38.0
75.8
64.1
151.9
292.4
245.4
324.0
70.6
253.5
269.6
220.1
122.9
318.0
341.4
284.2
228.1
241.7
100.7
198.1
43.4
54.1
128.0
22.2
78.0

O
F

Public aid................................... ...................................................................
Public assistance *............. ................. ........... ........................... .........
Vendor medical paym entsT....................................................
Other » ......................................................................................................
Health and medical programs11.............. ...............................................
Hospital and medical care..................................................... ..........
Maternal and child health services11_______ ____________
Medical research_________________________________________
School health (educational agencies) *............................ .............
Other public health activities 14_______ _________ _________
Medical-facilities construction _____ __ _____ _________
Other welfare services_________________ __ ____ _____ ______
Vocational rehabilitation, total...................................................... .
Medical rehabilitation 1.................... ....... .................................
Institutional and other care 16_________ ___________ ____
School lunch 16........................ ...................... ......... .........................
Child welfare17_____________________________ ____________

5,294.9
862.8
147.0
482.5

REPORT

Total...................................................................................................... 3,309.8
Social insurance..______________ _________ ___________________
285.0
Public employe© retirement *_________ __________ ________
120.0
U nemployment insurance and employment service5............
State temporary disability insurance, to ta l6. ...........................
Hospital and medical benefits7........... ............................. ..
Workmen’s compensation, to ta l8. ................................................
165.0

ECONOMIC

$132.9
69.2
42.0
63.7
30.0

1967

Education ................................................................................................. .
Elementary and secondury, total................... ........................... .
Construction1________ ______ ___________ ____ ______
Higher education and other, total________________________
Construction 7.................................. .................................. . . . _
Public housing *»....................................... ............................................. .

THE

Program

V
eteran program *.
s'
s,1

462.0

1,965.4
1,820.9
lie. 3
144.6

(27)

2,486.0
2 ,2 8 6 .3
268.0
198.7

20.6

2,608.2
70.1
248.3

(«)

6,661.2
1,013.5
866.3
304.6

111.9

20.0

20.4

21.0

L 19.671.0 20.966.0 22.440.0 25,078.9
I

26, 606.1
23,562.0
3.733.0
2.954.1
610.0
98.2

95.2

18.9

9.665.0 is; 091.4 17.471.0 18.766.0 20.140.0 22,224.5
2.223.1 2,788.9 3,000.0 3.160.0 3.180.0 3,460.6
,1 0
.2 0
1 1 .6 1,897.7 2 0 .0 2 0 .0 2.300.0 2,854.4
,1 2
366.7
360.0
193.4
360.0
360.0
480.0
33.2
6 .6
6
14.6
43.2
6 .6
5
80.0

REPORT
O TE
F H
PRESIDENT

t* Medical research of the U.S. Public Health Service, Food and Drug Administration,
Atomic Energy Commission, National Aeronautics and Space Administration, and
Department of Defense.
14 Excludes expenditures for water supply, sanitation services, and sewage disposal
but includes regulatory and administrative costs of these services; also includes expendi­
tures for medical equipment and supplies for civil defense.
15 Expenditures for homes for dependent or neglected children and for adults other
than veterans and the value of surplus food for nonprofit institutions.
Federal expenditures represent cash apportionment and the value of commodities
purchased and distributed under the National School Lunch Act, the value of surplus
commodities distributed under other agricultural programs, and, beginning 1964-66,
special school milk program. Nongovernmental funds are also available from private
organizations and from payments by parents (in 1966-66, parents' payments totaled an
estimated $835,000,000).
17 Includes foster-care payments and payments for professional and facilitating serv­
ices; excludes expenditures of public institutions and public day-care centers, capital
expenditures by courts and by youth authorities, payments from parents and relatives,
and direct appropriations by State legislatures to voluntary agencies and institutions.
i* Programs authorized under the Economic Opportunity Act; excludes programs
delegated to or reported with data for the Office of Education and the Welfare Admin­
istration.
is Federal expenditures exclude bonus payments and expenditures from veterans'
life insurance trust funds; State and local expenditures refer to State bonus and other
payments and services (local data not available).
20 Includes burial awards.
ii includes vocational rehabilitation, specially adapted homes and automobiles for
disabled veterans, counseling, beneficiaries' travel, loan guarantees, and domiciliary
care.
m Federal expenditures only, data for State and local expenditures not available.
33 Federal and State subsidies (and administrative costs) for low-cost housing.
Less than $60,000.
“ Represents OfTlce of Education administrative costs; training of Federal personnel;
and “grants” as reported in the summary table prepared by the Federal Education
Program Branch, Office of Education, except (1) those covered under other social welfare
programs such as veterans' programs and (2) the value of surplus property. Beginning
1937-38 includes revenue from public lands for education and, beginning 1950-61, includes
training grants and basic research for which data were not available in earlier years.
« Except as otherwise noted (see footnotes 6 and 8).
27 Data not available.
Source* Data taken or estimated from Treasury reports, Federal budgets, and avail­
able reports of Federal, State, and local administrative agencies.

ECONOM
IC

1 Expenditures from Federal, State, and local revenues (general and special) and
trust funds and other expenditures under public law; includes capital outlay and ad­
ministrative expenditures, unless otherwise noted. Includes some expenditures and
payments outside the United States. Fiscal years ended June 30 for Federal Govern­
ment, most States, and some localities; for other States and localities, fiscal years cover
various 12-month periods ended in the specified year.
* Preliminary estimates.
* Excludes net payments in lieu of benefits (transfers) under the financial interchange
with the railroad retirement system.
4 Excludes refunds of employee contributions to those leaving the service; Federal
expenditures include payments to retired military personnel ana survivors. Data for
administrative expenses not available for Federal noncontributory programs.
* Includes unemployment compensation under State programs and programs for
Federal employees, for ex-servicemen, and for veterans under the readjustment acts of
1944 and 1952, payments under the temporary extended unemployment insurance pro­
grams and training allowances under the Manpower Development and Training Act
and Area Redevelopment Act.
e Cash and medical benefits, including payments under private plans where applicable
in the 4 States with programs. Includes State costs of administering State plans and
supervising private plans; data for administrative expenditures of private plans under­
written by private insurance carriers or self-insured are not available.
» Includea in total shown directly above; excludes administrative expenditures, not
available separately but included for entire program in preceding line.
9 Cash and medical benefits paid under Federal workmen’s compensation laws and
under State Jaws b y private insurance carriers, by State funds, and by self-insurers.
Excludes administrative costs of State agencies before 1949-50 and all administrative
costs of private insurance carriers and self-insurers. Beginning 1969-60, includes data
for Alaska and Hawaii.
* Includes cash and vendor medical payments under old-age assistance, aid to families
with dependent children, aid to the blind, aid to the permanently and totally disabled;
medical assistance programs; and, from State and local funds, general assistance. For
1939-40, Federal exj>enditures include $1,000,000 in administrative costs for which
distribution by source of fund is not available,
“ Work program enrnings, other emergency aid programs, and value of surplus food
distributed to needy families.
n Excludes expenditures (I) for domiciliary care in institutions other than mental or
tuberculosis (included under institutional care); (2) for health and medical service pro­
vided in connection with State temporary disability insurance, workmen’s compensation,
public assistance, vocational rehabilitation, and veterans' programs (included in total
expenditures for these programs); and (3) those made directly for international health
activities and for certain subordinate medical programs such as those of the Bureau of
Mines, the National Park Service, and the U.S. Civil Service Commission.
12 Services for crippled children and maternal and child health services.




61.6

2 6 .6 6,617.6 10,777. 6
,8 6

1967

7 5 -3 1 4 — 67— p t

Education.................. ............................... ..
Elementary and secondary, total. _
Construction *.............................. .
Higher education and other, total..
Construction
........................ .
Public housing *»_.

CO

to

Oi

in poverty and low-income statust 1959-65— Number and percent of noninstitutional population who were poor or near poor

The poverty and low-lncome roster

Type ofunit and Income level

1060

1961

1062

1063

1964

The incidence of poverty and low-tnoome status
1065

61.0
36.3
16.7
5.6
4.9
.7
2.6
2.4
.2
■ -4 2.9
2.6
.4
46.6
30.4
16.1
8.6
6.6
3.1
36.8
24.0
11.9
14.7
9.6
6.1

40.8
34.1
16,7
6.8
6.1
.7
2.0
2.3
.3
3.2
2.8
.4
44.0
28.9
16.1
8.0
4.9
3.1
36.2
24.0
12.2
14.5
9.2
6.3

Percent of persons poor or near poora
47.6
32.7
14.8
5.6
4.8
.8
2.6
2.1
.4
3.1
2.7
.4
41.9
27.9
14.0
8.0
4.8
3.2
33.9
23.1
10.8
21.4
13.6
7.8

31.0
30.5 29.3
22.1
22.3 21.1
0.0
8.2
8.2
52.5
50.5
49.7
47.4
46.5 44.7
6.1
4.0
6.0
41.4
38.0
39.2
30.8
36.1
33.0
4.0
3.1
4.1
74.2
73.0
71.0
64.4
08.1
07.1
6.1
6.9
6.6
29.7
29.3
27.8
20.4 20.8
10.4
9.2
8.4
8.6
22.3 21.9 20.4
13.8
15.6
15.3
0.6
6.6
6.8
32.1
31.7
30.3
22.1
22.0
21.3
9.0
10.0
9.1
26.9 | 20.8 | 26.3
17.9
18.5
18.2
8.1
9.0
8.3

28.0
20.1
8.6
60.3
44.2
0.1
38.6
34.5
4.1
60.4
60.0
9.4
27.2
1&6
8.7
19.5
12.0
6.9
29.8
20.5
0.3
25.5
17.2
8.3

27.3
18.0
8.4
49.8
43.9
5.9
37.6
34.2
3.4
09.6
59.7
9.9
25.8
17.3
8v 6
19.6
12.5
7.1
27.9
18.9
9.0
23.5
16.4
8.1

26.3
18.0
8.3
47.8
42.0
5.8
36.6
31.2
4.3
67.4
69.3
8.1
24.8
16.3
8.6
17.9
11.1
6.8
27.3
18.1
9.2
23.0
14.6
8.4

24.8
17.1
7.7
46.5
39.8
6.7
33.7
28.7
5.0
60.9
57.6
9.
23.4
15.6
7.8
17.3
10.4
6.8
25.5
17.3
8.1
19.0
12.4
7.2

P R E S ID E N T

62.8
37.0
16.8
6.6
4.9
.7
2.7
2.4
.3
2.9
2.6
.4
47.3
32.2
16.1
8~r
6.4
3*0
38.8
26.7
12.1
16.0
10.8
6.2

1965

THE

62.9
38.1
14.8
6.6
6.0
.6
2.7
2.4
.3
2.8
2.6
.3
47.4
33.1
14.3
8jT
6.0
2.8
38.7
27.2
11.6
16.2
11.2
6.0

1904

O
F

64.8
40.1
14.7
6.6
6.1
.4
2.8
2.6
.2
2.6
2.4
.2
49.3
36.0
14.3
ij T
6.6
2.8
40.1
28.6
11.6
16.6
11.4
6.1

1062 ! 1963

REPORT




64.7
38.0
16.8
6.6
6.1
.6
2.9
2.6
.3
2.7
2.6
.2
40.1
33.0
16.2
0.3
6.6
2.8
30.8
27.4
12.4
16.1
10.7
6.4

1961

ECONOMIC

Total w ith low in com e..........................................................
Poor.......................................................................................................... ..
N ew poor................................................................................ ............. ..
Unrelated Individuals...............................................................
Poor.......................... ...............................................................
Near poor— ..........................................................................
Under age 66....................................................................................
Poor— ......................................................................................
Near poor.................................................................................
Aged 66 or over.............................................................................
Poor............................................................................................
Near poor................................................................................
Persons In families.................................................................... ...
Poor............................................................................................
Near poor............................................................. ...................
W ith no children under age 18...............................
Poor............................... ................................. .........
Near poor................................. ........................... .
W ith children under age 18.......................................
Poor.............................. 1....... ......................... .........
Near poor------------------------------------------------------------------------Adults------------------- -----------------------------------------Poor_______ _________________ ____
Near poor________________________

1960

1967

Persons poor or near poor * (millions)

1059

THE

1969

326

T a b l e 2 .— Trends

Children under age 18..................................
Poor.................................. ........................
Near poor........................................ .

23.7
16.7
7.0

2a

6
17.2
6.4

22.5
16.0
6.5

22.8
15.9
6.9

22.1
15.3
6.8

|
21.7 J 20.4
14.8
14.3
6.1
6.9

37.1
26.1
11.0

15.8
11.5
4.3
10.2
6.6
3.5
3.7
2.2
1.5
6.4
4.4
2.0
2.8
1.9
1.0
2.2
1.5
.7
1.4
1.1
.4

31.7
24.0
7.7
26.7
18.4
8.3
23.6
16.4
7.3
28.8
19.7
9.1
21.1
14.3
6.9
35.3
23.3
12.0
67.9
51.2
16.7

30.7
23.7
7.0
26.0
18.3
7.7
23.2
16.3
6.9
27.7
19.5
8.2
20.3
13.6
6.7
33.0
22.9
10.1
68.2
54.1
14.0

29.7
22.6
7.1
24 9
17.3
7.6
21.5
14.5
7.0
28.0
19.2
8.8
20.3
14.2
6.1
31.7
21.9
9.8
63.0
47.1
15.9

29.3
21.8
7.5
24.4
16.5
7.9
20.7
13.4
7.3
26.9
18.6
8.3
18.9
13.2
5.7
31.3
20.2
11.1
65.1T
48.7
16.6

28.5
21.0
7.5
23.5
15.5
8.0
20.7
13.2
7.5
25.3
17.1
8.2
18.0
12.0
6.0
29.8
19.5
10.3
58.8
43.5
15.3

27.4
19.8
7.6
22.2
14.2
8.0
19.1
11.7
7.4
24.5
16.0
8.5
17.7
10.8
fi.9
28.0
18.8
9.2
56.6
41.0
15.6

26.1
19.0
7.2
21.0
13.7
7.3
18.5
11.2
7.3
22.9
15.6
7.3
16.5
10.9
5.7
26.7
18.2
8.5
52.0
38.5
13.6

tio n s a n d c h ild re n u n d e r age 14 w h o liv e w it h a fa m ily o f n on rela ti v es sire n o t rep resen ted
in th e l o .v -in co m e roster b e ca u se in c o m e d a ta are n o t co lle c te d for in m a tes of in s titu tio n s
or u n rela ted in d iv id u a ls u n d e r a ge 14, A s o f M a r c h
th ere w ere a b o u t 34t>,0(X) su ch
ch ild re n a n d 2,133,000 p erson s o f a ll ages in in s titu tio n s .
3 I n clu d e s u n r e la te d in d iv id u a ls sh ow n se p a r a te ly a b o v e .
S o u rc e : D e r iv e d from s p e cia l t a b u la tio n s from th e C u r re n t P o p u la tio n S u r v e y for
M a rc h 1960-66 b y th e B u reau o f th e C e n s u s for th e S o c ia l S e c u r it y A d m in is t r a t io n .

a
H

PRESIDENT

16.4
11.0
4.5
10.6
6.8
3.8
3.7
2.3
1.4
6.9
4.5
2.4
3.0
1.8
1.2
2.3
1.5
.8
1.8
1.1
.4

T E
H




16.7
12.3
4.4
11.1
7.4
3.7
3.9
2.5
1.4
7.2
4.9
2.3
3.1
2.1
1.0
2.5
1.6
.9
1.5
1.1
.4

O
F

1 I n c o m e , fo r tlie sp e cifie d y e a r , o f fa m ily u n it o r u n r e la te d in d iv id u a l b e lo w th e S o cia l
S e c u r it y A d m in is t r a t io n in d ex at th e p o v e r t y le v e l b y fa m ily size a n d sox o 'h e a d or,
a lt e r n a t iv e ly , a t th e s o m e w h a t h ig h e r lo w -fn e o m e le v e l. (S ee th e S o cia l S e c u r ity
B u lle t in , A p ril itftiij issu e, p p . 20-21 ). T h e S S A in d ex h a s b een a d ju s te d for p r ic e ch a n g es
d u r in g th e p e r io d .
- T h e p e r c e n t th a t p o o r or near p o o r p erson s (o r fa m ilie s ) a re o f tota l n u m b e r o f p erson s
(o r fa m ilies ) in each c a te g o ry in th e n o n in s titu tio n a l p o p u la t io n . A ll p erson s in in stitu ­

17.0
12.6
4.4
11.5
7.8
3.7
3.9
2.5
1.4
7.5
5.2
2.3
3.3
2.3
1.0
2.6
1.7
.9
1.7
1.3
.4

29.3
20.5
8.8

REPORT

17.1
13.0
4.1
11.5
8.0
3.5
4.0
2.7
1.3
7.5
5.3
2.2
3.4
2.4
1.0
2.6
1.8
.8
1.5
1.1
.4

31.3
21.3
9.9

ECONOMIC

5 or more children.................................... ...........
Poor.......................... ....................... ................
Near poor.---------------- -------------------------

17.3
13.4
3.9
11.8
8.3
3.5
4.3
3.0
1.3
7.5
5.3
2.2
3.4
2.3
1.1
2.6
1.8
.8
1.6
1.2
.3

32.1
33.8
23.6
22.2
10.2 | 9.9

1967

Near poor--------------------------------------- --------------------------Families of 2 or more___________________________ _____
Poor.___ ________ __________________________________
Near poor.................................... ........... ....... ........... ...................
W ith no children underage 1 8 ..-..................................
Poor-------------------------------------------------------------Near poor.----------------------------------------------------With children under age 18.................................. .......
Poor___________________________ _____________
Near poor______ ______ ____ ________________
1 to 2 children- _________________________
Poor____ _________ ___________________
Near poor------------------- ----------------------3 to 4 children............. ................. . . . ..............
Poor....................................................................

17.7
13.4
4.3
12.0
8.3
3.7
4.3
3.0
1.3
7.7
5.3
2.4
3.7
2.5
1.2
2.7
1.8
.»
l.S
1.1
.4

34.1
24.3
9.8

Percent of households poor or near poor *

Households poor or near poor» (millions)
Total with low income *. ________________________

36.2
26.4
9.8

00
to

328
of poverty in 1964 of unrelated individuals and persons in families, by race and melropoiilan-nonmetropolitan residence

58.0
5.5
4.4
1.1
53.1
42.6
38.1
4.4
10.5
7.9
2.6

10.1
2.0
1.5
.5
8.0
4.1
2.8
1.3
3.9
2.2
1.7

17.2
36.9
34.3
47.2
15.1
9.7
7.4
28.9
37.0
27.5
66.3

62.0
2.9
2.6
.2
59.8
50.4
52.9
3.5
3.4
2.9
.5

0.3
1.2
1.0
.1
5.1
4.1
3.1
1.0
1.0
.7
.3

10.0
40.7
39.1
01.2
8.6
7.3
5.9
28.2
29.7
24.0
03.8

55.4
3.5
3.1
.4
51.9
46.8
43.4
3.5
5.0
3.8
1.3

13.5
1.9
1.7
.3
11.0
8.1
6.6
1.5
3.5
2.5
1.0

24.4
54.7
52.6
73.1
22.4
17.4
15.3
44.1
68.9
05.0
80.7

Source: Department of Health, Education, and Welfare.

13.3
.4
.3
(l>
12.9
11.2
10.8
.4
1.7
1.5
.3

4.4
.2
.1
0)
4.2
2.9
ZS

.1
1.3
1.1
.2

32.9
49.2
44.2
<*>
32.5
25.9
20.1
20.2
75.1
75.7
71.0

P R E S ID E N T




18.0
43.2
41.2
55.3
10.3
12.3
10.0
32.fi
46.7
40.0
70.3

THE

i Fewer than 50,000 households.
* N ot shown for*base less than 100,000.

34.3
6.3
4.3
1.0
28.fi
19.3
15.4
3.9
9.7
6.4
3.2

O
F

18fl.fi
12.3
10.5
1.7
177.6
156.9
145.2
11.8
20.7
10.1
4.6

REPORT

T otal........................... —...............
Unrelated individuals...................... . .
White.............................-...................
N onw hite..........................................
Persons In families............................... White..................................................
Male head.. ___ ................. Female h e a d ........................
Non white.........................................
Male head.................... ............
Female head............................

Outside central cities
In centred cities
Poor persons
Nonfarm
Farm
Total
Poor persons
Poor persons
Poor persons
num­
Poor persons
Total
Total
ber of N um ­ Percent Total
Total
number
number
of total number
persons ber
number
N um ­ Percent
of
N um ­ Percent
of
of
N um ­ Percent
of
N um ­
ber of total persons ber of total persons ber of total persons ber Percent
persons
of total

ECONOMIC

Fam ily status and race

Nomnetropolitan area

1967

Metropolitan area

Total United States

THE

T a b l e 3 .— Incidence

THE 1967 ECONOMIC REPORT OF THE PRESIDENT

329

Table 4. Number o poor persons and incidence of poverty 1959 and 1965
—
f
,

Characteristics of head of household 1

Persons in poor house­
holds 2 (millions)
1959

Total....... ............................................... ..................................
Agnd (65 years and over)
...
White.................................. .......... ..............................
Male........................................................................ .
Fem ale................... ......... .........................................
Nonwhite__............................ ............................ ...........
M a le.........................................................................
Fem ale................... ................................... .............
All other *________________ ______ _____ _____ ____
Farm ...................................... ................... .......................
White____ ________ _________ - ______ ___
Male_____ ___________ ______
Female............................. ............................—
Non w h ite.-............................................................
Male....................................................................
Fem ale............................................ .................
NonfarnL.-- _ _______________________________
W hite......................................................................
Male....................................................................
Female............... .................................. ...........
Non white______ ______ ___________________
M a le.................................................................
F em ale. ____________________________

38.9
5.3
4.8
2.7
2.1
.5
.3
.2
33.7
6.4
4.3
4.1
.2
2.2
2.0
.2
27.3
19.2
14.3
5.0
8.0
5.2
2.8

1965
32.7
5.0
4.4
2.1
2.3
.6
.3
.3
27.8
3.0
1.8
1.7
.1
1.1
1.0
.2
24.8
16.4
11.8
4.6
8.4
5.1
3.3

Incidence of poverty
(percent) *
1959
22.1
42.9
41.1
33.6
57.8
70.6
65.2
79.9
20.6
43.1
34.3
33.8
49.2
87.5
88.4
79.9
18.3
14.5
11.8
40.9
49.0
41.9
71.4

1965

(fl)

17.1
32.9
31.0
21.6
50.8
60.1
50.9
73.9
15.7
27.0
19.318.8
31.5
80.1
81.1
15.0
11.3
8.9
34.2
42.5
34.5
66.4

1 Household defined here as either a family or an unrelated individual.
1 Persons in households with family income or income of unrelated individual in 1965 below the Social
Security Administration poverty index, taking into account family size, composition, and farm-nonfarm
residence.
* Poor persons as percent of all persons in the category.
4 Includes only 1- and 2-person households with head aged 65 years and over.
1 Includes all households headed by persons under age 65 and families of 3 or more headed by an aged
person.
• Percent not shown because of small number of persons.
Source: Derived b y SSA from special Census Bureau tabulations of March 1960 and March 1966 Current
Population Surveys.




330

th e

1967 ECONOMIC REPORT OF THE PRESIDENT
T a b l e 5 . —Financing

OASDHI (percent of payroll)

OASDI
Present program:
Level equivalent of incom e.____ -......................................... ................................
Level cost of benefits________ ___ ____ _________________________________
Actuarial balance .....- ........... ............. .......Effects of proposed changes:
Cost of proposal:
Benefit increase . ~
Other improvements __________________________________________
Total_____ ____________________ ____ _______ _____________________
Additional income to finance proposal:
Contribution base............................................ ......... ............................. ...............
Contribution rates. ......................... .......................... ........................ ..............
Total...................................... ................................... ............................................
Net effect of proposal................................ ......... .................................. .
Proposed program:
Level equivalent of income____________ __________ ________ ____ ___
Level-cost of benefits.................................. ........... .......................... ........

Actuarial balance_______________ ________ ____ _______ ____________




9.53
8.79
+ .74
1.36

.1
2

1.48

HI
1.23
1.23

0
.1
1
.1
1

.50
.26
.76
- .7 3

+ . 10

9,78
9.77
-M l

1.23
1.13
-f.10

.2
1
0
.2
1

THE

1967

ECONOMIC REPORT OF THE PRESIDENT

331

T able 6

PRESENT^PROPOSED OftSMCONTRIBUTION RATES
YEAR

EMPLOYEE- ANO EMPLOYEE, EACH
PRESENT

PROPOSED^

3.9% 3.9%
1967-68
4.5
1969-72
4 .4
1973»dafter 4.85 5J0

SELF-EMPLOYED
PRESENT U W 1'

5.9% 5.9%
6.8
6.6
7.0
7.0

y 46600 EAKNMft Mfi

Vmooearnm m mem 191wm
*
et

*m mm m tm t hti mm tm
em

A D * Kl»0 EtfN tf M tfF tC W IW A DT E E F E
N
W S F Tf
N HRA T R




PROPOSED ^

332

T able T

TE
H

EMPLOYEE CONTRIBUTIONS FOR OASDI
( monthly amount)




7.80

8.80

9.00

1 .7 13.20 m o
10

44.50

8.80 9.00

**
CD
tx i

^
4.40

teoo

$
4.85

$5.00

9.70 10.00 9.70 10.00 |

13.20 13.50 14.55 15.00 14.55 15.00

15160 15.60 1110 18.00 17.60 18.00 19.40 20.00 19.40 20.00 i
21.45

21.45 24.20 0.415 24.20 2475 26.68 27.50 26.68 0150
N ERI 6
O A NHS
N ER I G
O A NN S
N F R IN S
O AN G
N ERI G
O A NN S
V
2535 AROVf#6600 29.25 mti&oo 2925
3250 ABOE?6600 3250
miuTHJ for

N E R NS
O J W6
A OE
B V (6600
C U T DF R
O NE O
C UT D O
ONE F R
C W IW H NE R INS CNRST0 &
O R IO S 0 A N 6
OTI 0 I M
O 8 HWS A O tfT O
K EE T
B V S O O BNFT
R EEI S
C UT DF R
ONE O
OMRUf tf
O Tlf TO r
t
O B NFT
R E EI S

CUTDF R
ONE O
N E R I G CNRBTOS
O A NN S OT I UI N
A60Vt#7800 O BNFT
R EEI S
CUTDF R
ONE O
CNR UI N
OTI TOS
B
O BNFT
R EEI S

C U T PO
O NE F R

33.75
N ERI G
O AN S
N
A V *9000
Mt
Ot T P ft
OlMfP O
CNR UI N
OTI TOS
B
oe stN F
E in

c n r u io s
o t ib t n

O BNFT
R EEI S

3750
N E ftNNt
OA Id
A ovtfaooo
B
C UT'?F R
ONS O
CNR UI N
OTI TO*
B
oa b n f s
e e it

CNRBTOS
OT I UI N
O BNFT
R EEI S

37.50
4500

PRESIDENT

900

1 1 .7 0

*390 14.40 Mso

O TE
F H

300
400
550
650
750

7 .8 0

LAW

1974 AND THEREAFTER
1973
PRESENT PROPOSED KESfNT PROPOSED
UW
UW
LAW
UW

REPORT

200

h 9 0

present

V E A R S
-712 7 1
9
PRESENT PROPOSED
LAW
UW

196$
>•70
PROPOSED
LAW

ECONOM
IC

*100

19158
PRESHIT PROPOStD
UW
UW

1967

M N LY
O TH

tmm

T able 8

MONTHLY SOCIAL SECURITY CASH BENEFITS
UNDER PRESENT LAW AND UNDER PROPOSAL
AVKA6£MONTHLY

FARMINGS
M INIM UM
BENEFIT

RfTlRtD OR PISABlfrP WORKtl^

y

P R E * tN T

* 44.00

20
0
250
300
350
400
450
500
550^

6

6320 72.70
90.00
103.40
11700
m so
15630
167.90
meo
19330
221.00
24800
m oo
6

TWT S t m t M M l AH WiFt kU * E CS M O ttH WREW M K W ! S U E T .
U M M W U W M IlU W iP f ftP R H E N T U W .




RHlfttP OR P1SA01EP WORKER
ANP WlPfc- v
PR E^N T
PROPOfFP

ttosoo
109.10
13500
155./0
175.50
moo
214.40
251.90
270.60
283.20
311.00
338.00
37800

W ID O W
AGE-6Z OB. OVf-R
PRE^fcNT | PROPOS6-D
i $ O L I- *1> e y i v o e

YOUNG WIDOW
A N D 1 CHILD
PRf-5E-NT
PROPOSfP

$105.00
10910
135.00
15520
175.00
194.00
21440
25200
271.00
28080
33160
43200

$6600
?44.00 f7QOO ?66 00
94.80
52.20
94.80
78.20
64.60
117.40
1(7.30
8390
135.90
135.00
74.20
152.60
101.70
15260
8400
11240
168.60
92.80
168.60
124.20 14190 18650
102.50
186.40
13550
203.90 234.50 112.20
20400 234.60
146.00
120.50
219.00
2ia o o
157XJO
23550
129.60
235.60
252.00
16800
138.60
25200
138.60
25200
16800
25200
25200
13860
252001 372JOO
168.00
25200
16800
25200
138.60

♦0
1
0
ISO

650
750
900

PROPO^E-D

70.00
74.30
8540
9660
106.70
11790
129.00
138.60
149.00
159.40
182.40
204.60
237.60

334

THE

19 67 ECONOMIC REPORT OF THE PRESIDENT

Chairman P ro x m ir e . I am a little bit confused by your analysis of
the fiscal impact of your proposals. I had assumed superficially,
without having had the very helpful presentation you have given us,
that the impact of the 20-percent increase in social security payments
on the economy, beginning July 1, would be about at an annual rate
of $5 billion—roughly $5 billion—a year in increased Government
expenditures, increased expenditures by beneficiaries.
Mr. C o h e n . About $4.5 billion.
Chairman P r o x m ire . About $4.5 billion ?
Mr. C o h e n . Yes; at a full 12 months’ rate.
Chairman P ro x m ir e . It is fairly close to the impact of the expected
increase in Vietnam expenditures—something like that, or maybe a
little bit smaller. But you seem to say here that you would modify
that to some extent through calendar 1967. Am I wrong, or is that
about right?
M r. Co h e n . Y

ou

are correct.

Chairman P r o x m ir e . There would be no increase in contributions;
no increase in taxes?
Mr. C o h e n . That is right.
Chairman P ro x m ir e . Until January 1,1968. Is that correct?
Mr. C o h e n . That is right. The full figure for the fiscal year 1968
is actually $4.1 billion.
Chairman P ro x m ir e . But it would be bigger than that, I should
think, in the last half of 1967, inasmuch as there would be no increase
in contributions in the last half of 1967. There will be an increase
because of the larger base in the last half of the fiscal year or the first
half of 1968.
Mr. C o h e n . I was giving you the expenditures first; and you are
correct, that in the last 6 months of calendar 1967, there is no proposed
income increase—neither a rate increase or a maximum earnings in­
crease. So for the last 6 months, roughly $2 billion of that $4.1 bil­
lion—the annual rate—would be a benefit expenditure without any
increased income coming into the system.
Chairman P r o x m ir e . This is spending in a waj that is quite dy­
namic. Insofar as I understand it, my assumptions, at least, have
been that this money is really spent. Relatively a small proportion is
saved. For most income, I assume, the taxpayer when he gets a tax
cut will save about 7 or 7% percent of his tax benefit. I would assume
that social security beneficiaries would save very little because of their
age and because of their low income; is that correct?
Mr. C o h e n . I think that is correct.
Chairman P r o x m ir e . So that their saving might be only 1 or 2
percent.
Mr. C o h e n . I think it would be very slight.
Chairman P r o x m ir e . I would like to know how you anticipate this
money is likely to be spent at this time. For example, my own assump­
tion would be that very little of it would be spent on education, which
is good, because we have terrific demand for education, facilities that
strain the manpower available in educational facilities. Is that cor­
rect from an economic standpoint ?
Mr. C o h e n . Y e s .




THE 1967 ECONOMIC REPORT OF THE PRESIDENT

335

Chairman P ro x m ir e . These are people who are over 65 and are not
going to go back to school, in most cases. In some cases, I suppose,
they would help the family to finance a child who is ffoin^ to school.
Mr. C o h e n . Yes.
Chairman P ro x m ire . But this would be rare.
Mr. C o h e n . I don’t have the exact number but as a result of the
1965 Amendments to the Social Security Act, a child age 18 to 22 at­
tending school, whose father is retired, disabled, or deceased continues
to get this social security benefit.
Chairman P ro x m ir e . It would be relatively few.
Mr. C o h e n . Yes; a relatively small number, but I do think that,
although it is small, it has a very significant impact on the particular
family.
Chairman P ro x m ir e . Yes.
Mr. C o h e n . We have many striking individual cases.
Chairman P ro x m ir e . I am trying to look at this on the overall
aspect of the impact of the economy, and particularly, in the first place,
on prices.
Mr. C o h e n . N o ; it probably would not have much effect.
Chairman P ro x m ir e . Then there is another very strained area of
our economy, and that has to do with medicine, doctors, nurses, and so
forth. This particular increase would not greatly affect that, I should
think, because most of these people are on medicare anywav: is that
correct ?
Mr. C o h e n . Although I don’t have any objective information—I
rely mostly on my experience with members of my own family—I
think the problem is that medicare only covers roughtly about 40 or
45 percent of the total medical costs of aged people, and they still have
an unfinanced burden. However, a substantial number of them do
carry voluntary private insurance.
Chairman P ro x m ir e . Are you talking about the total program ?
Mr. C o h e n . Yes, sir.
Chairman P ro x m ire . Including the voluntary program?
Mr. C o h e n . Yes, sir. Even with the two combined programs there
are still significant exclusions. For instance, consider drugs. The cost
of drugs is a very notable exclusion. A very small part or the nursing
home costs are covered by the medicare program. And there are
others.
Chairman P ro x m ir e . This is likely to put significant pressure in
this area then.
Mr. C o h e n . Yes: and I think quite frankly that since medical costs
are still goingup----Chairman JProxmire. The most rapid rising elements.
Mr. C o h e n . They are the most rapidly rising element in the CPI.
I think that a part of the benefiit increase would be spent on rising
medical care costs*
Chairman P ro x m ire . Then I take it, in addition to this, yoxi are
going to have a salutary effect, I should think, in the construction and
homeTtmilding aera ? I mean these people won’t be buying homes, but
they may be moving into somewhat better homes which might have
an effect in this area which is so heavily depressed, or am I wrong
about that?




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Mr. C o h e n . I think housing conditions for the bulk of aged people
are very, very tragic.
Chairman P r o x m ir e . This would help them improve those condi­
tions.
Mr. C o h e n . It would; although I think there is another factor and
that is the tendency of older people not to leave their immediate neigh­
borhoods or contacts, no matter how bad the housing is, because they
don’t like to move away from familiar circumstances. I think there
is a built-in reluctance to move. The two big problems of the aged,
medical care costs and housing conditions, still need a great deal of
further attention.
Chairman P r o x m ir e . Then can you summarize in general w h a t
effect you think this is likely to have on prices, this increase in benefits
coming at this time, looking at the economy as you would, as an excel­
lent economist and as a member of the administration ?
Mr. C o h e n . I would say, taking the disadvantageous aspect first;
namely; in a period of rising prices and particularly, rising medical
care prices, part of the benefit increase, in a sense, may be used up be­
cause aged people will be only meeting the cost changes that are
occurring.
But, on the other hand, I think the benefits will be expanded rapidly,
and they will serve to provide the aged with a somewhat better
standard p f living.
Chairman P r o x m i r e . Yes. What I am concerned about, and of
course, we are all deeply concerned with that, but I am also con­
cerned right now with what effect this is going to have on prices
across the board. They will spend less of this on housing be­
cause of patterns and habits and because they are older people and
w/ould be less inclined to move. They would be spending probably
little on autobomiles.
Mr. C o h e n . That is right.
Chairman P r o x m ir e . I imagine some in that area but not very
much. Not much on recreation because these are people who need
the money and have to spend it on necessities. Some on travel.
M r . C o h e n . A v e ry m a jo r p a r t w o u ld be spent fo r fo o d .
Chairman P r o x m i r e . A v e r y m a jo r part w o u ld be fo o d ?
Mr. C o h e n . A very major part, I think, would be spent for food.
What the impact of that would be on prices in relation to agricultural
products and demand I am not sufficiently aware of, but I do think
that a benefit increase would be reflected in additional purchases in
food, and unfortunately it may be reflected in somewhat higher rents
for those who have rental housing. When social security beneficiaries
get an increase it becomes known in the community and the costs which
have been somewhat held down are reflected in higher prices for medi­
cal costs and housing.
Chairman P r o x m i r e . We have been so much concerned with the im­
pact of farm production policies on prices for food and so much less
on the demand side that my instinct is that this would not have a great
effect on increase in food prices.
Mr. C o h e n . I w o u ld n o t th in k so.
Chairman P r o x m i r e . We have almost an unlimited capacity for
production of food. We have Government programs that try to help
the farm income by retarding production. But I would think that
from that standpoint, it would not be inflationary.



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Mr. C o h e n . I w o u ld n o t th in k th a t it w o u ld be su b sta n tia l, even i f
there w^ere som e increase.
Chairman P r o x m ir e . Secretary Wirtz said yesterday that we could
practically eliminate unemployment if we only had the structural and
administrative manpower and some additional know-how. From a
national standpoint, how do we know to what extent our resources are
being fully utilized ?
What I am getting at, frankly, is that I am concerned with the
enormous amount we spend on the space programs, which absorb the
energies of people who I think ought to be active in the field of educa­
tion, to a great extent. And, if we can save mone^ in this program^
and maybe in some other programs, or at least establish priorities, per­
haps we could move ahead in this area, which is deflationary in my
judgment, of getting more people educated, so that instead of being
consumers strictly, recipients of benefits, they are people who can
become productive and producers.
Mr. C o h e n . I certainly share----Chairman P r o x m ir e . With the priorities we have.
Mr. C o h e n . I share Secretary Wirtz’ views. Secretary Gardner
and I have met with him several times, to discuss what we think is one
of the most difficult problems that we have to face; namely, the devel­
opment of training programs for the hard-core groups in our society.
They are the adults, many with fourth, fifth, sixth grade education,
with very few skills, a great deal of repeated unemployment during
the last 5 or 10 years, living in labor market areas where there are not
always a full range of opportunities. How do you develop a program
that will develop these individuals’ potentialities and resources and
encourage the attitudes, motivations, skills, ability, and I would even
say dress, looks, composure, so that they can become persons in the
labor market who can get jobs? I am not talking now of very highly
skilled jobs, because I do not think that can be done as quickly or
easily. But I am talking about the great host of barely semiskilled,
even unskilled routine jobs that are going begging. Our training pro­
grams at the present time do not really help these untrained individu­
als become available for competitive work in our society.
Chairman P r o x m ir e . My time is up, but until we come back, you
might be thinking of this—if you can think while you are answering
the other questions—but this is what I am going to go after on the
next turn. I want to press this point. That is, how do we know
that the resources we have, the people we have who are teachers, who
are educators, who can work as instructors, that this vital and precious
resource is being utilized properly? Why don’t we have a priority
system and so forth ?
Mr. C o h e n . Yes.
Chairman P r o x m ir e . That is what I want to get. I don’t want to
impose on Congressman Curtis’ time. I will come back to that
question.
Representative C u r t i s . Thank you, Mr. Chairman.
What I want to do first is to suggest three areas where I would like
to see some studies. Maybe they are already in progress. If they
are, then I would like to have a report for the^ record on that. If
they are not in progress, what comments you might make as to why
you think that they are not feasible. This all can be done for the




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record. If they are in progress, some comment for the record would
be helpful as to what stage they are in.
The first is a study of the economic impact of the payroll tax—it, in
effect, being a tax on jobs—and the problems we have in this area of
jobs versus machines.
The first question would be, what study might be in progress? If
you aren’t studying this, w'hy don’t you think that it is important?
The second one comes out of the interrogation of Secretary Wirtz
yesterday. The figures that I worry about, and the Secretary pre­
sented them again in his paper, show the increase in unemployment
among the young Negroes, male and female, particularly in the years
1965 and 1966, which is since the date that the war on poverty has
started. Yet it would seem to me, if there were any group that were
a major part of this war on poverty, it would be this group.
In other words, a study on why this increase in unemployment
should be occurring when all of these programs, that are supposed to
be hitting at that, have come into being. And this is in contrast to
the rest of the society where the unemployment ratio is going down.
So again the question is, has this been studied ? If so, what prog­
ress has been made ? If it hasn’t, what your comments might be about
conducting a study.
The third area—and this, too, I touched on in my interrogation of
Secretary Wirtz-—is trying to find out what is the employment result­
ing from the Vietnam war, in the military establishment, including
civil service employees, and certainly in the private sector, including
those which we could identify in munitions industries. What is this
increased employment, and what is its impact on the manpower pro­
grams that we have ? This would relate, too, to this second area that
I mentioned.
Again the question is, are there studies in this area? If so, what
progress is there? This would have further implication for our prob­
lems if we shift from war to peace.
We have a Subcommittee on Economy in Government of this com­
mittee, which I hope will get into this very important area, both when
we have to shift from a peace economy to a war economy, and likewise,
when you shift back again.
I might add here that I am very disturbed when the administration
spokesmen keep talking about how good the economy is, because it
is not a peacetime economy. Even though this war is a lesser per­
centage of GNP, still, I think we would have to identify our present
situation as a wartime economy. So that is the third area.
(The reports and comments in reference to the three areas presented
by Representative Curtis follow:)
Question: What study is in progress on the economic impact of the payroll
tax?
Answ er: The Social Security Administration has a basic interest in studies
o f the effects? of social security contributions. In June 1966* the Social Security
Administration and Brookings Institution held a joint conference to discuss
social security financing:. It was an exploratory «e«?sion at which a group o f
distinguished scholars discussed the basic issues. Representatives from the
Treasury, the Bureau of the Budget, and from the Council o f Economic Advisers
attended the session. Arrangements are underway for follow-up meetings. We
have in progress a study o f the incidence by income group o f contributions and
benefits which tnr^oivcs careful analyse® o f payroll tax incidence based on new
data developed by the SSA. The SSA is (also keeping in touch with sftudies and




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research on the impact of payroll taxes being carried on ait the Brookings Institu­
tion and elsewhere.
Question: What is the reason for the increase in unemployment among young
Negroes in 1965 and 1966?
Answer: A recent Study published by the Department of Labor (Negroes in
the United States: Their Economic and Social Situation, Bulletin 1551, June 1906)
analyzes the problem as follow s:
“ Unemployment rates are especially high for all youths. When the disadvan­
tages of inexperience and limited training are compounded by the results of dis­
crimination and impoverishment, the barriers to employment become formidable.
“Nonwhite graduates do less well than white graduates in getting and keeping
a job. They earn less than white youths who have left school before graduation.
More of them begin in the lowest status jobs.
‘"Thus, the advantages of education to nonwhite youths are barely beginning to
make themselves felt in the job market. . . . Clearly nonwhite youths are prepar­
ing for today’s jobs faster than existing practices are changing to absorb them.”
Question: What employment has resulted from the Vietnam war and what will
be our problems if we shift from war to peace?
Answer: The Department of Health, Education, and Welfare has not made
estimates of the extent of employment [resulting from expanded national defense
activities. We have conferred with the Department o f Defense and understand
that they have a report on the economic impact of defense programs in prepara­
tion. This Department has in the past worked with the Disarmament Agency on
policies that Would ease the transition from substantial defense activities D
o
peace-time activities.

Representative C u r tis . I want to interrogate you specifically on an
item that is right before Congress and does come within the purview
of this committee; namely, the social security trust fund. Secretary
Fowler testified before the Ways and Means Committee that if Con­
gress didn’t give the administration its increase in the debt ceiling,
that the payments out of the social security fund to social security
beneficiaries would be cut back.
I, in cross-examining him, said I couldn’t understand this. The
social security trust fund is a contingent fund, and it is for the very
purpose of taking care of contingencies so there would be no hiatus in
the payment of benefits.
Then the Secretary went on in his testimony to talk about how this
fund was not really liquid, so that you could immediately convert it to
cash. He said there would be delays.
Well, this comes to the question whether, as I had thought, we
looked upon this fund as a contingent fund in a liquid state. I would
like to be reassured about this: That the social security fund is liquid,
and would be available to take care of this kind of contingency*
Therefore, I hope that you are going to say that the Secretary of the
Treasury was uninformed on this point. Would you comment?
Mr. C o h e n . Yes. Let me say first that I would certainly hope,
whatever the technical financing problems of the Treasury Depart­
ment are, that the day would never come when the social security
beneficiaries wouldn’t receive their checks on time.
Representative C u r tis . That is right. We all hope that.
Mr. C o h e n , Yes, of course.
Representative C u r t i s . But the point is, what is the debt ceiling
argument?
Mr. C o h e n . Yes.
Representative C u r tis . Which is a serious argument on its own
merits.
Mr. C o h e n . Yes.




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Representative C u r t is . What has that got to do with paying social
security benefits?
Mr. C o h e n . Right.
Representative C u r t i s . Inasmuch as we have $ 2 0 billion in this con­
tingent fund.
Mr. C o h e n . Yes. I think the problem arises from the technical
method of meeting the expenditures. There is roughly, and I will just
use round figures now to illustrate it, about $18 billion invested in U.S.
Government bonds out of the total $20 billion in the OASI fund.
Representative C u r t i s . But are those marketable?
Mr. C o h e n . Yes, some are marketable.
Representative C u r t i s . That is right.
Mr. C o h e n . Not all of them are marketable, but some are marketable.
Representative C u r t i s . We are talking about liquidity, aren’t we ?
Mr. C o h e n . Yes. But here is where that situation arises. There is
about $2 billion in cash that is not invested at a given moment of time—
this is the amount at the end of the month. That is, there is roughly
about 1 month’s benefit that is not invested at this given moment of
time. I think the problem that arises is if you have to redeem one of
the special obligations, then the Treasury in effect has to raise the
money elsewhere to pay for it.
Representative C u r t i s . No, could I stop you there?
Mr. C o h e n . Yes.
Representative C u r t i s . This is the point. It is true if the Treas­
ury had to do that. But if these are actually marketable bonds—
like a company would hold or that an individual might hold—-you
don’t have to go to the Treasury. The trustees of the fund certainly
could just go out and say “ I have got a perfectly good Government
bond,” just like anyone else might have, and sell it on the market.
That is iiquidity.
Now maybe the Secretary of the Treasury is right. We may have
to do something about getting this trust fund into a real contingent
fund to do this, but from what I understood, Mr. Secretary, there
were about $3 or $4 billion of Government securities that are of the
marketable type in the fund.
Mr. C o h e n . That is about correct.
Representative C u r t i s . Well then, as I thought, the Secretary of
the Treasury is misinformed, and that is what I wanted to be sure of.
Any further response you would like to make for the record on this
point? I would appreciate. I do think though that when we have
our big go around in the next month or so on the whole social security
program, we will be wanting to look into the assumptions of the
fund, and also this point.
Mr. C o h e n . Yes.
Representative C ur tts . This point of liquidity, so that we can re­
assure the people that this really is a trust fund, that it is set aside
for social security benefits, that the rest of the Government financing,
whatever it might be, is not going to have an impact on that fund,
at least until the fund itself is reduced enough.
Mr. C o h e n . Yes. I would say personally that between the cash
balances and the marketable funds, there ought to be some method
to take care of the benefit payments for at least 1 or 2 months, so that
there wouldn’t be an immediate crisis.




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341

Representative C u r t is . I think it would be more than that really*
wouldn’t it, because your collections are coming in?
Mr. C o h e n . Yes.
Representative C u r t i s . And that will take care of a good bit of it,
and this is only the fact that it is a contingent fund?
Mr. C o h e n . Yes.
Representative C u r t i s . We have done that in the past. The fund
went down from $20 billion to around $17 billion as I remember, and
now we have built it back up again. Certainly you were drawing
down, in effect, on the fund to meet benefit payments in the past.
Mr. C o h e n . Y e s .
Representative C u r t is . Thank you very much. My time has
expired.
Chairman P r o x m ir e . Congressman Reuss?
Representative R e u s s . Thank you, Mr. Chairman.
Mr. Cohen, we appreciate your help. One of the biggest items in
the unsatisfactory cost-of-living increase in the last year was services,
and one of the biggest elements m services was the cost of medical care,
and one of the reasons for the increase in the cost of medical care is
that there still aren’t enough doctors in this country. I think all those
assertions are valid, are they not?
Mr. C o h e n . I do not think that is the whole story, though. I think
that is part of the story. Just to give an illustration—one of the most
significant factors in the medical cost situation is the increase in re*
muneration to nurses, which has been going on during this last year.
Nurses in many communities were getting paid less than secretaries,
and hospitals simply had to increase remuneration to nurses, in order
to keep the hospitals going.
Representative R e u s s . Yes.
Mr. C o h e n . That is not the only thing. I am just giving another
illustration of the factors involved in rising medical care costs.
Representative R e u s s . I wasn’t suggesting that the shortness of
psysicians was the whole story. On nurses, they have received, I
understand, considerable remuneration increases m the last year or
two, and we do have a series of programs designed to increase the
number of students in nursing schools and also allied health and pro­
fessional fields.
M r . C o h e n . N o t a sufficient n u m b er o f students, b u t we are startin g*
anyw ay.
Representative R e u s s . On our medical school program of the Fed­

eral Government, I have the impression that aids under that program
are giving primarily for so-called new activities by the medical schools.
Let me give you an actual case that has recently come to my attention.
I have had long discussions with the administration of Marquette
T
University Medical School in my city, and I am told by them that their
problem is a very general one, that while they can get matching 50 per­
cent Federal funds for new and somewhat exotic though worth while
programs, they get very little or nothing to bolster existing programs,
and thus, says Marquette, since they want to go into these new pro­
grams, if the Federal money is there, this takes a 50-percent sharing
by them out of their meager budget, and as a result, these tried and
true, but very necessary courses in, say, pharmacology or internal
medicine, are shortchanged, and they are unable to turn out anywhere
75-314— 67— pt. 2-------S




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THE 1967 ECONOMIC REPORT OF THE PRESIDENT

near the number of pharmacologists and internists that our society
needs.
Is that a valid appreciation of our present aid to medical schools
program, and if it is, don’t we need to alter the program and help
medical schools on the tried and true conventional pharmacology,
internal medicine elements, and not concentrate as much as we are
apparently doing on the more exotic?
Mr. C o h e n . I think there is a great deal of truth in what you say,
Congressman Reuss. I think what has happened in the past has
been caused by two factors.
First, through the National Institutes of Health, money is given
on a project basis for research and training, and this tends to focus
cm special areas of great interest with which a particular scientist or
a particular institution is concerned. I think this has resulted in some
problems because it has motivated individual scientists, individual
departments to work in a particular area. As a result, that particular
facet of the institution expands so markedly that other supporting
elements in the institution, which are necessary, relatively fall behind.
Then the second factor is the medical school program. The medi­
cal school program involved many years of debate, as you well know,
about whether the Federal Government should get into this area.
The final result was that the law put restrictions on the Federal Gov­
ernment and Federal moneys can be used only where additional stu­
dents and expansion will result—again, a desirable objective*
But I think the time is ripe for a complete reexamination of whether
there shouldn’t be what I would call institutional support for medi­
cal schools, rather than this special type, so that the medical schools
can be well rounded, that they have the supporting services that are
necessary, and that they can expand in quite a number of areas that
are essential to broad public interest.
Let me put it this way. I sense that the medical schools themselves
are examining this matter right now, because they are taking a look
at all these bits and pieces. When you realize that the Federal Gov­
ernment today, through all of these different programs, is paying for
a very major part of both research and training, and to some extent
construction of medical schools, it might be proper to completely
reexamine the whole area and the Federal Government’s role in
financing medical education.
Representative R e u s s . My hunch is apparently right then, that our
so-called Federal aid to medical education program hits around the
fringes in the new and exotic, all of which is fine. I have nothing
against it. But it does not provide help to the medical schools, ana
training more students in internal medicine, pharmacology, pathology,
and the more conventional elements of medical education.
Mr. C o h e n . Well, let me put it this way. Through the National
Institutes of Health, particularly through the fellowships, doctoral
and postdoctoral fellowships, training of people in the medical and
allied science fields and expansion of medical schools to take this on
are encouraged. But the extent of the financial support at what you
might call the regular student level—the person who is just going
through 4 years of medical school and using costly services, facilities,
and teaching resources—from the Federal Government is relatively
little and goes through different types of programs.




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It may well be that looking at the problem, as I say, on an institu­
tional basis, and providing Federal grants 011 an institutional basis,
may be useful.
The reason this hasn't happened up until now is that medical schools
themselves were afraid that an institutional grant might involve
Federal control of the medical schools. During the whole develop­
ment and passage of this legislation, while Senator Ribicoff was
Secretary, medical schools were assured that money would come to
them without any Federal dictation or control over how they operated.
Representative R e u s s . Hasn't this had the following ironic effect *
In the process of assuring the medical schools that there wouldn’t be
any Federal control or supervision or skewing of what they are doing,
haven't we achieved exactly that? We have skewed them in favor
of the exotic in the use of Federal funds, and we have impoverished
their central budget, which should be devoted to the job of producing
more good, modem, all-around physicians and surgeons, the people
who comprise 90 percent of the physicians of this country, who ac­
tually treat patients.
Mr. C o h e n . First, I think institutional grants would give the insti­
tutions greater freedom and less Federal control. When you have
categories and subcategories, as you say, the Federal Government is
really prescribing the area where that money ought to go. I think
institutional grants may be given without control.
Quite frankly, I think they are less attractive to Members of Con­
gress. That is the difficulty. In going through the congressional
process of both the legislative committees and the Appropriations
Committees, my experience has been that the first question they ask is,
“Mr. Secretary, what will this money be used for specifically?”
When you say “it will be used to provide a better medcal school”
or “more medical schools” that usually isn’t a specific enough reason.
Thus the legislation tends to become categorical, subcategoncal, more
limited, more prescribed. I think the Members of Congress have to
be convinced consideration of the problem may be in the national
interest.
Now there is one other problem. If you use institutional grants
for medical schools, you might well have to consider this approach
for institutions generally. A wide variety of other types of fellow­
ships, scholarships, and so on, are earmarked through many different
kinds of grants m education. Now university presidents are asking
Secretary Gardner and me why we do not have inst itutional university
grants generally. I think the question merits attention.
Representative R eu ss. We may need some education of the
Congress.
Chairman P r o x m ir e . May I point out we have a terrific attendance
here of committee members—with no television—which I think speaks
both for the attractiveness of your subject and your capacity to
present it, and also, of the quality of the members of this committee.
Mr. C o h e n . I see many members of the committee who are on other
legislative committees that I am to appear before during this session
or the Congress, so I sense that this may be a little preview of what will
come later. I am glad to have this opportunity to see what will be
forthcoming.
Senator J a v i t s . It is always good to h av e humility, Mr. Secretary.
Mr. C o h e n . Yes.




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Senator J a v i t s . I would like to emphasize and call attention to the
figures you bring forth in your statement, because I think they are so
important. We speak loosely of 25 percent of the population living
in a poverty situation, and 35 million Americans. Now those figures
are out of date. I note it is now 32.7 million Americans and 17.1
percent of the population, and you expect, if these social security
improvements go in, it will reduce that figure by one and a half percent, is that correct? That is an absolute one and a half percent.
Mr. C o h e n . I said one and a half million persons.
Senator J a v its . One and a half million persons ?
Mr. C o h e n . Yes. I actually think it is going to turn out to be a
little larger. I hope that by July 1, 1967—these figures presented
in the testimony are for 1965—the number in poverty possibly will be
less than 30 million*
Senator J a v its . Realizing your worst fears, I would like to ask you
this question. We, in the Committee on Labor and Public Welfare,
were all interested in the hospital modernization bill, which is criti­
cally needed, and which the administration submitted last year, calling
for $1 billion a year for 10 years. You are not even proposing that
this year in the budget. We are all interested in facilities for higher
education. You are proposing $408 million under the authorization
and $72.9 million under the fiscal year 1966 appropriation.
Part A of my question: Does this represent a calculated policy of the
administration to cut down on major construction in this period, as
these are two major construction propositions ?
Part B : Has the administration considered, assuming the answer
to A is in the affirmative, whether this would give us a backlog crisis
situation like we faced after World War II, and whether in view of
the fact that the Vietnam war, as these things go, is not a big war, is
this justified?
Mr. C o h e n . I think two streams of thought came together in this
fiscal year. As you know, Senator, when we proposed the hospital
modernization program last year, the hospitals of the United States
were very unenthusiastic about our recommendations, because the
proposal did not provide what they thought was an adequate Federal
subsidy for the modernization program. As a result of that, I believe
we never did have hearings on the proposal in your committee.
Senator J a v i t s . One day of hearings in April 1966.
Mr. C o h e n . One day of hearings. I guess that one day indicated
that there wasn’t much prospect of arriving at a solution to the
problem. I think it is true that the administration does not wish to
accelerate construction programs this year. When we reviewed the
problems of hospital modernization programs last fall, we were aware
that there are, as well, a whole series of problems with respect to the
development of the extended care facilities for the medicare program
and nursing homes.
We called a group of people in and discussed the problem. They
gave us food for thought in saying that: “ You had better look out
before you expand and modernize.” They said: “ There is a kind of
a Parkinson’s law at work in medical facilities. ^I f you construct more
and build more, doctors in the communities will fill them up.”
They asked us specifically to consider, before we went on an exten­
sive new construction program, as important and as serious as we




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think it is, as evidenced by our original recommendations, a whole
series of other alternative proposals. They said that we should not
come to the Congress only with a set of proposals for putting people
in institutions, because that seems to be the easy way.
Some people when they are sick think they are better off in a
hospital or a nursing home, whereas home nursing services, out­
patient diagnostic and treatment centers, and a whole host of other
types of institutions ought to be considered*
The Hill-Burton Act is expiring on June 30, 1969, and, I believe
I testified before your committee and you cross-examined me exten­
sively on it. The Hill-Burton Act has tended to build hospitals in
the small towns and rural areas, where there was a great deficiency.
It has been suggested that now more of the money ought to go to
larger urban areas.
It is our thought that we would make a major reevaluation of the
Hill-Burton program, along with other alternatives, and a moderniza­
tion program. I would say, in summary, modernization is very essen­
tial, but it is one part of a total program that ought to be considered.
The President’s budget this year does include a total appropriation
of $280 million for all aspects of the Hill-Burton program.
Senator J a v its . Mr. Cohen, I might say that I don’t agree that
you have to starve the hospitals in order to discourage doctors from
putting people in them. I think there are better ways than that kind
of bloodletting to deal with the hospital overuse, but we will not try
you on that. I have other things I want to ask you.
What is the attitude of the Department, which I see an implication
in your statement of these direct income support programs which
have been testified to so much before the committee which Senator
Ribicoff heads?
Incidentally, I would like to apologize to Senator Ribicoff, because
I mentioned yesterday a concept with respect to housing----Mr. C o h e n . I didn’t quite get the import of your question, Senator
Javits*
Senator J a v its . The import is: Does the Department look with fa­
vor on guaranteed minimum income programs, like Moynihan and
others testified to, of which you get an implication at the bottom of
your statement ?
Mr. C o h e n . We think there should be a complete study of all in­
come guaranteed proposals. I think some guaranteed income plans,
whether of the nature of the family allowance system that Mr. Moyni­
han has been suggesting, a negative income tax, or other proposals of
that general type, raise a fundamental question in our wage related
free incentive economy of paying some people who are employable
as much money as they can get or more, paying them through an in­
come program more than if they are working, which in turn raises very
serious problems a to whether the plans, in the present situation,
-s
would be workable. The President has indicated he intends to estab­
lish a commission of leading Americans to examine these proposals.
Let me say this. I don’t think the problem of meeting, of solving,
the problem of poverty, is any longer an economic or a fiscal problem.
As I said in my statement here, to meet the income deficiency so that
poverty would no longer exist in this country would cost about $11
billion. That is about 1.6 of the GNP. The problem is how to de­




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vise an income guarantee program which would be acceptable in our
economic system.
When I first started to work on social security 35 years ago, you
could not have suggested a comprehensive income guarantee program,
because it would have cost so much in relation to the GNP that it
couldn7 have been considered practical.
t.
Now' I think the problem has changed from one of money or cost.
I don’t, see any reason why, with $800 to $900 billion GNP, you couldn’t
find some w
ray, in the next year or two, to spend $8 to $10 billion to
alleviate poverty, but when the type of a system is inaugurated to pay
individuals who have an employable or semiemployable man or woman
in the family, as much or more than he could earn in the labor market,
I think that some people will think you are setting up disincentives
to work, which may be difficult to overcome.
Now one way to overcome the problem, and there has been a lot of
thought given to it, is not to pay an individual as much as he could
earn.
Senator J a v i t s . Of course.
Mr. C o h e n . But then you don’t fully meet the poverty problem.
You are faced with a dilemma. For example, would an individual
with say five, six, or seven children, under an income guarantee pro­
gram, get much more than he would earn ?
Now under both Mr. Moynihan’s proposals and other proposals,,
you could say we would probably pay them a little less, as Mr. Moynihan does with the family allowance, but then we would still need a
T
welfare program to support special types of cases.
The net effect of that type of program would not completely elim­
inate welfare—you would still have it, and you would also have an­
other type of program. What would be the relation of an income
guarantee program to the social security program ? I think there are
a number of questions which really have not been adequately solved
which require further study. The relation of an income guarantee
to a job guarantee and training program would need to be explored.
Senator J a v i t s . Mr. Cohen, my time is up, but I have two other
questions which I will dictate into the record and ask you to submit
the answers. One is this:
How much of an increase in social security benefits can be financed,
in the judgment of the Department, out of the current surplus in the
social security trust fund ?
The other question is: Does the Department have in contemplation
any new plan for medicare-medicaid to deal with the problems of
the unemployed and the retired or disabled persons, and what is its
attitude on including in medicare the cost of drugs for patients outside
of hospitals?
(The questions asked by Senator Javits and the responses by the
Department, subsequently submitted for the record, follow:)
Question: How much of an increase in Social Security benefits can be financed
in the judgment o f the of the Department out of the current surplus in the Social
Security Trust Fund?
A n s w e r : According to the latest long-range actuarial costs, the Old-Age, Sur­
vivors, and Disability Insurance Program has a positive actuarial balance (or
“ actuarial surplus” ) of 0.75 percent of taxable payroll. If this were utilized
to increase benefits, an across-the-board increase of 8 percent could be made,
and the Bystem would be in actuarial balance. Under these circumstances, no




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347

change would be needed in the presently-scheduled financing provisions (i.e.
maximum taxable earnings base and contribution rates).
Question: Does the Department have in contemplation any new plan for Medicare-Mediqaid, to deal with the problems of the unemployed and the retired
and disabled as well as for cash assistance recipients?
Answer: As the President has announced, we recommend that the same medi­
care protection now provided for the aged be provided for social security bene­
ficiaries getting disability benefits. Under this proposal hospital and medical
insurance protection would be available to 1 ^ million disabled persons under
t>
5—workers, adults getting benefits based on childhood disabilities, and widows.
In addition, we will recommend several relatively other changes that will in­
crease the administrative effectiveness of the medicare program.
We also recommend that the States be authorized to enter into agreements
under which they can pay the $3 monthly premium for supplementary medical
insurance on behalf of the medically needy aged and disabled as W'ell as for
cash assistance recipients.
We are very much concerned about the problem older i>eople have in meeting
the cost of prescription drugs. We recognize that this matter deserves our
prompt attention. The President has asked the Department to undertake a
comprehensive study of the problems of including the cost of prescription drugs
under medicare, and this study is underway.

Chairman P ro x m ire . Senator Talmadge?
Senator T alm a d g e. Mr. Secretary, there was recommended in the
report on public welfare minimum standards for public assistance pay­
ments below which no State may fall. Would you comment on this
proposal ?
Mr. C o h e n . Yes; the Advisory Council report proposes two rather
strikingly new principles in the public welfare program. It says that
there should be a minimum standard of subsistence determined by
Federal law.
But recognizing that many States, particularly the low-income
States, and I should say they are largely the Southern States, cannot
meet that minimum standard entirely out of their own income under
the present matching formula, the Advisory Council proposed revis­
ing the Federal matching formula system to one where the Federal
Government would assume the full responsibility for the difference
in cost between the State share and the total cost of the State program.
Let me try to make it very simple. Let's say that the State share is
one-half of 1 percent of the total personal income payments in that
State. The Federal Government then would pay the whole additional
cost above that to meet the standard.
In other words, my comment on that report is that it really involves
a very interesting and striking change in Federal-State relationships
and Federal-State financing. A Federal standard is proposed which
heretofore has not been in the Federal law. The report proposed that
in order to meet the standard, a different type of Federal matching
relationship would be needed. It is certainly worth considering.
It, of course, would also take quite an additional amount of Federal
money to carry out and I should add that as a third factor. It is of
some significance, because you can’t have a standard with a hundred
percent Federal financing above the State's share without it costing the
Federal Government more than at present.
Senator T a lm a d g e. Am I correct in assuming, therefore, that you
oppose that recommendation?
Mr. C o h e n . Well, I had not yet supported it or opposed it because
we are studying it, but I recognize that there is a great deal of merit
in it, because there are many people on the welfare rolls today who are



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receiving amounts below the poverty level, and I think that is unfor­
tunate. We must find some way to correct this situation.
On the other hand, I think it is also true that many Southern States
are making as much or more effort in relation to their fiscal ability to
try to meet this situation, and that probably some modification of the
Federal matching formula is necessary.
Now the President’s recommendations this year, which will be before
your Senate Finance Committee and the Ways and Means Committee,
do attempt to go a step in that direction by requiring the States to pay
100 percent of their standard of need as defined by the State, and in no
case, less than two-thirds of what the medicaid standard would be.
This does involve a new principle because it says “We are going to
hold the States responsible for trying to come up to some kind of a
minimum standard” but the minimum standard would be the standard
they set. I would be glad to discuss that at some length. It is a
significant step.
Senator T a l m a d g e . In your response to Senator Javits’ question a
moment ago about your comment in your statement, and I quote:
Putting a floor through direct income support programs so that no one falls
below a minimum need is an intermediate step in achieving this objective.

Am I correct in assuming that that is not to be construed that you are
endorsing the so-called negative income tax proposal or guaranteed
minimum wage for all citizens ?
Mr. C o h e n . I am neither endorsing or opposing those proposals,
no, sir. I think they require very careful additional study.
Senator T a l m a d g e . In your response you point out some of the
same problems that it would involve that I have. We have seen that
no matter how much our prosperity increases, our job opportunities
become greater, and our standard of living increases, our welfare
benefits and our welfare costs also go up astronomically.
Now I hear from time to time reports from all over the country about
people who are seeking employees to work for them, and they get a
flat refusal, and sometimes I get letters telling me the reason they re­
fuse them is because they are satisfied with living on their welfare
benefits and don’t want to work. Does the Department have any re­
ports of a similar nature ?
Mr. C o h e n . Gould I make several comments on that ?
Senator T a l m a d g e . N o w what program, if any, do we have—I
think everyone is sympathetic with everyone in need, in ill health, that
can’t get a job and can’t earn a living, but I have no sympathy with
the individual who prefers not to work, who wants to live on welfare.
What programs do we have that divest these people of welfare bene­
fits when they have actually refused to work ?
Mr. C o h e n . Let me say, Senator, just taking one illustration, the
Public-Welfare Amendments of 1962, which the then Secretary
Ribicoff proposed to the Congress, included a program to encourage
State welfare departments to set up training programs for employ­
able people who are on welfare and to give them work experience.
This was very minimal. This is not the kind of training we are talking
about for very highly skilled people. This was to train people who
had not had work experience over the years.




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34&

Yes, to date, only 11 States have taken advantage of that program*
and in fact I have a list of 32 jurisdictions that have given us notice
that they are not intending at the present time to implement it.
I think this is extremely unfortunate, and included in the Presi­
dent’s recommendations this year, is a recommendation that, as a basis
for getting welfare payments, the States would have to have a com­
munity work training program, so that employable people on welfare
would be given an opportunity for work and training to help them get
off the welfare rolls.
Senator T a l m a d g e . I supported that program and I am in sym­
pathy with it, but I am talking about a citizen who is now drawing
welfare benefits, and someone offers him a job, “ Come go to work for
me.” He says, “No, I don’t want to” and he continues to draw his
welfare benefits. Do you have any programs that could cut them off
and say, “ You ought to quit loafing and start making a living for
yourself?”
Mr. C o h e n . Yes. I don’t know all the facts about a particular
type of case, but if he is an employable person and drawing benefits
under the aid to families with dependent children, and refuses to
accept a bona fide work opportunity, the State may exclude him from
assistance.
Senator T a l m a d g e . One of the things that I also hear considerable
criticism about, too, is the ADC program. Lots of women from time
to time for various reasons find it a more interesting life to produce
children and to receive welfare benefits than to work. I believe in
some of our urban areas, they draw as high as several hundred dollars
a month for aid to dependent children, don’t they ?
Mr. C o h e n . For a family of three or four children, yes, that would
be possible.
Senator T a l m a d g e . What programs does the Government have of
trying to eliminate this subsidization of illegitimacy at the taxpayers’
expense ?
Mr. C o h e n . We have this dilemma. After the child is born, we
are faced with the problem of taking care of the child irrespective
of what the family circumstances may have been or the previous
situation, and I think it is important, wnatever the situation may have
been, that those children grow up to be responsible citizens. So we
have that problem.
Over the course of the last year, we have announced to the States
that they may use Federal funds for a family planning program.
States may use the Federal funds to have a family planning program
of information and services for people receiving cash assistance or
medical assistance under medicaid.
Senator T a l m a d g e . Some of them are more interested in the moneys
than they are the family planning aspect of it. I would hope, Mr.
Secretary, that you would make a diligent effort to study these various
programs. I think we ought to be careful so as not to destroy the in­
centive to work. I was happy to hear you make a similar comment.
Those in need, fine. Let’s assist them all we can. But let’s try to
devise some program to keep it from becoming so attractive to make a
life on welfare continue sometimes into the third generation. There
ought to be some action whereby the States and the Federal Govern­
ment could join hands and say'to the welfare recipients, “Now look




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1967 ECONOMIC REPORT OF THE PRESIDENT

here, you have been offered a job. You have turned it down. We are
not going to continue to support you as long as you can get a job.”
There ought to be some program it seems to me whereby people
that are producing illegitimate families and find it attractive to do
so, sometimes three generations live under one roof, all of them draw­
ing ADC payments, and supporting their paramours too. I have
known lots of families of that type. There ought to be some pro­
gram whereby that is stopped, because the taxpayers of this country,
if I judge the sentiment and attitude correctly, are greatly con­
cerned, not aJbout supporting the needy, not by helping those who
need help, but by constantly and enormously raising taxes to support
ladies who are shiftless and who don’t want to work and who are satis­
fied to live off the taxpayers.
My time has expired. Thank you.
CliairmanP r o x m i r e . Mr. Widnall?
Representative W i d n a l l . Thank you, Mr. Chairman.
At this point I would like to ask unanimous consent to insert in the
record two articles that are pertinent to what we are talking about
today, from nationwide magazines.
The first is from the U.S7 News & World Report, dated January 30,
1967, entitled “Is Social Security To Get Out of Hand ?” The second
is from Business Week, Februaiy 4, 1967, entitled “White House
Escalates War on Air Pollution.”
Chairman P r o x m ir e . Without objection those will be put in the
record at this point.
(The articles referred to follow:)
Is Social Security To Get O ut

of

H an d ?*

New plans for Social Security, promising still more benefits and adding bil­
lions to costs, are raising questions about the future of the system.
LBJ urges higher pensions, broader medicare, easier rules. Price: well over
4 billions a year And many argue the Johnson plan isn't enough.
In prospect is a cost explosion. The big question is where to get the money
to finance it all.
Social Security in this country gives every sign o f getting out o f hand as it
already has done in some countries of Western Europe.
Each generation of older people is insisting on higher and higher benefits,
covering a wider and wider range of needs, to be available on retirement or
sooner.
Few seem willing to pay the full cost o f these benefits. Congress finds irresdtrte this demand of milUons of voters to get something for nothing.
The result is an engine for pouring dollars into pockets of people who have
mot paid their way in taxes or savings—and on a scale that feeds the forces of
inflation. This situation is causing concern among many officials o f Govern­
ment and analysts o f private industry.
Even now the “unfunded liability” o f the Social Security system—the obliga­
tion to pay benefits for which reserves are not now in hand—is estimated at
around 400 billion dollars.
What President wants. President Johnson now is recommending that pen­
sions of those drawing benefits, or who will draw pensions in the future, be in­
creased by an average of 20 per cent
This increase, when voted, will add about 100 billions more to the “ unfunded
liability/* bringing the total to around 500 billions, which is half a trillion dollars.
That is a total 50 per cent larger than the entire national debt on which interest
is being paid.
However, to make sure that there is money enough to meet current benefits,
it is going to be necessary to raise taxes on payrolls.
•Reprinted from U.S. News & W orld Report, Jan. 30, 1967.




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351

The combined employer-ewploye tax now totals 8.8 per cent on $6,600 of
individual income.
It will have to go up to at least 9.3 percent on $7,800 of income just to keep
from falling behind. Mr. Johnson has not yet broken this news to the Congress.
Yet today’s situation is being described as only the beginning.
The history of the Social Security system in the United States, extending over
the last 30 years, has been one of steadily rising benefits, steadily rising taxes and
steadily rising obligations for which money some day will need to be found.
Nobody in an official position is willing to guess where this process will end.
An ‘‘escalator clause” is being proposed in Congress to carry pensions higher
almost automatically as the cost of living goes up, with no provision to add
automatically to taxes.
Medicare, too, is only beginning. Experience in all nations abroad having
comparable systems indicates that the public's demand for an expansion of medicial-service programs is insatiable, tending to outstrip the demand for old-age
pensions.
Pensions are a fixed obligation that can be figured accurately.
Medicare benefits are a service-type benefit for which no reliable estimate
can be made.
The Social Security system was created by law in 193.5, and a special tax
on payrolls was first levied in 1937. The first pensions were paid in 1940, per­
mitting a reserve to be built
How tax has increased. The starting tax was 2 per cent—1 per cent each on
employer and employe—levied against the first $3,000 of income. The tax on
Jan. 1, 1967, had moved up to 8.8 per cent on $6,600 of income, and it will con­
tinue rising. Payroll taxes even now are second only to income taxes as a form
of levy.
Old-age benefits have gone up steadily over the years. Coverage has been
broadened, and the scope of protection has been increased.
In the original act, dependents of retired persons were not covered. They
were brought into the system before the first retirement benefits were paid in
1940. In 1950, farm workers, domestics and nonfarm, self-employed persons
were covered.
Six years later, pensions were provided for persons totally and permanently
disabled at the age of 50 or above. In 1956, too, the retirement age for women
was lowered to 62 from 65, and, in 1961, men were made eligible to retire at 62.
In 1960, disability at any age was made ground for a pension.
At the start, a person retiring on a Social Security pension could earn only
a nominal amount without facing a reduction in his pension. That amount
gradually has crept up to $1,500 a year.
President Johnson drew cheers from Congress with his recommendation that
this amount now be raised further.
Many retired—and icorking. Many of the millions of Social Security pen­
sioners are working on the side and are not really retired. Many others use So­
cial Security pensions to supplement their private pensions.
This whole process of expanding coverage and broadening benefits is viewed
as leading inevitably to coverage of most medical care as the years go on.
President Johnson is asking Congress in the present session to extend medi­
care benefits to those totally and permanently disabled who are under 65. It is
just one jump to extend coverage to dependents of retired and disabled persons.
The cost of drugs for medicare patients outside hospitals is not now covered
but seems sure to be included soon, and the same is true of a good many other
services now excluded.
Once hospitals and the medical profession can get adjusted to carrying the
load of medicare for persons 65 and over, the age limit—if experience is any
guide—will be lowered.
Just what the cost of all this is going to be is anybody’s guess. Old-age pen­
sions, pensions for dependents, and disability pensions now are up around 22
billion dollars a year. Medicare accounts for an additional 2 billion.
Mr. Johnson is asking Congress to add to the retirement system benefit in­
creases that will total more than 4 billions a year. Medicare, on its present
limited basis, will expand to 3 billions in the next two or three years.
Treasury take$ a look. The explosion in costs of the Social Security system is
forcing the U.S. Treasury and Social Security officials to consider the problem of
future financing.




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When this system was first being studied, President Franklin D. Roosevelt
wanted a system that was fully “funded”—one in which earnings of a trust fund
would guarantee the pension benefits*
After studies by actuaries showed what the required size of such a fund would
be, the President backed off from that idea. He found that it would not be
long before the Social Security trust fund would own all of the national debt
then existing and would be looking around for other places to put its money.
The thought was offered that maybe the Social Security trust fund would
have to buy up the nation’s railroads or some of its utilities.
So the plan was shaped to provide a partial reserve fund, and payroll taxes
were collected for three years to build this fund before paying any pensions.
The Social Security trust fund was supposed to grow with the years. Plans
still call for an increase over the years.
Experience indicates, however, that Congress prefers to operate the system
on a pay-as-you-go basis—with a trust fund little, if any, larger than needed
to meet benefits of a year ahead.
Now even that concept is beginning to be challenged as taxes on payrolls
approach—and soon will be passing—10 per cent of a continually rising level of
individual income.
Senator Robert F. Kennedy (Dem.), of New York, with the backing of a num­
ber of “liberals” in Congress, is proposing that—instead of trying to pay all the
benefits from revenues flowing out of payroll taxes—the Social Security system
should be allowed to write checks against the general revenues of the U.S.
Treasury as well.
The Kennedy plan calls for raising benefits generally by an average of 50 per
cent. The highest family benefit would be increased from $368 a month now to
$833.20, or about $10,000 a year. Bach time the cost of living rose 1 per cent,
the benefits would go up.
To meet these added expenses, there would be a 10 per cent total tax on earn­
ings up to $15,000 a year. This tax would be expected to meet about 65 per cent
of costs. The general fund of the Treasury then would be drawn on for the
remaining 35 per cent, or about 14 billion dollars a year by 1975.
Effects of private plans. Expansion of Social Security, with its rising costs,
is causing the Treasury to eye private pension plans and their benefits, as well
as their reserve funds.
The Treasury figures that more than 2 billion dollars a year in revenue is lost
to the Government through tax-free deductions of income that goes to establish
and build private pension funds. Reserves of these private funds, invested in
stocks and bonds for the most part, now total around 90 billion dollars.
Income from these stocks and bonds in reserves of private pensions likewise
is tax-free and results in a further loss of federal revenue.
In commenting on a study of private pensions plans, William T. Gibb III, an
official of the U.S. Treasury, said on Dec. 6, 1966: “We must ask ourselves
whether we are getting a fair return for the public moneys spent on the private
retirement system.”
The Government has been exploring plans that would increase the cost of
providing private pensions, with the alternative to higher cost a reduction in
pensions that are promised to higher-paid employes. The effort would be to
move toward equalizing pensions or considering Social Security and private
pensions as a unit.
Said Mr. Gibb, after some strong public protests over suggested changes:
“ It would seem to me that it would be hazardous to assume that nothing will
come of a project that represents three years of work and the thinking of people
high in Government.”
The Government, too, is eying the reserve funds of private pension plans.
There is a feeling that the very size of these reserves—rising at the rate of
billions each year—will require regulation by Government to guard against
abuses and to protect against immense scandals in case unscrupulous groups
should get control of individual funds. It will not be many years before 125
billion dollars in assets is involved.
A g r o w in g w o r r y . W h a t y o u f i n d i s t h a t p l a n s t o p r o t e c t p e o p l e a g a i n s t t h e
h a z a r d s o f l ife — b o th p u b lic a n d p r iv a t e — a r e p r o life r a tin g a n d e x p a n d in g a t a
r a t e t h a t s u d d e n l y i s b e g i n n in g t o c a u s e o f f i c i a l c o n c e r n .
Y e t p o lit ic a l p re s s u re s a r e s o g r e a t, a n d t h e r a n g e o f p r o t e c t io n s w h ic h c a n b e
a d d e d is s o w id e , t h a t th e w h o le s y s te m i s t e n d in g t o m u s h ro o m , w it h n o
l i m i t y e t i n s ig h t .




real

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353

IF YOU T H IN K WELFARE COSTS ABE H IG H IN THE UNITED STATES

As Social Security costs mount in the United States, official Washington is
taking a close look at what other countries are doing in this field.
What's found is that, by comparison, the U.S. is only a beginner in the effort
to provide cradle-to-grave security.
In major countries of Europe, for example, where welfare is an old story,
these programs have been expanded over the years to provide far more types
of aid than does the U.S.
In some countries, welfare costs dominate national budgets and claim a ma­
jor share of all the taxes collected.
A question raised in Washington: Is the same thing going to happen in U.S.?
Here is a report on latest developments in the welfare system of some other
principal nations:
France. It’s the employer who bears the brunt of Social Security costs in
France, paying a tax of more than 40 per cent on payrolls. The employe con­
tributes about 6 per cent of earnings. These contributions pay for a welfare
system regarded as setting standards for other countries of the Common Market.
A married worker who turns 60 can keep working full time and collect a
pension equal to about 30 percent of his regular pay. If he waits till 65, the
pension amounts to 60 per cent.
Health insurance pays up to 80 per cent of medical expenses, including dental
<iare, for young and old, with no time limit. Then there are disability insurance,
sick pay and family allowances that can add 50 per cent to the income of a typical
worker with three children.
Germany. Spending on social welfare amounts to 18 per cent of Germany’s
gross national product, or nearly double the proportion spent in the U.S.
Generous pensions for retired workers are being raised by 9 per cent in 1967
for more than 8 million beneficiaries to keep pace with inflation. Sick-pay bene­
fits now provide up to 85 per cent of regular earnings for a family man. That’s
in addition to medical care for all ages.
Growing in popularity among German workers is a periodic “health” trip to
a spa, with social insurance picking up the bill, including $2 a day for pocket
money.
Plans now are to slow down growth of Government spending on welfare, cur­
rently at 6 billion dollars a year, or one third of the federal budget.
Italy. The trend in Italy is away from payroll taxes to bigger Government
contributions from other revenues.
Social insurance is being liberalized up and down the line. A worker can
collect an old-age pension at any age after 35 years of coverage. Otherwise,
men begin collecting at age 60, women at 55. Old-age pensions are being boosted
substantially. So are payments to widows and disabled workers, as well as
family allowances.
As the Government takes on more of the load, payroll taxes on employes have
been reduced. Still, employers are taxed about 45 per cent of payrolls, among
the highest rates in the world.
Sweden. “A classic example of an overambitious welfare state,” is the way
one economist describes Sweden.
Welfare spending on cradle-to-grave programs has doubled in five years. Fur­
ther rises in pensions, to cover higher costs of living, are on the way. Maternity
benefits have been doubled for many, including unwed mothers.
Payroll taxes for old-age and health insurance are soaring. Most welfare
expenditures are financed out of other revenues, however. This means more
tax boosts. In March, the sales tax goes up to 11 percent from 10 percent, and
extra levies on taxis and motor cars will also be raised.
Complaints over tax increases are spreading in Sweden. Even so, as tax
receipts grow, more costly welfare schemes are proposed.
Britain. Spending on social services, up nearly 65 per cent in the last five years,
is taking a growing share of Britain’s resources.
Costliest part of the system is sickness insurance, now running into trouble
as demand for free care strains the supply o f doctors and hospital space.
A flat pension of only about $11 a week is paid to retired workers, though
a supplementary plan will gradually raise payments to those who retire in the
future. Sick pay, maternity benefits and family allowances are also provided
for British workers.
Canada. This country, once lagging far behind the U.S., now is in the midst
of an explosion in social insurance.




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A retirement plan getting under way this year will eventually provide a pen­
sion equal to 25 per cent of regular pay. That comes to top of a flat $75 a month
which Canada pays all residents over 68—or $150 to an aged couple—retired
or not. By 1970, people will be eligible to collect at 65.
Benefits will also be paid, for the first time, to widows and disabled workers.
Then, 1968, will come a comprehensive medicare program for all.
Around the world. In one country after another, the trend is toward higher
benefits and more social services. Holland is raising old-age and sick-pay ben­
efits. In New Zealand, half the people now get some kind of social-welfare
payment from the Government.
Payroll taxes, already heavy in many nations, are going up still further. Gov­
ernments are making bigger and bigger contributions out of general revenues.
Many think the same thing will happen in the U.S. in years ahead.

Secretary Cohen later submitted for the record the following letter
by Robert J. Myers, Chief Actuary of the Social Security Adminis­
tration, commenting on the U.S. News & World Report article re­
printed above:
D e p a r t m e n t o f H e a l t h , E d u c a t io n , a n d W e l f a r e ,
S o c ia l S e c u r it y A d m in is t r a t io n ,

Washington, D.C., January 27, 1967.
Mr. D a v i d L a w r e n c e ,
Editor, U.S. News & World Report,
Washington, D.C. 20037
D ear M r. L a w r e n c e : Your January 30 issue contains an article, “ Is Social
Security to Get Out of Hand?” , which contains a number of factual points of an
actuarial nature that I should like to discuss to point out certain errors that are
present.
In the first box at the bottom of page 42, it is stated that the original program
was to be financed on the basis that “ a huge reserve was to be built up so that the
system would be fully ‘funded’
This statement—although frequently appear­
ing in one form or another—is completely incorrect The system as it was under
the 1935 Act did not provide for ftdl actuarial reserves that would, at all times, be
equal to the accrued liabilities of the system. As a matter of fact, the financing
basis now is exactly the same as it was then insofar as general principles are
concerned—namely, that full actuarial reserves are not developed; rather, over
a long-range future period, the income is estimated to meet the outgo. In fact,
you correctly state the matter in the last paragraph of the second column on
page 44.
Further in regard to the first box at the bottom of page 42, it is stated that the
early cost estimates as to how the program's experience would be in 1967 are far
different from the actual experience. This is really like comparing apples and
elephants, because both the benefits and the coverage of the system have been
greatly changed in the three decades and because earnings levels have risen so
significantly during this period. Quite necessarily, the OASDI actuarial cost
estimates made at any time are for the program as it is then in existence and for
the earnings level then prevailing. One would hardly reasonably expect the
actuary to predict future legislative changes some 30 years off in the future.
Similarly, we assume level earnings because of the difficulty in projecting earn­
ings rates and, more importantly, because the benefits structure adopted at any
one time is necessarily based on the earnings levels at that time.
In the third box at the bottom of page 42, you accurately compare the com­
bined employer-employee contribution rate and the earnings base for 1967 under
the original law with what it actually is now. However, it is interesting and
significant to make this comparison on the basis of total wages. Under the earn­
ings levels prevailing in 1935, a combined employer-employee tax rate o f 6% on
a $3,000 maximum base was equivalent, on the average to 5.5% o f total wages
(which might be said to be the ultimate tax burden anticipated)—since the
$3,000 base covered 92% of total wages. The present 8.8% on a $6,600 earnings
base is equivalent, on the average, to a rate of 7.0% of total wages (since the
$6,600 earnings base covers about 80% o f total earnings). Thus, the differential
in the tax rate as between the present law and the original law is not nearly as
large as it would at first seem. Moreover, it must also be kept in mind that,
insofar as the employer is concerned, the net tax rate for unemployment insur­
ance is well below what might have been anticipated in the mid-1930’s, so that thi»




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reduction is a partial offset to any increase in his OASDI tax rate. Another
thing that should be kept in mind, of course, is that these tax rates pay toward
considerably more protection than was originally contemplated.
In the second column of page 42, you refer to the unfunded liability as now being
about $400 billion and that this will increase by about $100 billion more under the
President’s proposal. You define this unfunded liability as being “ the obligation
to pay benefits for which reserves are not now in hand” , which is a rather loose
definition. Actually, what is meant by this concept is the amount of money that
would currently have to be on hand in interest-bearing obligations if the system
were to be soundly and adequately financed over the long-range future under the
completely artificial assumption that from this day on no new entrant would come
into the program. The latter assumption is one that can be dealt with in actu­
arial calculations, but it is meaningless in a social insurance system that provides
for compulsory, continuous coverage of virtually the entire labor force.
A figure for the unfunded liability of $321 billion had been published for the
system as it stood before the 1965 Amendments. The result of these amendments,
according to my estimates, was to increase this figure to about $350 billion
(not to $400 billion, the source of which I question). Furthermore, your state­
ment that the President's proposal would increase the unfunded liability from
$400 billion to around $500 billion (or by 25%), is not correct, since one must take
into account not only the increases in benefits, but also the future increases in
contributions on the presently covered group.
In the last paragraph of the third column on page 42, you surmise that the com­
bined employer-employee tax rate will have to increase to at least 9.3% on an
earnings base of $7,800. It is not quite clear what is meant here—whether this
is to be the situation in the next year or two, or whether it is to be the ultimate
situation. It would appear that the former is the case, because even under
present law the rate rises well above 9.3%. Considering the short-range situation
only, as you now know, the financing wi,ll be adequate at the present 8.8% for
1967-68, if the earnings base rises to $7,800 in 1968 (and income will exceed outgo
in each year).
In the various boxes on pages 42-44, cost data are given for the actual experi­
ence in 1967 under the proposal, as contrasted with what is stated to be the
“original estimate” . Actually, as you bring out, the “ original estimate” is really
that for the 1939 Amendments as made in 1943 and not the real “ original esti­
mate” that was made for the 1935 Act in 1935. The figures that you give are
reasonably accurate, although in certain instances I would come out with slightly
different results.
Sincerely yours,
R obert J. M y e r s , F.S.A.,
Chief Actuary.
W h it e H ouse E sc a l a t e s W a b on A ir P o l l u t io n *

How Johnson would would clean up the air—
These new regulations . . .
—Power to control emission levels for industries with heavy pollution, with
tougher standards in heavily polluted areas
Stronger Federal enforcement procedures
— Registration of all fuel additives with Health, Education, & Welfare
Annual inspections of smog-control devices on autos
. . . would be combined with more research
50% more spending on research on sulfur-free fuels, disel fuel smoke and
odors, new propulsion systems
Program proposed by the President would be headed by Federal agencies working with industry and local governments. Big question is who wiU pick up the
tabt
“ Control now for clean air** was the theme Washington pushed last December
at a conference on air pollution. This week, President Johnson aslfed Congress
to translate that slogan into a comprehensive Air Quality Act of 1967.
In a special message on protecting the nation's natural heritage, the President
proposed a tough program against dirty air, with the federal government taking
•Reprinted from Business Week, February 4,1967.




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ECONOMIC REPORT OF THE PRESIDENT

the lead. Without strengthened regulatory and research efforts, he said, the
U.S. in 10 years will '“ have lost the battle for clean air.”
New task. Technical grasp o f the air pollution problem and its solutions ad­
mittedly is incomplete. But the Administration now is taking the tack that nec­
essity is the mother of invention, and improvements can be incorporated as they
develop. The moves come against a background of the Thanksgiving Day smog
crisis in New York, where the President estimates 80 persons died.
John W. Gardner, Secretary of Health, Education & Welfare, says that the
air pollution level is “ advancing more rapidly than our efforts at control, and
our best estimates indicated that the present pace of control efforts we would
lose ground steadily.
Who pays ? Who will pick up the tab for the program is uncertain. The cost
to industry is bound to be heavy. Several bills have been introduced into Con­
gress for quick tax write offs on both air and water pollution abatement works.
But these are not expected to pass this year. For one reason, the President in
his message called for HEW to huddle with the Council of Economics Advisers
to look at ways of encouraging industry and local governments to abate pollution.
So more study will precede a policy decision on whether industry should bear all
the cost, or get tax credits or subsidies.
Federal action is required, Johnson argues, because local governments failed
to come through under the 1963 Clean Air Act. This act provided three federal
dollars for each dollar in local money to develop interstate control programs.
However, the President said, “ despite this incentive, no effective regional pro­
grams have been developed.”
Proposals. The President now asks fo r :
• Emission control levels for industries that are heavy polluters. Probable
first targets are electric power generation, petrochemicals, paper and pulp,
metallurgical processing, and fertilizer manufacture.
• Regional air quality commissions to enforce control in interstate areas the
experts are now describing as airsheds. Penalties of $1,000 per day are proposed
for failure to comply. Roughly, 80 airsheds now can be identified across the
country.
• Inspection of auto exhaust control devices, with the new Transportation
Dept, providing matching grants to states to set up inspection programs and the
Secretary o f HEW establishing criteria for the grants.
• Tightening of enforcement procedures. Now, it takes more than a year
before an interstate commission's orders can be backed up by a federal court.
The new bill woulU cut this to 60 days.
• Accelerated research in fuel additives, with all additives registered with
HEW*
The Administration figures that the new program will cost $18-million more to
carry out in fiscal year 1968 than the $64-million now authorized. Some $15million of the new money would be earmarked for research.
Congress goes along. The Senate is moving swiftly and seems receptive.
Senator Joseph S. Clark (D-Pa.), commented: “ I am confident that any poli­
tician who picks up this issue and runs with it will never regret it.”
Senator Edmund S. Muskie (D-Me.), chairman of the Public Works air and
water pollution subcommittee, readied the Prsident’s bill and immediately
scheduled hearings, with HEW Secretary Gardner and Presidential science ad­
viser Donald Hornig to testify next Wednesday. Senator Muskie then takes off
on a series of cross-country air pollution hearings.
In the House, a more critical reception is expected in the Interstate & Foreign
Commerce Committee.
First targets. For industry, the President’s program could have fast impact.
HEW feels some pollution levels can be set as soon as six months after legisla­
tion receives final Congressional approval. First likely targets are such in­
dustries as steelmaking and electric power production.
The President disavows a relationship with industry that is just “ one
merely of regulator and regulated.” He said in his message that “ out of per­
sonal interest, as out of public duty, industry has a stake in making the air fit
to breathe. An enlightened government will not only encourage private work
toward that goal, but join and assist where it can. And a HEW official said
that consultation with industry will be one part of the standard-setting process.
Reactions. Specific industry standards plus the prospect of federal enforce­
ment came as a surprise to most of the industries named in the President’s
message. At least two provisions are certain to raise questions. One gives




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357

HEW the power to subpoena, documents for use in abatement hearings. The
other is the right to enter plants to make inspections and to see company records.
William J. Clapp, president o f Florida Power Corp., thinks the federal govern­
ment has a place in filing standards in air pollution, but calls attention to many
electric industry programs under way to control sulfur dioxide emission and air
borne particles.
Standards also bother E. J. Hanley, chairman of Allegheny Ludlum Steel Corp.
He says: “ I hope the government works with industry on this. I'd hate to see
happen what happened with the auto companies where Safety points w^ere
listed by the government and then the companies asked to come talk about them.”
Hanley denies that the steel industry has been as negligent as critics say.
Joel Hunter, president of Crucible Steel Co. of America, has misgivings about
“ such broad and sweeping authority” resting in the hands of HEW.
Water standards. The President’s message made only slight mention of
water pollution. One Administration official pointed out that under the present
laws, “it will take us all this year to set water quality standards and to shift
from low gear to high gear.” These standards are being set by the states and
must be approved by the Secretary of Interior.
Significantly, standard-setting by the states is being abandoned in Johnson’s
approach to air pollution. “We learned from water pollution and other efforts
that if you take a more involved process, you just lose time,” said one HEW
official.
CHICAGO DIGS ITSELF OUT

Last weekend's blizzard is second disaster in month for the Windy City. It
cost some $150-miUion in lost goods and services, brought business to standstill.
Few in the Midwest had reason to regard last weekend’s blizzard as a bonanza,
but Tom Meyer of Cleveland was one o f the few.
He is president of Meyer Products, Inc., whose principal product is snow plows.
“ One of our distributors sold out his entire stock of 50 plows over the weekend.
Other dealers could have sold more, but their employees couldn’t reach the shops
to service the demand.”
However, for anyone in northern Illinois, northern Indiana, and southern
Michigan not in the snow removal business, It was a cold, bleak three days.
White stuff. Chicago, which bore the brunt of the bilzzard, was the recipient
of an estimated 24-million tons o f snow during a 29-hour period beginning early
Thursday morning. The 23-in. fall cost the city an estimated $150-million in lost
production of goods and services and came right on the heels of the disastrous
McCormick Place fire.
Traffic arteries were completely clogged on Friday, and many employees were
unable to get to work. Marshall Field & Co., Carson Pirie Scott & Co., and other
big department stores, lacking the staffto man their counters, had to cloee. A
major port of the financial district including the Federal Reserve Bank of
Chicago, the Mercantile Exchange, and the Soard of Trade also had to call it a
day.
Workers failed to get to plants in outlying areas, too, and companies such as
Zenith Radio Corp., Sunbeam Corp., and a Ford Motor Co. assembly plant were
closed.
Not only employees failed to reach their destination. O’Hare International
Airport—the nation’s busiest—was closed for more than three days, and thous­
ands of would-be travelers were stranded. Another 7,500 were stuck in Mil­
waukee while waiting for O’Hare to reopen.
With storekeepers and police immobile, shops and untended snowtwwd trucks
on Chicago’s West Side—
-where race riots erupted six months ago—were looted.
When the melee ended, 200 people had been arrested, 4 injured, and a 10-year-old
girl was dead.
At midweek, when a fresh snowfall started, many Chicago businesses closed
early and several plants cancelled night shifts in fear o f a new blizzard even
before the weekend snow had disappeared.

Representative W i d n a l l . Thank you.
Mr. Secretary, in the U.S. News & World Report article on social
security, it calls to the reader’s attention how the early concept of
social security has changed. It givfcs the early projections of how
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social security financing would stand by 1967, and how far different
from the way it was projected and has turned out.
In benefits, the original estimate for 1967 was $2 billion, and today’s
estimate for 1967, $26.3 billion.
In payroll tax, the original plan for 1967 was 6 percent on the first
$3,000 of worker’s pay, and the actual for 1967, 8.8 percent on the first
$6,600 of worker’s pay.
We are now considering projections for the future which will in­
volve an increased payroll tax and also an increased base for social
security. We also find that on top of that, what we have in the reserve
fund has diminished considerably. The original estimate for 1967
was $54 billion, and today’s estimate for 1967, $23 billion.
Doesn’t this disparity alarm you and indicate to you that we are
going to run into a completely unsecure reserve fund?
Mr. C o h e n . Let me make two points before I answer that question.
It is clear that Congress has made striking changes in the social secu­
rity system over the years. I think this is sound. I think Congress
has repeatedly reexamined the social security system in the light of
remarkable economic and social changes that have occurred, attitudinal
changes as well, about the role of the Federal Government in this area
and its relation to private pension plans, and except for very minor
points, I think all of those improvements have been highly successful
and important.
I would also like to say, while there are two members of the Ways
and Means Committee and a member of the Finance Committee and
a former Secretary of Health, Education, and Welfare here, that if
you go back and look at those 30 years of experience, you will find
that every administration and every Secretary and every Ways and
Means Committee and Finance Committee have given great weight
and consideration to the longrun financing of this program.
There may have been differences on just how to deal with specific
points, but I think I can say with absolute assurance that no matter
who has been chairman of the Ways and Means Committee or the
Finance Committee, or under what administration—Mr. Myers has
been the chief actuary since the beginning—they have always asked
and gotten information about the long-range financing implications
of costs, how to finance the program, and they have put something in
the law related to that long-run cost.
Now that doesn’t mean that the answer was necessarily correct or
will turn out to be correct in years to come. I would put it this way.
I think they did the best that human intelligence could do under the
circumstances in recognizing, as I said in my prepared statement,
what the long-run costs are.
Now when you are living in a dynamic capitalist economy, such as
we have, a free enterprise economy, in which the gross national prod*
uct is going up $30 or $40 billion a year, obviously, the social security
system ought to change in relation to the dynamic character of the
economic system, or otherwise the distribution of income to the aged
and the disabled and the widows and orphans would be out of balance
with the rest of the economy.
Social security, its great virtue, is that it is a mechanism for distrib- *
uting the productivity of the whole economy, not merely to the peo­
ple who are productive, but to the people who are outside of the labor
market.



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Representative W id n a l l . Mr. Secretary, may I interrupt you at
tliis point?
Mr. C oh en. Yes.
Representative W i d n a l l . That isn’t what I am getting at. What
I am getting at is the adequacy and the soundness of the reserve fund.
Mr. C o h e n . Yes, sir.
Representative W i d n a l l . And I believe in your prior testimony,
prior to my taking up the questioning, you indicated that there was
just enough in cash available to take care of 1 month’s payments.
There is about $18 'billion in other reserves.
Mr. C o h e n . Yes.
Representative W i d n a l l . N o w , what are the reasons for the social
security reserve funds, if jou don’t have available the moneys to in­
stantly pay when required in time of crisis ?
Mr. C o h e n . In answer to that I would say I would feel a great deal
better if the amount in the reserve were somewhat larger than it is
now. The total reserve at the present time is equivalent to about 1
year’s benefit. That is, we are spending in the nature of $20 billion
to $25 billion at the present time; and the total reserves, including
those in the health insurance trust fund, are about $23 billion.
I am being very general now. But it would be, in my opinion, much
better if the reserve were somewhat larger. On the other hand, though,
in relation to these arguments, I want to make the point that a govern­
mental social security system does not need to have a so-called fully
funded reserve. By a fully funded reserve, I mean a reserve that you
would have to have if you were a private insurance company which
would probably have alxmt $350 billion for the social security program
at the present time.
Now, as I said in my statement, I think we can have a reasonable
pay-as-you-go financing, with a reasonable contingency reserve but,
in any case, there must always be a prospective contribution rate in the
law tht the Actury says will fully cover future costs. Then you have
a sound sysitem. But I think Congress should, at least every 3 to 5
years, reexamine the whole actuarial and economic base to see if they
want, to change the contribution and benefit levels.
But in answer specifically to your question, I would say a reserve of
somewhat more than the present reserves roughly 1 year’s benefit dis­
persals, would be desirable.
Representative W i d n a l l . I believe you just said we could reason­
ably nave a pay-as-you-go system. We do have a pay-as-you-go sys­
tem right now, don’t we ?
Mr. C o h e n . Well, it depends on exactly how you define “pay-as-yougo.” We have a pay-as-you-go system now in which some small part,
around 5 or 10 percent, of the cost of the program, is paid out of inter­
est. This is, o f course, substantially less than it was under the original
law.
As I remember, under the original law of 1935, in the eventual longrun future, about a third of the benefits would have been paid out of
interest.
Now, in answer to your previous question, that is a remarkable shift
in policy in the program—to shift from a program in which one-third
of the benefit disbursements were paid out o f interest to 5 or 10 per­
cent, And so we are on a somewhat more pay-as-you-go system, but I




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always think in a system like this, in an economy which is as dynamic
as ours, in which the purpose of social security is to assure people of
continued payment of benefits, that a somewhat larger current reserve
would be more satisfactory.
Representative W i d n a l l . One other thing:. I am very deeply con­
cerned by the fact that I believe right now we have built into the
social security system a means of trying to keep people on the poverty
level, and that is by the limitation on earnings.
It seems to me that that is one of the first things we should do. We
should materially increase the amount of earnings a person could have
and still retain their social security, and I know in our own office and
many other congressional offices, we are told there are thousands and
thousands of people who are physically capable of working who find
difficulty in getting full-time jobs at their age, but are perfectly ca­
pable of taking part-time jobs that could materially add to their earn­
ings, and also maintain them on a far better than poverty level.
Mr. C o h e n . The President’s recommendations would increase the
present $1,500 limitation to $1,680, Mr. Widnall. That is a 12-percent
increase*
Representative W i d n a l l . But I think that is really chickenfeed
when you are talking about the rise in the cost of living in our econ­
omy, the material increases that have taken place. I think something
substantially more than that must be done.
Mr* Cohen. Well, I think the problem presented there is the dis­
tinction between part-time and full-time work. I think the question
is at what point would you be paying people their full benefit while
they are working full time.
In other words, at some point along here, we will have to make a
decision of whether we want to pay social security benefits when
people are working full time. Should it be an annuity program or
should it be a retirement program ?
Now I appreciate that there are differences of opinion where the
exempt amount should be, $1,500 or $1,680 or some higher amount,
but if you pay all individuals over 65 who are working, it would cost
$2 billion more in benefit expenditures per year. And all of that
money would be going to people who were working, while the people
who were not working wouldn’t get any increase in benefits. So I
think you have to balance those factors.
I am just saying that major fiscal, economic and social policies are
involved in making that decision.
Representative W i d n a l l . Thank you, Mr. Cohen. My time is up.
Chairman P r o x m ir e . Mrs. Griffiths ?
Representative G r i f f i t h s , Thank you, Mr. Chairman.
May I ask, Mr. Secretary, if a man is working in covered employ­
ment and passes away, what is the maximum family maximum that
the widow and children can draw ?
Mr. Cohen . Today, under the present law ?
' Representative G r if f i t h s . Yes.
Mr. C o h e n . $368, Mrs. Griffiths.
1Representative G r i f f i t h s . H o w many children ?

Mr. C o h e n . A w i d o w a n d t w o ifh ild r e ft , o r a f a m i l y c o n s i s t i n g o f
th r e e c h ild r e n w o u ld g e t $868.
\ tS'

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:

.f




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THE 1967 ECONOMIC REPORT OF THE PRESIDENT

361

Representative G r i f f it h s . If the mother were working in covered
employment and passed away, what is the maximum that the father
and children could draw ?
Mr. C o h e n . Generally the father could not draw any benefits, but
the family could draw $368 if there were three children.
Representative G r i f f it h s . If there were three children ?
Mr. C o h e n . Yes.
Representative G r i f f it h s . If the mother takes a job, how much
can she earn without giving up any of the social security ?
Mr. C o h e n . At the present time? If she has earnings up to $1,500
per year, she can continue to draw her full benefit.
Representative G r i f f it h s . If the father continues to work, how
much social security does he get with three children ?
Mr. C o h e n . Mr. Myers can answer that.
Mr. M y e r s . Mrs. Griffiths, if there is a father with three children,
who can draw the $368, it does not matter whether he works or not,
since the children draw that much by themselves. If there is a mother
with two children----Representative G r i f f it h s . She can draw it.
M r . M y e r s . She would have to give up some of it if she works.
But if she has three children, the full $368 is paid regardless of her
working.
Representative G r i f f it h s . But i f she has two children and works,
she has to give up or she can only make $1,500, can she ?
Mr. M y e r s . That is correct.
Representative G r i f f it h s . What is the average mean wage of wom­
en ? Isn’t it about $3,000 ?
Mr. M y e r s . The average wage for what you might say is a full­
time woman worker under the system, who works in all four quarters
of the year, is now about $3,600 a year.
Representative G r i f f it h s . What is the average for men?
M r. M yers . It is about $6,000.
Representative G r i f f it h s . So what real objection d o you h av e to
that woman worker drawing $368? She is going to 'be paying into
the system. What objection do you have? Why is she treated like
a retired worker? This is simply income that is taking the place of
the father’s income, and obviously he m a d e much more money. Why
do you want to take that money away from her ?
Mr. C o h e n . I think your question really goes basically to the ques­
tion of whether you should nave any type of retirement test at all
where there are young children. Now I think that is worthy of ex­
ploration. That is different from the kind of question that Mr. Wid­
nall asked me, because I think you should make the presumption, where
there are children, that the mother ought to be able to stay home with
the children if she elects to do so.
Representative G r i f f it h s . Not only the presumption—pardon me,
do you think the presumption should be that she should stay home
with the children?
Mr. C o h e n . Yes, I w o u ld say.
Representative G riffiths. Of the women in this country, 56 per­
cent aren’t staying home with the children; 81 percent of the college
educated aren’t staying home with the children.




362

THE

196 7 ECONOMIC REPORT OF THE PRESIDENT

One of the real shocks that I have heard this year is that in Fall
River, Mass., 90 percent of all married women work. It has the
lowest juvenile delinquency rate in Massachusetts. Maybe we ought
to reverse this. Maybe we ought to keep the fathers at home and pay
them. What kind of nonsense is it that says that a woman has to live
on $868, when she makes 1 cent over $1,500, she is taxed 100 percent
on it ?
Mr. C o h e n . Above $1,500----Representative G r i f f i t h s . Yes, she is taxed 100 percent.
Mr. Cohen. No.
Representative G r i f f i t h s . She has to give up $1 for every dollar.
Mr. C o h e x . No ; she only gives up 50 percent for the next $1,200.
Your point, despite that, is still germane.
Representative G r i f f i t h s . The real truth is that the system would
be taking in money if the woman worked, wouldn’t it ?
Mr. C o h e n . There would be an additional cost to the system of full
benefits were made payable to women who work regularly, but a wom­
an who worked would pay contributions.
Representative G r i f f i t h s . Of course, she makes a contribution. So
you really couldn’t have any objection.
Mr. C o h e n . No, I don’t think----Representative G r i f f i t h s . You are operating on a myth, the whole
thing. How many women are drawing under this ?
Mr. C o h e n . How many women are drawing benefits ?
Representative G r i f f i t h s . Yes, how many families where the father
is deceased ? How many families draw ?
Mr. C o h e n . I don’t know that I have it right here, Mrs. Griffiths.
Do you want to make an estimate, Mr. Myers ?
Mr. M y e rs. There are approximately 1 million survivor families,
and of those about 700,000 of the mothers are drawing benefits. The
other 300,000 are working in full-time employment and are not.
Representative G r i f f i t h s . N o w how much does it cost the social
security system to pay to the mother as long as the children remain in
school to 22, what is the cost of that between 18 and 22 ?
M r. M y e rs. In those cases, there are no benefits for the mother.
Representative G r i f f i t h s . The benefits though is paid for the child,
but the mother gets that money.
Mr. C o h e n . Y o u want to know what the cost for the child is?
Representative G r i f f i t h s . What was the cost to the social security
system of that ?
Mr. Myers. The cost of that change in the law, which was made in

1965, was 10 percent of the taxable payroll, represents about $300 mil­
lion a year.

Representative G r i f f i t h s . N ow one of the problems that you have
in the whole system is that once you keep these women home, once
they are not permitted to earn beyond a certain amount without losing
money, then they arrive in their 50’s and you hear from them. We
should reduce the age at which women draw social security. They
haven’t worked throughout the whole time. W h y don’t you with­
draw this penalty against them ? They are not getting too much any­
how, and they are not going to earn too much, and they are going to
pay into the system, and keep those women working, and stop lower­
ing the age at which people can draw social security.




THE 196 7 ECONOMIC REPORT OF THE PRESIDENT

363

Mr. Cohen. Certainly if the age were going to be lowered, it would
be much more costly than paying young widowed mothers who work.
Representative G riffiths. And they are not going to get enough
money anyhow, but they are going to try to live on it and they are going
to die from malnutrition diseases.
Mr. Cohen. I s it your point they should receive benefits irrespective
of the amount of money----Representative Griffiths. The $368 that women should receive no
matter what she makes. What you are trying to do is to replace the
husband’s income. What you have never noticed in the Social Secu­
rity system is that women are now working. If you reduced the
amount she could earn, but also looked at the fact that a family works
and didn’t tax the woman at all, I might go with it. But the only
time you are observing that the woman works is when you are reduc­
ing the amount you pay her. You aren’t saying, “ Well, a whole
family is paying ui and you are never going to get any money out of
it.” You don’t object to her paying the money, but you object to payingher.
This is one of the things that I think would be very helpful, and
I would like to ask you this: One of the real problems that you have,
even with ADC, is that you aren’t training these women; you aren't
helping women. We have a whole system set up here that is keeping
them from getting jobs. We are penalizing them, just as you are
penalizing this woman from getting a job, and as long as the only
thing that is available to that woman to get money is to have children,
she is probably going to have them.
Mr. Cohen. Might I say on the ADC, Mrs. Griffiths, I think you are
quite right. We are recommending a change in the law this year.
There has been under this program a policy in the law of not recog­
nizing that when the mother goes out to work she now has to give up
her benefits dollar for dollar under AFDC and that acts as a dis­
incentive to work.
We think there should be in effect an exemption or an incentive
so that when she goes out to work, she can keep some of that money
and raise her standards, so that she not only has work experience, but
that her attempt to meet the level of her family is----Representative G riffiths. H ow many States refuse to permit a
person any money who is drawing welfare?
Mr. Cohen. Quite a number of States, where we permitted dis­
regarding the first $20 of earned income of aged people who work
plus one-half of the remainder up to $80. I have a list here of 28
States that have said that they will not implement this for the aged,
and 9 in which they have no intention of implementing it. In other
words in subtracting these from the 50 States there are only 15 States
that even did it for the aged, for which of course there was the greatest
political and social interest in doing it.
Even with regard to disregarding income for the disabled, where
in a rehabilitation program you want to encourage the disabled to
work so they can get back to work, I have a list here of 35 States that
have not implemented it.
Then there is one in connection with children for exemption of in­
come of childrenWe have a provision that was put in the law a couple of years ago,
where a child under age 18 could go out to work, let’s say a job on



364

THE

19 67 ECONOMIC REPORT OF THE PRESIDENT

Saturday or delivering newspapers, and we exempt income up to $50
per child or $150 per family.
I have a list here of 24 States that have indicated that they do not
implement this provision.
Representative G r i f f i t h s . This is one of the problems. They
can’t replace that money. My time is up, but I want to ask one more
question for you to answer in the record.
What does it cost, what is the administrative cost of welfare ? Will
you please answer that for the record ?
Mr. C o h e n . Yes.
(The question and answer, subsequently submitted, follow:)
Question: What is
: In fiscal

the administrative cost of welfare?
1966, total costs o f administration, services and training:
for all six categories of welfare totalled $611.5 million, o f which $359.2 million
was the Federal share.
Administrative costs per casemonth in the fiscal year 1965 were:
Old-age assistance_______________________________________________________$5. 27
Aid to the blind_________________________________________________ _______ 8. 70
Aid to disabled__________________________________________________________ 9. 87
Families with dependent children_______________________________________ 21. 35
A n sw er

Chairman P r o x m ir e . Mr. Rumsfeld?
Representative R u m s f e ld . Mr. Cohen, I followed Mrs. Griffiths7
*
line of questioning. I found it persuasive.
I might say that I have received a number of letters from individ­
uals in my constituency who arcue the saine point, although possibly
not as eloquently.
I would be curious to know, Mr. Chairman, whether or not it would
be appropriate for Mr. Cohen to give some thought to the questions
that Mrs. Griffiths has raised, ana possibly report back to this com­
mittee at some future point. I appreciate the difficulty of responding
to her immediately, and I do not tliink you did respond in fu ll..
Mr. C o h e n . N o .
Representative R u m s f e ld . And I sense you feel the same way.
Mir. C o h e n . I will certainly look into it.
Representative R u m s f e ld . I think it is an important and interesting
matter.
Chairman P r o x m ir e . Yes, indeed. Let me say that I think it would
be perfectly proper for Mr. Cohen, in revising his remarks in the
record, or in the transcript, to add whatever he would like to add,
and I take it he can add something on that point.
Mr. C o h e n . May I say to the Congressman, I will be appearing
before Mrs. Griffiths in about 3 weeks, before the Ways and Means
Committee, and I presume she has given me advance notice that I
should be better prepared to answer that question at that time, which
I will do.
Representative R u m s f e ld . Regardless of where you end up in re­
sponding to her, I would be very interested in seeing the reasons and
the arguments that you arrive at.
There was a question that was raised in one of our committee hear­
ings earlier this week that has also come to my attention as a result of
mail from my constituency. It involves the question of individuals
coming into the United States, working for the minmum period to
qualify for social security, returning to their native country, and
drawing social security benefits.
This practice of course has an effect on our balance of payments*
It has, I think, some impact on some of the statistics you have given




THE

1967 ECONOMIC REPORT OF THU PRESIDENT

365

us here, because you have not drawn any distinctions between pay­
ments that end up in this country, and therefore work against the
problem which you have outlined so well, and those payments which
do not end up in the country, and which therefore would have no
effect whatsoever on the problems we are discussing. I would be
interested in having factual information as to the total dollars and
the number of individuals involved, by country.
Mr. C o h e n . Yes*
Representative R u m s f e l d . I have had instances where individuals
who have themselves come to this country and have written me saying
that I should do everything possible to prevent others, by specific
names, because, these people wrote me, of the fact that that was their
intention, and they did not feel it was fair to this country to have
these people come in and then return and simply draw their payments.
If you are prepared to give those statistics now, I would be happy to
have them. If not, I would like them for the record.
Mr. C o h e n . I can put them in the record. I might say, Congress­
man, that the law, in general, provides that a person must have resided
in the United States 10 years, if the payment is to be made outside of
the United States, or else there must be a reciprocal treaty or agree­
ment between this country and the other country of which he is a
citizen.
I have no doubt that there are some people that came to the United
States to become entitled to benefits and returned to their native lands.
I think the question is should a person who has worked x or y number
of years in this country have the right to have eligibility for social
security even if he leaves the country.
Obviously there has to be seme minimum period, and Congress made
it 10 years. I think it is reasonable. But it may well be that ex­
perience shows that there should be some other period of time.
Representative R u m s f e l d . I think this is a possibility, that the
changing picture on balance of payments might very well indicate to
the Congress that some amendments to these provisions might be ap­
propriate.
(The following material, relative to the questioning above, was later
supplied by the Department for the record:)
Question; W hat part o f SSA payments go abroad and what effect does this
have on the balance o f payments, particularly those people who may come into
this country, work a minimum length o f time, and return to their native country
to draw benefits?
Answer: As o f June 30,1966, there were 175,541 beneficiaries living in foreign
countries. The total benefits paid to persons living abroad in fiscal year 1966
was $156,598,000, seven-tenths of one percent o f all payments in that year. The
table below shows the number o f beneficiaries in specific countries. A little
over one-half (52 percent) o f the workers on whose account the claim is being
paid are U.S. citizens. A somewhat larger proportion (58 p e r c e n t ) o f aU benefits
paid are 'base# on the work o f U.S. citizens, whose benefits are higher on the
average than those o f non-citizens.
Thus in flseal year 1966 approximately $65,771,000 went to non-citizens abroad.
These beneficiaries were either citizens o f countries having treaties w ith the
United States or whose social security systems have been found to provide U.S.
citizens comparable treatment under the country’s social security system, or
persons or the dependents o f persons who had worked at least ten years in this
country or had been in the active military service o f the U.S. According to
Department o f Commerce figures total government payments abroad involving
a dollar outflow in 1966 amounted to $5.3 billion. Total SSA payments abroad
to non-citizens ($66.7 million) thus represented only 1.2 percent o f total U.S.
government expenditures abroad that resulted in a doUar outflow.



T a b l e 6. — OASDHI— Benefits

in current-payment status for individuals, by country or continent— Monthly amount payable to beneficiaries
living abroad, by type of beneficiaryt June 30t 1966
W ives and h u sb a n d s4 of—

B eneficiary's place o f resid en ce1

T o ta l................... .....................................
A frica...... ................................................
Cape V erde Islands....................................
South A frica...................................... ..........
O ther................................
. .
A sia ....... .............................................................

T o ta l

Retired
w o rk e rs 1

D isabled
w ork­
ers *

Children * of

AU
workers

Retired
w orkers

D isabled
workers

A ll
workers

Retired
and
deceased
workers

W idowed
m oth­
ers®
D isabled
workers

W idows
and
w idow ers1

Parents >

$12,107,235

$7,843,848

$322,149

$1,012,491

$983,665

$28,826

$963,959

$910,214

$53,745

$265,738

$1,644,082

$54,968

68,038

42,826

524

7,254

7,203

51

8,967

8,865

102

1,522

6,670

276

42,667
9,601
15,870

26,754
6,901
9,171

112
0
412

5,374
932

5,323
948
932

51
0
0

4,191
868
3,908

4,089
868
3,908

102
0
0

729
139
654

5,330
745
595

77
0
196

770,829

513,079

12,671

74,077

72,499

1,578

69,755

56,303

3,452

20,171

89,444

1,632

C y p ru s ......... .................................................
H on g K o n g ................................ ......... .........
In d ia ...............................................................
Israel................................................ ..............
Japan...............................................................
Jordan.............................................................
L eb an on .........................................................
M a ca o..
R y u k y u Islands..........................................
Syrian A ra b R e p u b lic ..............................
T u rk e y ............................................................
O th er...............................................................

19,854
135,068
7,771
146,623
313,088
18,998
43,873
13,726
31,038
7,788
14,000
19,066

13,470
70,989
4,936
107,947
224,683
9,645
27,868
8,715
20,173
5,704
9,619
9,430

603
562
93
4,689
2,758
1,308
916
598
678
0
0
566

2,029
22,696
989
12,926
23,653
2,137
2,778
2,107
2,736
449
697
880

1,924
22,492
943
12,591
23,324
1,833
2,711
2,069
2,627
449
697
819

105
204
46
335
329
304
67
18
109
0
0
61

1,219
9,310
791
5,381
20,361
3,607
7,523
632
3,769
704
1,711
4,747

1,026
8,924
746
4*693
19,559
2,838
7,152
596
3,632
704
1,711
4,723

193
386
46
688
802
769
371
36
137
0
0
24

186
4,153
240
1,635
8,362
621
1,496
229
1,367
156
477
1,240

2,291
27,040
657
13,979
32,908
1,451
3,242
1,387
2,068
711
1,496
2,194

56
318
65
166
464
169
so
58
222
64
0
0

C anada........................................_........................
Central A m erica and West Indies_________

1,625,374
219,739

1,029,132
158,439

39,266
6,312

122,038
11,273

118,775
11,233

3,263
40

158,661
17,602

150,192
17,180

8,469
422

38,441
4,192

233,035
20,315

4,801
1,606

Baham as___________________ ___
.
B a rb ados.......................................................
B erm u da .................................... ...................
British Leew ard and W indw ard Is­
lands................................. ...........................
C osta R ica....................................................
D om in ican R e p u b lic .................................
Jam aica...........................................................
N icaragua................... ...................................
Trinidad and T o b a g o ................................
O th er..............................................................

13,^61
26,842
9,057

8,528
19,749
6,591

176
877
0

918
1,620
927

891
1,620
914

27
0
13

1,604
692
695

1,604
630
593

0
62
102

323
133
60

1,668
3,663
784

44
108
0

28,623
11,500
11,012
68,930
9,462
11,895
29,157

20,951
7,463
7,089
56,649
5,543
8,321
17,555

465
628
842
1,869
466
277
812

2,101
707
300
2,675
345
382
1,298

2,101
707
300
2,675
345
382
1,298

0
0
0
0
0
0
0

1,176
1,414
1,483
2,149
1,741
1,130
5,509

1,176
1,414
1,436
2,042
1,741
1,139
5,405

0
0
47
107
0
0
104

176
404
284
642
766
130
1,375

3,474
792
950
4,685
534
1,490
2,275

281
192
64
361
67
15
333

E u rop e....................................................................

7,999,079

5,428,577

204,350

668,843

652,393

16,450

391,479

367,074

24,406

110,426

1,176,035

19,369

A u stria........................................ ..................
B elgiu m .........................................................
Bulgaria.........................................................

124,084
49,566
13,229

94*492
32,507
6,455

3,301
723
0

6,182
4,020
1,363

6,024
4,020
1,363

158
0
0

5,486
2,885
320

4,989
2,728
320

497
157
0

2,171
1,162
139

12,260
8,168
4,952

192
101
0




M exico...................................
O ceania........ .........................

584,592
60,661

Australia-------------------N ew Zealand.................
O th er.................... ..........

62,553
44,200
131,409
619,940
716,343
237,835
1,633,781
25,528
38,876
241, 918
56,071
197,003
3,140
280,058
273,458
112,609
447,252
164,498
8,651

1,834
1,509
4,897
26,943
19,938
13,189
68,405
2,400
839
8,371
2,661
11,155

30,641

28,209
1,865

39,603
2,784

36,503
2,516

48,583
9,972
2,106

24,718
4,877
1,046

90
114

2,112
558
114

Ph ilippin es----------------------South A m erica............ .........

656,496
103,203

306,272
60,698

26,088
2,770

Argen tina...... ................
Hrazil_________________
C h ile................................
C olom b ia ........................
P eru.................................
Venezuela.......... .............
O ther................................

24,011
23,787
9,973
9,540
11,912
11,031
12,940

15,115
13,075
5, 741
5,549
6,919
6,156
8,143

1,185
226
562
237
94

0

0

106

2.205
1,003
12,035
43,230
78,755
14,431
91,804
3,134
5,196
10, 626
1,315
15,647
179
16,719
4,923
4,428
65,153
10,710
1.206

2,027
871
10,792
40,931
75,743
13,207
84,066
2,649
5,100
10,070
1,163
14,002
179
15,498
4,633
4,085
62,770
U M68
1,183

3,100
268

100,507
14,865

1,962
497
57

150
61
57

11,385
2,770
710

11,067
2,552
653

79,030
7,035

75,330
6,659

3,700
376

127,894
16, 426

120,356
15,592

1,574
1,739
670
540
803
649
1,060

65
159

670
419

1,706
4,197
1,800
1,963
2,205
2,533

1,641
3,844
1,800
1,630
2,205
2 ,470

2,002

178
132
1,243
2,299
3,012
1,224
7,738
485
96
556
152
1,645

162,638
14,272

521
275

2,002

618
1,060

127
466

1,121
2,329
710
6,233
217
295
1.130

0

577
166
148
1.131

0
121
0
31
0

19,224

7,345

554

554

7,803

18,673
551

7,345

554

554

7,353
450

7,292
450

43,546
4,271

35,363
6,095

10,525
140

318
218
57

3,180
1,030
61

5,387
647
61

140

7,538
834

38,618
3,995

62,796
11,457

15,798
822

676
1,108
460
232
752

4,332
2,319
1,076
550
784

142
164

0

1,221
390
343
2, 383
542

112

353

0
353
0

18,460
14,482
4,279
25,264
1,073
1,588
3,231
123
3,294

0

1,200
1,196

0

i Based on m onthly benefit check address. D ata for places w ith 100 or m ore bene­
ficiaries show n separately. A ll benefit paym ents were being w ithheld on June 30, 1966,
from beneficiaries living in the following countries in w hich conditions were such that
there was no reasonable assurance that the payee w ould actually receive the check and be
able to negotiate it: Albania, C hina {including Outer M ongolia and T ib e t), C uba,
Czechoslovakia, Soviet Zone o f G erm any, H ungary, N orth Korea, and the U nion of
Soviet Socialist Republics (including Estonia, Latvia, and Lithuania).
- Aged 62 and over.
3 U nder age 65.




0

0

0
0

0

133

212

0

171

2,872

7,742

Canal Z o n e ...................
O ther................................

3,670
1,032
991
22,007
2,426
242

103
475
1,148
4,084
2,038
5,906
56
109
441
1,324
194
44
739
237
362
1,273
484
59

521
35

2,806

66

4 Includes w ife beneficiaries under age 65 w ith entitled children in their care, and
divorced w ives.
,
v ,
.
! Includes disabled persons aged 18 and over whose disability began before age 18 and
entitled full-tim e students aged 18-21.
, .
6 Includes surviving divorced m others w ith entitlted children in their care.
7 A ged 60 and over for w idow s and surviving divorced w ives, and aged 62 and over for
widowers.
Source: U.S. D epartm ent of H ealth, Education, and Welfare, Social Security A d ­
m inistration, Office o f Research and Statistics, D ivision of Statistics, February 1967.

PRESIDENT

U.S. possessions...................

0

8,314
7,548
15,408
84,568
120,269
24,148
447,873
4,274
7,520
39,033
53,696
41,487
4,382
47,032
34,192
12,415
89,386
108,366
744

O TE
F H

4,905
2,820
9,316
38,955
84,841
12,617
272,433
2,041
4, 585
27,121
13,396
33, 759
1,297
31,728
19,958
7,501
35,678
37,526
509

REPO
RT

10,254
5,022
2,528
13,575
7,060
348

5,011
2,947
9,782
40,076
87,170
13,327
278,666
2,258
4,633
27,820
13,691
34,889
1,297
32,305
20,124
7,649
36,809
38,315
409

ECONOM
IC

80,438
57,586
178,002
833,763
1,041,041
309,247
2,651,609
38,723
58,761
331,440
128,881
303,669
9,042
390,777
338,988
140,982
675,455
331,859
11,848

1967

D en m ark........................
F in la n d .-...................... .
France.............................
G erm any (U .S . Zone)
(Ireece.............................
Ireland............................
Ita ly — ...........................
M alta...............................
N etherlands...................
N orw a y ...........................
P olan d ________________
P ortu gal..........................
Rum ania.......... ..............
Spa in...............................
S w eden.............. ............
Sw itzerland_____ ____
U nited K in g d om .........
Yugoslavia........ .............
O th er............ .................

05
Oi

T a b l e 7.—

0 A 8 D H I- Benefits in current-payment status for individuals, by country or continent ~Xumber payable to beneficiaries living

abroad, by type of beneficiarytJune S O t 1966
Wives and husbands * of—

B eneficiary's place o f residence *

Cap® Verde Islands.
South A frica ________
O t h e r .............. ............
Asia..

E u rope*
A u s t r ia .. .
B elgiu m - B u lg a ria ..
D enm ark:-




i
Retired j
and
; D isabled
deceased workers
workers

W idowed W idows
mothers 4 j
and
Parents 1
w idow ers7
I
1
i
23,827 j

175,541

92,433

8,126

26,825

25,051

774

24,477

22,699

1,778

5,006

1,037

481

5

183

182

1

232

230

2

30

103

3

665
126
246

294
77
110

1
0
4

137
22
24

136
22
24

1
0
0

133
14
86

131
14
85

2
0
0

16
2
12

83
11
9

1
0
2

11,649

6,294

127

2,020

1,976

44

1,483

1,378

105

3&r

1,369

23

327
2,318
115
1,819
4,667
421
722
236
537
113
187
287

172
938
59
1,198
2,814
126
321
116
273
66
101
110

6
7
1
45
28
13
8
6
7
0
0
6

65
640
23
278
653
77
83
61
84
12
18
26

62
635
22
270
643
68
81
60
80
12
18
26

3
5
1
8
10
9
2
1
4
0
0
1

46
239
17
87
409
164
■ . 329
26
111
21
89
96

40
228
16
69
387
138
218
23
105
21
39
94

6
11
1
18
22
26
11
2
6
0
0
2

3
71
4
20
132
14
31
4
24
2
9
19

34
419
10
189
525
24
49
23
35
U
20
30

1
4
1
2
6
3
I
1
3
1
0
0

23,887
3,013

12,804
1,930

391
65

3,255
265

3,148
263

107
2

3,340
374

3,008
366

332
9

694
73

3,343
283

60
23

197
347
114
413
167
168
875
152
157
423

103
233
72
257
91
96
684
76
105
213

2
9
0
5
5
10
19
4
3
8

26
34
18
52
17
10
59
10
8

25
34
17
52
17
10
69
10
8
31

1
0
1
0
0
0
0
0
0
0

33
16
12
41
33
33
39
40
18
109

33
14
10
41
33
32
37
40
18
107

0
2
2
0
0
1
2
0
0
2

6
3
1
3
8
6
8
13
2
24

26
50
11
52
10
13
61
8
19
33

1
2
0
3
3
1
5
1
2
5

107,106

62,402

1,944

16,155

15,779

376

7,858

7,259

599

1,666

16,841

240

1,524
634
184
074

1,080
372
75
701

31
7
0
17

184
89
31
107

131
89
31
105

3
0
0
2

84
45
6
33

74
41
6
30

10
4
0
3

28
16
2
6

165
104
70
no

2
1
0
0

31

787

PRESIDENT

N icaragu a____________
T rin id a d and T o b a g o .
O th er.............. .................

A ll
workers

T E
H

B aham as......................................................... ..
B a rb ad os______________ __________________
B erm u d a_______ __________________________
B ritish L eew ard an d W indw ard Islands.
C osta R ica ............................................... ..........
D om in ican R e p u b lic..................................... .

D isabled
workers

O
F

Other..........................

C an ada........................... .......................
C entral A m erica an d W est Indies..

R etired
workers

REPORT

C y p r u s ..............................
H on g K o n g ......................
In d ia ...................................
Israel..................................
Jap an .................................
Jordan................................
L eb an on ............................
M a ca o................................
R y u k y u Islands_______
Syrian A rab R ep u b lic..
T u rk e y ..............................

All
workers

ECONOMIC

A frica ..

C hildren * of—

R etired Disabled
workers * w orkers*

1967

T o t a l.

Total

00
gg

521
1,524
7,172
8,273
2,826
18,801
278
453
2,744
633
2,320
37
3,074
3,083
1,248
6,161
1,828

00

92
48
23
132
67
3

M exico.....................................
O ceania...................................

11,7 94

3,413
364

275
17

m

14

47
251
198
126

67
216
884
2,285
335
6,052

5
6

101
71
25
103

0

64
206
851
2,231
319

6*817
50

100

3

10
33
54
16
136
5

1

614
294
010
27
759
433
160
790
910

877
27
747
429
157
758
892

24

1,272
65

1,171
57

101

11

15

6

11

0

12
4
3
32
18

0

15
177
687
1,741
282
1,789
53
77
163
25
373
3

13

3,034

276

720

26

A rgen tina...... ................
Brazil................ .............
Ch ile..................... ...........
C olom bia.......................
P eru .............. ..................
V en ezuela..................... .
O th er. _ .........................

316
32*
130
167
148
178

2

146

5

1

1

6
14

000

2

55
17
15
325

50
665
444
163
1,1B7
1,562

3
4
15
5

0

10

1,081
157

1

79

1,135
65

1
0

203
60
16
4,059
285

342
G 660
,
57
97
532
750

080
76

4,801
269

5,323
300

1,888

1
13
54
27
75

54

23

5,121
291

106
206
1,064

145
130
15

180
151
63
71
73
82
100

101

Canal Z o n e . . . ............ .
O ther...............................

16

303
18

101

0




126

364
24

281

10

1 U nder age 65.
* Includes wife beneficiaries under age 65 w ith entitled children In their care, and
divorced w ives.
1 Includes disabled persons aged 18 and over w hose disability began before age 18 and
entitled full-time students aged 18-21,
* Includes surviving divorced mothers w ith entitled children in their care.
7 A ged 60 and over tor w idow s and surviving divorced w ives, and aged 62 and over
for widowers.

P R E S ID E N T

» Based on m on th ly benefit check address. D ata for places w ith 100 or m ore benefici­
aries show n separately. AH benefit paym ents were being w ithheld o n June 30. 1066.
from beneficiaries living in the following countries in w hich conditions were such that
there was no reasonable assurance that the payee w ould actually receive the check and
be able to negotiate it: A lban ia, C h ina (including Outer M ongolia and T ib e t), C uba,
Czechoslovakia, Soviet g o n e o f G erm any, H ungary, N orth Korea, and the U nion o f
Soviet Socialist R epublics (Including Estonia, L a tvia, «n 4 I4thaan la),
i A g «J 0? and over.

2,300
150

THE

U .S . possession s................

2,435
150

O
F

14,466
1,446

0

4

0
1

275
230
67
385
15
23
43

REPORT

P h ilip pin es.........— ......... .
South A m erica______ ____

2

13
3
40

222

131
15

58

3
26
62
75
34
185
12

65
1,008

216
58
17

8

283

Australia................. .
N ew Zealand_________
O ther.................. .......... .

18
203
749
1,816
316
1.074
65
79
176
28
413
3
350
92
72
1.074
237
25

ECONOMIC

733
2,262
10,408
14,744
4,039
36,606
402
702
4,186
1,750
4,402
127
5,004
4,120
1,685
8,664
4,548
163

1967

Finland---------------------F rance.............................
G erm an y (U .S . Zone)
G r e e c e ..........................
Irela n d ............... ............
Ita ly — ............ ...........
M alta_________ _______ _
N etherlands................. .
N orw a y .............. .......... .
P olan d ........................... .
Portugal........................ .
R u m a n ia ...................... .
S p a in .............................
Sw eden.......................... .
Sw itzerland------------- ...
U nited K in g d o m ____
Y u g o s la v ia -................ .
O th er................ ............ .

00

o>
C
O

370

THE 196 7 ECONOMIC REPORT OF THE PRESIDENT

Representative R
. In your statement you sajr: “The income
deficiency of the poor in 1965 was $11 billion. This is the total
amount by which their incomes fell short of the poverty line* With­
out these programs”—and I am not quite sure what “these programs”
means—“the deficiency would have approached $20 billion.”
This means, that “these programs” reduced the potential deficiency
by $9 billion ?
Mr. C
. Right.
Representative R
. Could you explain what “these pro­
grams” are and w’hat their cost was ?
Mr. C
. The two general programs that I was dealing with
was the so-called social security program, and the public assistance
or public welfare program.
Representative R
. What were their cost ?
Mr. C
. Their total benefit expenditures at the present time
would be in the nature of about $5 billion for public assistance and
about $20 billion for the social security program. That is about $25
billion.
Representative R
. So an expenditure of $25 billion reduced
the deficiency from $20 billion potential to an estimated $11 billion.
Mr. C
. Public assistance payments in 1965 were $3.5 billion,
100 percent of which went to the poor. In 1965, social security cash
benefits were $18 billion. In the social security program of course,
the payments are not made only to the poor. Any person who has
contributed and meets the eligibility requirements receives benefits
and there are large numbers of middle-income groups who, if they
have private pensions and other investment income or if they are still
working some or less than full time are not in the poor category.
Representative R
. I appreciate that. I would just like to
concur with the comments of Mr. Widnall concerning your comment
about greater work force participation of beneficiaries who are able
to work.
I have had a bill in that would accomplish this for a period of years.
It has never received favorable consideration. I am hopeful that we
can do something in this area. I think it is very important.
I have a number of questions, but one is quite general, and I will
pose it first. You have indicated that the social security income and
output of the programs have a stimulating effect on the economy, in
your opening remarks, a net stimulating effect.
Certainly the administration's proposal for a tax increase will have
a depressing effect.
Let’s say they are offset, which I think is not an inaccurate state­
ment. The net result is that with respect to the effect of the economy,
they are offset, and yet the other effect is that you will have higher
taxes, non-social security, and in addition, you will have higher social
security taxes, and there will therefore be a smaller total percent of
earnings left to individual wage earners as a result of both of these
factors, and therefore Government will be playing a larger role in
the expenditure of an individual’s total earnings than previously, and
yet there is no net effect there on the economy.
Now you made a very fine statement in response to the question
concerning a guaranteed income, and you said a number of things
that I agree with you on very strongly.
um sfeld

ohen

u m sfeld

ohen

u m sfeld

ohen

um sfeld

ohen




um sfeld

THE 1967 ECONOMIC REPORT OF THE PRESIDENT

371

It seems to me that this trend that you have described in your state­
ment works directly against the response you have made I believe, to
Senator Talmadge or Senator Javits, about the need for incentives
in our system.
The fact is that, in the last analysis, incentive is most important in
solving some of these problems, and you suggested that with respect
to the hard-core unemployed it isn’t just dollars that are going to solve
the problem. Are you worried about this? Are you worried about
the fact that the net effect of the administration’s proposals will tend
to work against the things you believe in with respect to incentive?
Mr. C o h e n . Well, of course incentive is not easily measured by the
usual kinds of tests. It involves psychological as well as economic
factors.
As a taxpayer, like everyone else, I don’t like to pay higher taxes
per se. But with respect to the social security system, as the contri­
butions go up, I think that if you assure the average worker that he
T
is getting a greater degree of protection, the evidence seems to be on
the whole that he is willing to pay tor a reasonable amount of
protection.
Representative R u m s f e l d , You don’t feel therefore it doesn’t have
an unfortunate effect on the incentive question because of this com­
pensating factor you mentioned ?
Mr. C o h e n . I would have to admit that it would have some effect on
some people. I could conceive of the problem in lower and inter­
mediate income levels. Quite frankly I don’t think it is a disincentive
on higher income people.
I see no evidence whatsoever that people with higher incomes and
with higher education and with greater opportunities have a disin­
centive because of higher social security taxes or in most cases higher
income tax rates.
But I would have to admit the validity of your question. You have
to look all the way down the line and see what the disincentives are
to people of less education, less opportunity, and maybe there comes a
certain marginal point balancing a lot of other things where there
could be a disincentive. In other words, I don’t want the social se­
curity tax to go so high that it is a disincentive. I don’t think we are
at the point at the present time.
Representative R u m s f e l d . My time is up. I would like to ask one or
tw o questions for the record.
First of all, your statement is interesting. I am a little concerned
that it doesn’t seem to consider the effect of inflation, increases in the
cost of living, as far as impact on the problems you have outlined here
to the extent I would be satisfied. I think you have overemphasized
one side of the picture and underemphasized the other.
In your statement, in the section called “ Expenditures for health,
education, and welfare,” I would like to have submitted for the record
a breakdown as you have done in part for Federal public, State and
local public, and private, with the trend say, since 1962, both in actual
numbers and as a percentage. I would like to see what the trend of the
private contribution in these areas are.
I mention this because I have seen instances in Illinois, where the
private sector, the voluntary organizations are pulling out of areas as
Government money comes in.




372

th e

1967 e c o n o m i c r e p o r t o f

th e

p r e s id e n t

W e just had a former member of this administration who is now
running one of the great foundations of this country, announce that
they were pulling out of many areas because of the Federal Govern­
ment’s involvement in those areas, and I think this is something that
needs much more attention than we are giving it.
Mr. C o h e n . Yes, sdr.
Representative R u m s f e ld . Because we are taking it out at one
pocket and putting it in another, and we don’t solve any problems
that way.
Mr. C o h e n . I would like t o put something in the record in answer
to jo u r question, because I think, overall, there is no evidence that the
private sector in health, education, or welfare has diminished. As a
matter of fact, it has also gone up rather markedly, although the
character of the expenditures may have changed.
Mr. R u m s f e ld . I want t o see it as a percentage.
M r . C o h e n . W e w ill be g la d to p u t it in th e record.

Representative R u m s f e ld . Thank y o u , sir.
(The material referred to follows:)

Question: What

is the trend in private expenditures for health, education, and

welfare?

Answer: Public and private expenditures for health, education, and welfare,
fiscal years 1961-62 through 1965-66:
[Dollar am ounts in billions]

1961-62

1962-63

1963-64

1964-65

1965-66

Percent
increase,
1962-66

T ota l public and p r iv a t e 1..............................

$03.0

$100.0

$108.0

$117.0

$181.0

41

T ota l p u b lic........................................... .............

62.2

66.5

71.1

77.5

87.6

41

Federal funds-------------------------------------State and local funds................................

30.6
31.6

33.0
33.6

35.6
35.0

38.8
38.7

46.8
40.8

53
29

3%

35.2

STT

S T

4579

40

T o ta l private *........ ......... ......... ........................

T

* T ota l adjusted t o elim inate duplication resulting from use o f cash insurance benefits to purchase m edical
care and educational services.

Chairman P r o x m ir e . Congressman Brock ?
Representative B r o c k . Let me say first I have enjoyed veiy much
your testimony.
Mr. C o h e n . Thank you, Mr. Brock.
Representative B ro c k * I appreciate it, Mr. Cohen. You have been
clear and concise. I am just particularly interested in the questions
asked by Mrs. Griffiths and also Congressman Rumsfeld and others,
on this problem relating not only to women but to the aged.
W ith your limit on income, it seems to me that you do have a dis­
incentive there. I am concerned lest we seem to be telling people when
you get to be 62 or 65, 'why don’t you just lay down and die. Don’t
be productive any more. I don’t lcnow— what is the average payment
to a social security recipient now ?
Mr. C o h e n . About $84 a month.
Representative B r o c k . That is $1,000 a year, approximately. You
are talking of a $1,600 limit on the income. That is a $2,500 gross,
if they work, for the average.




THE 196 7 ECONOMIC REPORT OF THE PRESIDENT

373

You have got half the people that are below the average. They
are getting even less. I can’t imagine why this administration or
the Social Security Administration would want to limit the pro­
ductivity of an individual. We all age in differing degrees and at
different times, and it seems to me that those who want to remain
productive in society ought to be encouraged in every way possible
to do so. Is there some reason other than what you have said ?
Mr. C o h e n . Well, I don’t know that I could amplify any more on
wlxat I have already said. I think it is a matter of degree.
In the recommendation to increase the earnings exemption to $1,680
we recognize the same principle as you. The question is at what point
would you not be giving an incentive, because there would be people
7
who would work anyhow and draw their full benefits. You would be
taxing younger people to pay for people who would work anyway.
What we are trying to do is find some point on that scale where
people are encouraged and given an incentive to work, but we do not
necessarily want to pay an annuity to people who would otherwise
work and not retire.
Representative B r o c k . I am willing to do that, but I question
whether we ought to keep that point oelow the poverty level. W e
keep talking about $3,000. I am not sure that $3,000 is anywhere near
adequate to somebody in New York City, for example.
Mr. C o h e n . Yes.
Representative B r o c k . It may be in my district, but it certainly in
some of the more metropolitan areas is not.
Mr. C o h e n . This gets into a problem on the statistics. The actual
poverty line for an aged individual 65 and over is $1,500, and for a
man and wife, $1,890. The $3,000 figure is where there is a man, wife,
and two children.
R ep resen ta tiv e B r o c k . I d o n ’t k n o w h ow m a n y p eop le y o u k n o w
w h o are t r y in g to liv e on $1,500 to d a y , w ith to d a y s c o st o f liv in g ,
b u t it is d o g g o n e d h a r d t o eke out a b are existen ce, an d I p e rso n alty
th in k i f w e w o u ld g o som ew h ere closer to $3,000, i t w o u ld be a lo t
better.

Another question, following Mr. Rumsfeld’s thought. On these
incentives, as I recall, there has always been this magic figure of 10
percent. I think Secretary Ribicoff, when he was Secretary, men­
tioned the maximum of 10 percent when you reach a point of diminish­
ing returns on the productivity of this program.
You say we haven’t reached itT and, of course, we haven’t today,
but we are programed to go beyond that, and I wonder if you have any
concern, because you are proposing a 20-year increase this year. Sub­
sequent Congresses probably will enact further benefits. How high
do you think we can go ? What is the point where we stop ?
Mr. C o h e n . I was with Secretary Ribicoff at the time lie made that
statement before the congressional committee, and after about a year
or two of discussions in congressional committee, the 5 percent level
was broken— eventually, not immediately— by including medicare.
A t the present time as you knowj the eventual, not current, total
employee tax rate would go as high as 5.65 percent, roughly 5%
percent.
R ep resen ta tiv e B r o c k . H
year?
75-314— 67— pt. 2------ 10




ow

h ig h w ill it g o fo r the 2 0 percen t th is

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THE 1967 ECONOMIC REPORT OF THE PRESIDENT

Mr. C o h e n . It will go to 5.8 eventually, not immediately.
Representative B r o c k . Y o u are getting close to 12 then overall.
Mr. C o h e n . Yes, overall. Now I think you always have to look at
that in terms of the distribution of income in the country. I think
there is, quite frankly, a limit to the use of the payroll tax as a method
of financing social security benefits. There is some point at which it
would be a big disincentive.
Representative B r o c k . Would you suggest going to general reve­
nues at some point in the future then ?
Mr. C o h e n . Well, I think it is something that ought to be looked
into, but before I would go to extensive general revenue financing, I
think that Congress would have to take a very hard look at the role
of payroll financing and general revenue financing, in relation to the
benefits that are provided, the distribution of income, and what other
types of programs it wished to finance in the income maintenance
field.
Now if Congress were going to some guaranteed income minimum,
some income deficiency program, in my opinion, that would have to be
paid out of general revenues. And you would want to examine first
the total type of program and its characteristics before you made a
decision about using general revenues.
Representative B r o c k . I certainly agree. I can ask you one other
question.
If you were 21 years old today, would you consider social security a
good investment?
Mr. C o h e n . I certainly would, for two reasons, sir.
First many people do not realize that social security provides life
insurance protection. A young man at 26 or 27 with two or three chil­
dren gets the equivalent under social security of a $40,000 or $50,000
life insurance policy, which I don’t think many young men who are
starting in the work force could provide on their own at that time.
Representative B r o c k . Did you ever, Mr. Cohen, inquire of any of
the insurance companies as to what kind of annuities or insurance pro­
gram they could furnish for the same amount of money ?
Mr. C o h e n . W ell, you see there is a difficulty of just looking at an
annuity. W e are providing three types of group insurance in a com­
bined package and that is the point ! am trying to make.

Social security is not merely a retirement program. A young person
gets $40,000 or $50,000 life insurance protection. The program also
provides disability insurance coverage without a medical examination,
which is very attractive to the middle-aged person when his family re­
sponsibilities are developing. He may have $40,000 to $50,000 disa­
bility insurance protection under social security. If he becomes dis­
abled he may be a tremendous burden on his family and his relatives.
Now, of course, if a man lives to 65, and he hasn’t died or become dis­
abled that is fine; but you should include the valid cost of the protec­
tion he has had over the years.
Representative B r o c k . I was interested to inquire of a local insur­
ance company in my hometown. If they provided the protection
against disability, the insurance, and the retirement program, all of the
advantages that accrue through social security, what would be the
premium charge to a 21-year-old, and it was significantly lower than




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the premium charge, if you want to call it that, for social security tax
that that individual pays.
O f course, the obvious difference is that there is as you mentioned
earlier, there is this fact that theirs is funded. It is invested.
Mr. C o h e n . Y o u are touching on an important point. What they
charge you, I am quite sure, is the equivalent of what the employer and
the employee contribute.
Representative B r o c k . No; I asked for a dollar figure, and I com­
pared it with what the gross figure was, and then what the individual
paid.
Mr. C o h e n . I would like to see it then, Mr. Brock. I don't think
it is correct.
Representative B r o c k . I am saying that it was lower than the
joint figure. I am not saying it is lower than the individual, but I
am saying that somebody has got to pay the joint figure. It is dol­
lars that come out of somebody’s pockets. This is hypothetical, and
just an interesting philosophical inquiry.
Mr. C o h e n . It is so easy to think of the Social Security System as
just a retirement system and it is true if a man pays all his life and
dies at age 64 and he is not married and he has no children, he has
paid a whole lifetime without getting anything back. But that is
part of the risk. I pay fire insurance and automobile insurance, and
I am glad when I do not have to get anything back on that.
Representative B r o c k . All I am trying to point out here, sir, is
not any suggestion that we change what we are doing at all; but I
am saying that when you start talking about funding this program
out or general revenues, you are going to open a Pandora’s box, be­
cause there is a very distinct choice then that we must, I think, in
good faith, offer an individual, if he can acquire an equivalent pro­
gram at the same cost.
I f you are going to fund it out of general revenues, then we have
got to give him an alternative, so that he has a right to make his own
decision.
Mr. C o h e n . Let m e just put it this way— general revenue financing
opens up a number of questions.
Representative B r o c k . Yes, sir.
Mr. C o h e n . O f w h ich th a t is o n ly one o f th e questions.
Representative B r o c k . Thank you very much.
Chairman P r o x m ir e . Thank y o u , Mr. Brock.
I might say that I want to pursue the line which Mr. Brock was
pursuing.
It seems to me what is overlooked here is that the man who takes
out an insurance policy with a private insurance company doesn’t
have Congress behind the private insurance company, and 35 years
ago what was the maximum payment when the program started ?
Mr. C o iie n . LT
nder the original act, as I recall, it was $85.
Chairman P r o x m ir e . What was the minimum ?
Mr. C o h e n . Ten dollars.
Chairman P r o x m ir e . Minimum monthly payment ?
Mr. C o h e n . Ten dollars.
Chairman P r o x m ir e . Ten dollars a month ?
Mr. C o h e n . A m on th .
Chairman P r o x m ir e . O f course, h e w o u ld be stu ck w ith th at.




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But Congress comes along and doubles it, triples it, and now it is
going to be seven times as big as that, so I think it is quite a differ­
ence.
Mr. C o h e n . You made a most important point, Senator Proxmire,
and that is when you take out a private insurance policy under con­
tract, yon usually get a fixed number of dollars in return.
Chairman P r o x m ik e . That is right.
Mr. C o h e n . But under social security, although I don’t want to pre­
dict what future Congresses will do, you really have what I call a
dynamic benefit.
Chairman P r o x m ir e . You sure do. I want to come to that, which
I think is one of the most fascinating aspects of this. But, first, I just
want to add my word to what has been implied, and I would go much
further than some of the other members.
I would knock out the limitation on income for social security bene­
ficiaries entirely. It seems to me it goes back to the old theory that
we have a scarcity of jobs, and an abundance of labor, that we can’t
possibly solve our unemployment problem, and I think we are getting
into a position now where we are confident we can.
In that kind of a society we want people to work if they want to
work. W e have two unfortunate immediate impacts.
One is it would increase the cost of the fund, and I think that even
though they get revenues from people working, it wouldn’t overcome
that.
The other part, of course, is that unemployment statistics would go
up, but I think those are both minor and superficial, compared to the
advantage of getting people to produce as long as they want to.
Now Iwould like to go back to the question I asked when I finished
previously, and you had replied in part. But my question was how
do we know to what extent our resource-building resources, in other
words, the people who are the instructors, teachers and so forth, are
being fully utilized, and what kind of priority system is possible and
feasible that we can set up to determine this? These are priorities
within the Federal Government.
Mr. C o h e n . Within the Federal Government?
Chairman P r o x m ir e . Within the Federal Government; recognizing
we can order States and private people around.
Mr. C o h e n . Yes.
W ell, I would say in the Federal Government we are only beginning
to do it.
Chairman P r o x m ir e . Don’t you think we ought to ?
Mr. C o h e n . Yes, I do.
Chairman P r o x m ir e . Isn’t this the very heart o f growth and de­
velopment?
Mr. C o h e n . Right. Now we have instituted, as you know, in the
last couple of years under Assistant Secretary Gorham, a new system
of program planning and budgeting, which is an attempt to make a
cost effectiveness analysis of our programs. I think this bears par­
tially on the question, because I happen to believe that the training
programs have a higher degree of effectiveness than almost any other
programs.
Chairman P r o x m ir e . Secretary Wirtz said yesterday that in terms
of welfare costs, a training program would pay for itself in 2 years.
In terms of Federal tax revenues, it would pay for itself in 4 years.




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It is just insane under those circumstances for us not to recognize
this. Speaking strictly from a conservative fiscal standpoint of min­
imizing the cost to the taxpayers, let alone the humane elements which
are far more important.
Mr. C o h e n . I think I would say it is probably more difficult th an
Secretary Wirtz indicated.
Chairman P r o x m ir e . He wasn’t saying it would be easy at all. He
recognized the very serious problems of getting the instructors in the
right place.
Mr. C o h e n . Eight*
Chairman P r o x m ir e . And getting the know-how and so fo r th .
But he said that this from an economic standpoint is the answer.
Mr. C o h e n . There is no question about this from a strictly econom­
ic point of view. Let me just give you an illustration. I f we had the
Milwaukee Vocational School in every major metropolitan area of
the country, I think that there would be many more of these young
people at work.
Chairman P r o x m ir e . I agree with you. That is maybe not the
No. 1— or maybe it is the No. 1. But the prime asset in Milwaukee is
the fact that we have trained manpower. I read this and I don’t
know if it is true, that we spent something like 17 times as mudh in
Milwaukee on vocational education as they do in Philadelphia.
Whether those figures are true or not I don’t know.
Mr. C o h e n . O f course, th e Milwaukee Vocational School is not a
1-year wonder. It has been developing in Milwaukee for 50 years
and it has gained community acceptance. The quality of teacher in­
struction and the relationship with the labor unions and the employ­
ers has been excellent.
The unions and the employers are accepting this training. They
are taking these graduates. l?hey are helping the school. There are
many communities in this country that are so far away from what is
being done in Milwaukee. I think that there is a lot ox other training
that could be done. For example, Mr. Scheuers whole thrust in get­
ting us to train people for a whole host of what I call relatively un­
skilled jobs, is relatively untapped in this country.
Chairman P r o x m ir e . How about the possibilities of developing a
priority system? Can this be done? I left off at the end of my ques­
tioning before when I had finished my 10 minutes, with a reference
to the space program, for example.
W ell, that may not be very relevant, but I know the Federal Gov­
ernment is getting more, and more, and more, educational programs
and getting to have a greater and greater influence on education, and I
think we have to be very careful about leaving the States and localities
with as much discretion as possible. But at the same time it would
seem that even an announcement of an indication of where the priori­
ties would be, that that would be most helpful.
'
Mr. C o h e n . Yes, I think y ou are right. I don’t know whether this
would help, but I would say Mr. Scheuer’s amendments to the Econom­
ic Opportunity Act, if proved successful, as I think they have been,
should indicate that more money ought to be invested in the OEO pro­
gram for training people in these very marginal areas.
I think also the instructors can come from the same area as the
trainees. Wcrure not talking about Ph. D. training now. W e are not




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THE 19 67 ECONOMIC REPORT OF THE PRESIDENT

talking about electronics. W e are not taking about plastics. I am
talking about training people who can perform unskilled work in State
hospitals; the people who will take care of the linens and the food dis­
tribution in hospitals, about unskilled staff who can work in nursing
homes, about all sorts of aids in the educational process; for example,
in the Headstart program.
I don’t think we have to elevate this so high that it would take 5
years to accomplish. I think that you can train people for a whole
host of jobs that are going begging at the present time, and I think,
as Secretary Wirtz said, it would be a good investment. Some of them
would come off the welfare rolls, maybe not all of them, but many of
them could.
Chairman P r o x m i r e . N o w I want to ask you about something else.
This is from what I think is a very delightful column by Paul Samuelson, you may have read it, on social security in the current issue of
Newsweek. I would like to read three short paragraphs because I
think that they pose a most interesting problem that has been raised
here but do it, I think, in a very dramatic way:
The beauty about social insurance is that it is actuarially unsound. Every­
one who reaches retirement age is given benefit privileges that far exceed any­
thing he has paid in and exceed his payments by more than 10 times as much
or fire times counting einployer-employee payments. How is this possible?
It stems from the fact that the national product is growing at compound
interest and can be expected to do for as far ahead as the eye can not see.
Always there are more youths than old folks in a growing population. More
important, with real incomes growing at some 3 percent per year, the taxable
base upon which benefits rest In any period are much greater than the taxes
paid historically by the generation now retired- And social security unlike
actuarial funded insurances is untouched by inflation.
After Germany's terrible 1923 inflation, private insurance was wiped out but
social insurance started all over as if nothing had happened. Social security
is squarely based on what has been called the eighth wonder of the world*
compound interest. A growing nation is the greatest Ponzi game ever contrived,
and that is a fact, not a paradox.
Now the question is are you presiding over “the greatest Ponzi game
ever contrived,” and isn’t this ponzi ^ m e possibly based not only on
Samuelson’s most optimistic assumptions about a continuously grow­
ing economy, and this is the kind of talk we got in 1929 you know, and
we do live, as you say, in a capitalistic system.
W hat happens under these circumstances with only 1 year’s reserve
funds, if we suffer a cyclical, a serious cyclical setback and suffer a
serious recession?
Mr. C o h e n . W ell, first, let me say I would rather feel that I was
presiding over the eighth wonder of the world than over a ponzi game,
and I do think that there are some really miraculous principles in­
volved in social security.
Chairman P r o x m i r e . You see all this is based on the assumption
that you are always going to grow.
Mr. C o h e n . Yes.
Chairman P r o x m i r e . Y o u are always going to move ahead.
Mr. C o h e n . There is a built-in conservative influence in the ac­
tuary’s estimate because he assumes a level wage in his actuarial es­
timates. He does not assume a constantly increasing wage based on
an increasing gross national product. So that is part of the reason
why periodically in the reevaluation o f the actuarial estimates, you
can improve benefits. I f wages do go up, you get more income into




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379

the system, which can be used in benefit payments. Mr. Myers, for
I think all of these 30 or 35 years, has always used a level wage.
Chairman P r o x m ir e . The mcreased base will go u p .
Mr. C o h e n . Yes, and I think as that base goes up and as earnings
go up and you get more income into the system you can somewhat
improve the system. But I do feel that the social security system
basically is a method by which at any given moment, society, through
Congress, can decide how to distribute part of the gross national
product.
I don’t want to be overoptimistic, but as you said earlier, I think
you can get a better deal out of the dynamic adjustment of social
security than you do from a fixed contract from a private insurance
company.
Chairman P r o x m ir e . You indicated earlier you were very concerned,
may be I don’t use the right adjectives but you were somewhat con­
cerned about the size of the reserve fund. You would feel better at
least if it were bigger rather than as small as it now is.
Mr. C o h e n . I th in k 2 or p o ssib ly 3 y ears o f benefit p a y m e n ts w o u ld
b e m ore protective to th e system .
Chairman P r o x m ir e . That would

be a lot bigger than it is now. It
is only 1 year.
Mr. C o h e n . It is only 1 year at the present time.
Chairman P r o x m ir e . What is it, $23 billion? It should be $46
billion ?
Mr. C o h e n . About $45 or $50 billion would be 2 years.
Chairman P r o x m ir e . I suggest what we should do as soon as pos­
sible, maybe we should instead of waiting until January 1, strictly
from this standpoint, disregarding the economic problems, and I want
to come back to that right away, out maybe what we should do is im­
pose a social security tax increase July 1.
Mr. C o h e n . Well, it is very difficult to do.
Chairman P r o x m ir e . Particularly we might do that if we decide
not to go ahead with the surtax.
Mr. C o h e n . The problem of changing the social security tax in the
middle of the year becomes very, very complicated for employers.
Chairman P r o x m ir e . They need that much time!
Mr. C o h e n . It isn’t a matter of time.
Chairman P r o x m ir e . They start at the first of the year.
Mr. C o h e n . They start at the first of the year and by April or May,
they have already collected the full tax on the wage base of $6,600 from
high-income employees. I f you levy the new tax, would the employer
start all over? There are some complications. But it is not easy to
levy a new tax in the middle of the year.
Chairman P r o x m i r e . Rather than bite into this little surplus, it
would seem to me it would be better for us to maybe impose a slightly
higher tax than has been proposed until we build up the reserve to
this 2- or 3-year level.
Mr. C o h e n . O f course, it doesn’t------Chairman P r o x m ir e . We can make other economic adjustments.
Mr. C o h e n . Yes.
Chairman P r o x m ir e . A s far as economics, by not increasing th e
surtax, or by tax reductions.
Mr. C o h e n . The amounts are all significant, but, of course, the dif­
ference for the last half of the year is in the nature of $2 billion.




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1 9 67 ECONOMIC REPORT OF THE PRESIDENT

Chairman P r o x m ir e . I f you are going to build up a $50 billion re­
serve, instead of a $23 billion reserve, and do it in a reasonable time,
you would have to have a fairly substantial tax increase.
Mr. C o h e n . Y e s , y o u w o u ld . I d o n ’t kn ow h o w r a p id ly it w ou ld
be p ossible to d o th at.
Chairman P r o x m ir e .

And certainly under this system it would be
a wise thing to do. You want to do it now, not in a period when the
economy is moving downward.
Mr. C o h e n . No, and of course, you wouldn’t want to build it up so
fast. You probably wouldn’t want to build it up more than a couple
billion dollar a year.
Chairman P r o x m ir e . N o . That would be 25 years.
Mr. C o h e n . It would take some time to do it.
Chairman P r o x m ir e . Fifteen years.
Mr. C o h e n . Yes.
Chairman P r o x m ir e . Let me just ask a couple of questions before I
yield to Congressman Scheuer. These will be brief.
W hy not tie the social security benefits to the cost of living?
Mr. C o h e n . That is a very intriguing suggestion that has many
pros and cons. I think on the pro side, individuals would feel a sense
of assurance or security to know that if the price level went up, they
would get the increased benefits. Congress, as jo u know, has adopted
cost-of-living adjustment for military and civil service retirement
benefits, and I think Federal workmen’s compensation. The argu­
ment on the other side I think is twofold.
One question that arises is that if Congress did make the change,
would there be a tendency to preclude periodic reexamination of the
benefit level ?
Chairman P r o x m ir e . I would doubt it. Knowing how popular this
is and how receptive and responsive we are to what our constituents
are interested in, the way these things go, they are almost unanimous.
Mr. C o h e n . There is another point that M’ember of Congress have
made to me. They say: “W e prefer not to put the increase in bene­
fits in the hands of the bureaucrats. Congress is here every 2 years.”
Chairman P r o x m ir e . W e like t o d o it every 2 years.
Mr. C o h e n . Members of Congress say: “W e like to do it every 2
years or so and we prefer to do it rather than have some automatic ad­
justment.”
Another factor is the problem of an incentive for inflation. An in­
flation proof benefit makes a person, you might say, perfectly willing
to accept inflation. I f 23 million beneficiaries believe: “Inflation
doesn’t make any real difference to me because my social security
benefit will be increased,” will they become less opposed to inflationary
pressures? Congress has provided automatic adjustment provisions
m several small systems, as I mentioned. But what would be the effect
if you did it as a general matter of policy, affecting 20 or 25 million?
Chairman P r o x m ir e . The last question I have is the percentage that
are pulled into— I don’t know if you can give this, make a rough esti­
mate— pulled into the poverty class for each 5-percent increase in the
cost of living? You have told us how to get people out of the poverty
class by an $11 billion investment. Do you have any notion at all, or
is there anyway we can compute how inflation pulls people into the
poverty class by diminishing the value of their income?




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Mr. C o h e n , You have t> make a static assumption there that the
o
cost of living goes up but their earnings do not go up.
Chairman P roxmire. That is correct. I am talking particularly
about people who are on fixed income.
Mr. C o h e n . W e will try to make an estimate of that for you.
(The information referred to, subsequently filed for the record fol­
lows:)
Question: What is the percentage that are pulled into the poverty class for
each five percent increase in the cost of living?
Ansiter: The SSA poverty index has been adjusted year by year to reflect
changes in the cost of living. More precisely, the estimated food costs at the
poverty level have been increased in proportion to rises in the per capita cost of
the U.S. Department of Agriculture economy food plan.
From available data, it is clear that as the state of the economy has improved,
those groups who could take advantage of increased earnings opportunities have
declined as a proportion of the total poor. For them the effect of price rises
has been more than offset by increased employment and higher earnings levels.
It is the groups on fixed incomes—primarily the retired aged, and families
headed by women who cannot work—who have been most seriously disadvan­
taged by price increases, although social security benefit increases resulting
from the 1965 amendments helped some of them.
The SSA is looking into the possibility of developing some rough estimates
of the proportion of aged retired persons in fixed incomes who would faU below
a poverty line 5 percent higher than that used for 1965. We do not have these
estimates at this time. It should be noted that, since food prices may not rise
as fast as the total consumer price index, the poverty line may not—presum­
ably will not—rise as much as the “cost of living” in any given period.
Chairman P r o x m ir e . Congressman Scheuer?
Representative S c h e u e r . I am very grateful to the chairman for
his kindness and consideration in letting me ask you some questions,
Mr. Cohen.
Chairman P r o x m ir e . Let me tell you, Congressman Scheuer, judg­
ing by the questions you ask, we are mighty happy to hear them. I
thmk we ought to make you an honorary member.
Representative S c h e u e r . I accept. I had a small taste of being hon­
orary chairman for a few seconds. The chairman is very generous in­
deed, and I am grateful.
Mr. Secretary, I enjoyed your always stimulating and brilliant tes­
timony very much. I recall in your testimony you referred to the fact
that administration proposals for additional funds for the elementary
and secondary educational program will help us reach an additional
million culturally deprived children.
Can you tell us what the total constituency is of culturally deprived
children in the elementary and secondary years?
Mr. C o h e n . Do you mean sort of conceptually or numerically ?
Representative S c h e u e r . H o w many culturally deprived kias do
we have in this country ?

Mr. C o h e n .

O h , how m any do we have ?

Representative S c h e u e r . very roughly.
Mr. C o h e n . I would start with the 14 million children who live in
families below the poverty level. I would say some of them are not
culturally deprived, and some of those with incomes over that are.
My target figure would be in the nature of 10 to 15 million children.
Representative S c h e u e r . That seems reasonable. How many of
them are we reaching now, impacting in some way ?
Mr. C o h e n . Last year under the Elementary and Secondary Act
there were 7 million children who benefited in some way under title I.




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So, roughly, you might say we are reaching somewhere between a half
to 70 percent of the total.
Representative S c h e u e r . That is certainly a very respectable total
if the impact were a real one and a meaningful one and not a trivial
one.
On the question of Headstart, we had about 187,000 kids involved
in the fiscal 1967 Headstart program. They now have applications,
actual registration forms, for 400,000 kids, and we have a constituency
there of about 2.5 billion kids. How many kids in the preschool area,
where from the evidence that we have adduced we seem to have hit real
paydirt in helping those kids begin to make a go of their school situ­
ation, how many kids will be impacted by your Headstart proposal
this year?
Mr. C o h e n . I think, and you correct me if I am wrong, that your
committee put $350 million into the Headstart program last year, and
I think the President’s recommendations this year involve substanti­
ally the same amount, but giving a greater degree of priority to the
children in the year-round program, rather than the summer programs.
Representative S c h e u e r . That is right; 187,000 in fiscal 1967 were
year around.
Mr. C o h e n . Tes. So, that while there is no appreciable increase of
money, the experience has demonstrated so well that the large num­
ber— 500,000 who were in the summer program— could benefit from
a year-around program.
Representative S c h e u e r . Yes; there was a large number.
Mr. C o h e n . The administration would like to start the year-round
program. The President has included in the OEO budget $135 million
for the followthrough to start in the first three grades. Actually, there
isn’t going to be any net expansion in the Headstart program, but the
real expansion comes in the continuity of Headstart— starting with
the first grade and then going on. I think the idea is rather than
putting more money into Headstart at the present time, we should see
how much we really can justify as a bona fide expenditure by following
through and retaining the advantages that occurred between the ages
of three and five up through the ages six to nine.
I think the philosophy behind this recommendation is that if we
can demonstrate that the idea of Headstart is correct, although we
can’t yet, but I think it probably was the belief of your committee in
the House and the administration that that is correct, then we ought
to follow through in successive years with a great deal more money in
the whole Headstart program and title I of the Elementary and Sec­
ondary Education Act.
Representative S c h e u e r . This really gets to my question. I think
you are a thousand percent correct in not only the validity of the Head­
start approach, but also of the absolute inaispensibility of following
through with Headstart kids when they get to the public school sys­
tem. I am sure you are familiar with the Max W olfe study.
Mr. C o h e n . Yes.
Representative S c h e u e r . Where the public school system isn’t doing
the job, the Headstart kids who are doing very well, not only don’t do
very well in school but they actually go to the bottom of the class.
f c . C o h e x . Yes.
Representative S c h e u e r . It is a very disillusioning experience.




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383

Mr. C o h e n . I think we need some more studies like the W olfe study.
Representative S c h e u e r . Yes.
Mr. C o h e n . W e need them either to confirm or replicate or diversify
our experience. I f what the Wolfe study shows is correct and if
Congress believes that it is so, I would hope that then in the next 5
years Congress will put much more money into title I for this purpose.
Representative S c h e u e r . My question would be this: Don’t we know
enough to know that we could invest far more resources in this con­
tinuum of Headstart and followthrough? Isn’t there enough evi­
dence that this does make a qualitative difference in the way the kids
catch on in school, and if we consider that the billion dollars that we
spent on title I was, in itself, only perhaps a 2- or B-percent increase
in the elementary and secondary school budget, the $135 million that we
are talking about for followthrough for the first couple of grades is
really trivial in scope. W hy aren’t we doing a better and a bigger j ob ?
Mr. C o h e n . I think there is another factor though, Congressman
Scheuer, that enters in. The Coleman study on the equal opportunity,
and other studies I have seen, indicate to me that there is one other
factor, and that is the home environment. The President’s message,
which he sent to Congress today, stresses the child and parent centers.
I think that it is also important in Headstart, or followthrough pro­
grams to add a component for reaching the parents so that whatever
this element, let’s call it motivation for the sake of another word,
that is put into both the child is also put into the parent. Educational
attainment, work incentives, improvement, followthrough in the
family, the child, and the community should all interlock.
Representative S c h e u e r . I couldn’t agree more. I think one of the
things the Headstart program proved to the school system was the
absolute necessity of parent attitude, involving the parents. The
President’s program that is coming up today is really an elaboration of
the experience we learned in Headstart.
Mr. C o h e n . It is.
Representative S c h e u e r . My question is: taking the President’s
program that is coming up today, and Headstart, and followthrough
as a continuum, why aren’t we now devoting vastly greater resources
to this program ? And I will take the suggestion of Senator Proxmire
as indicative of the kind of point I would like to make, where he
quoted Secretary Wirtz yesterday as saying that when we invest
resources in the most difficult single minority of our population, the
long-term, hard-core structurally unemployed, we get it back in 2
years in welfare savings, and we get it back again, double our money,
so to speak, in the first 4 years when these people are on a taxpaying
status.
Now, if you can apply this kind of a cost-benefit payout of such
spectacular success with the most difficult single group in our popula­
tion, why can’t we apply the same kind of cost-benefit analysis to the
expenditures of the early years before the trouble really gets to be
deeply rooted, when I think we all agree that a dollar saved now will
save $10 or $20 later on in juvenile delinquency costs and in the costs
of very expensive programs like Job Corps, when these kids get to*
gether high school dropouts and functional illiterates in 8th grade.
Don’t we know enough about the cost-benefit implications of these ex­
penditures early in the child’s life to feel that on an actuarial basis,




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1967

ECONOMIC REPORT OP THE PRESIDENT

from the point of fiscal and economic policy, as Senator Proxmire
pointed out, we ought to be putting vastly more resources into this
continuum now?
Mr. C o h e n . Although mathematical proof of it is not always down
on paper to say that we know enough, I happen to believe that it is
true, and as I read the material that comes across my desk, it convinces
me that what I believed previously is true.
But I do think that we have to develop more concrete evidence
through what I call longitudinal studies that follow the family for
15 or 20 years, to show how these increased investments in the educa­
tional system really pay off. I think they will pay off, and I agree
with you the $100 million more spent between ages three and seven has
a very good payoff.
Representative S c h e u e r . Y ou wouldn’t advocate that we wait until
the Headstart kids from last summer graduate from graduate school
to decide whether the Headstart program last summer paid off.
Mr. C o h e n . N o . I would prefer to operate on my biases and preju­
dices than wait for that statistical information to come in.
Representative S c h e u e r . Good. I hope this will be translated into
programmatic requests from the Congress. Just one last question,
because I know the hour is getting late.
W e have had two reports from the National Advisory Council on
title I, two reports that I consider the most sensitive and compassionate
and brilliant pieces of “govemmentalese,” if I may say that, that I
have ever seen. They were really of the highest quality of excel­
lence. W e know how title I is functioning. W e know the deficiencies,
we know the pluses and the successes too. W e have heard a great deal
of discussion in recent months of doing away with the grant-in-aid
program, doing away with the tax-sharing— the Heller program—
we have heard of. Based on the successes and the failures of the title
I program, which did operate through the States, what is your
reaction as to whether we should continue the grant-in-aid programs
with the Federal guidelines and the criteria and so forth, and some
Federal presence, or do you think we can afford to wipe the slate clean
and proceed with the States and the cities in these vast educational
programs which we hope will be upcoming pretty soon, on a general
tax sharing formula ?
Mr. C o h e n . W ell, I have to again admit to a prejudice in answering
that question. I personally favor very strongly what I call categorical
rograms as you might say, contrasted to something like the Hellerechman plan, and I favor categorical programs, because I think
what they do is they establish a national priority determined by
Congress as to what it thinks is important.
I am perfectly willing to admit that Congress can in its wisdom
make a mistake, and be either too narrow or too limited, but I think
on the whole, deciding you want to eliminate air pollution and rifling
in on that objective by merging all your available resources to attack
it for a period of time is certainly a reasonable decision on the part
of Congress. Or trying to deal with disadvantaged children, or Head­
start, or whatever else you want to deal with in the same way, because
it expresses the national interest and it rationalizes resources, and it
directs public attention to the problem.

g




THE

1967 ECONOMIC REPORT OF THE PRESIDENT

385

It helps people train, knowing that a program exists, to get jobs, to
have an opportunity to be employed, and thus be of service.
However, on the other side now, quite frequently we have estab­
lished categorical programs, and then after we have attained a large
part of our objective, we tend sometimes to keep the program from
responding to changing emphasis or priorities. I don’t think that
because we have established a program at a particular time it ought to
remain the same program forever. You might be able to modify or
merge it.
Now taking your point, I think that maybe 10 years from now or
8 years from now, title I, Headstart, followthrough, maybe some other
education titles, might be enveloped in a broader educational category.
Representative S c h e u e r . W e certainly hope they will be embraced
by the public education system itself, don t we ?
Mr. C o h e n . Now that is part of the problem. You see, you have
touched on it. The fact of the matter is we have had such notable
weaknesses in many local educational boards and agencies throughout
the country that Congress really said “ Gee, we can’t afford to allow
some people to decide not to do these things for our children. W e
4re going to make the categorical grant very attractive.” And they
1
did, title I is a 100 percent Federal grant if the community has a main­
tenance of effort provision for dealing with disadvantaged children.
W ell, I guess there are 17,000 school districts now participating in
title I, and that is what Congress wanted. I would be the last to say
that Congress exercised an unwise judgment in making that decision.
But if after 5 or 8 or 10 years and you have attained 70 percent of
your objective, you might then add some other elements and make a
broader category. I think that it is perfectly reasonable for Congress
to do this.
I think you can undertake the Heller-Pechman plan in addition to
rsome of these things, but I strongly would not like to see categorical
programs that are meeting the national interest, and those aimed at
national interests not yet attained, eliminated. I might say this for
Senator Proxmire— the lesson I learned at the University o f Wiscon­
sin under my professors who were most concerned about retaining a
Federal-State-local system was that the categorical grants allowed you
to attain a national objective with a decentralized method of adminis­
tration. In our creative Federal system, you can meet national needs
with Congress acting as the board of directors. I think experience,
despite all the trials and errors and difficulties, has shown in these last
;30 years that a lot has been accomplished.
R ep resen tative S c h e u e r . I th a n k y o u .
Chairman P r o x m ir e . Thank you again, Mr. Scheuer, for your fine
-questions.
I want to thank Mr. Myers and Mrs. Merriam as well as Secretary
Cohen, and I can tell you, Mr. Secretary, that Wisconsin and Mil­
waukee are mighty proud of you and I think they are very proud of
your performance this morning, which has been excellent, responsive,
and thoughtful and very welcome.
The committee will reconvene tomorrow morning at 10 o’clock to
liear the noncontroversial Chairman of the Federal Reserve Board,
Mr. Martin. Thank you.
(Whereupon, at 1 p.m., the committee adjourned until Thursday,
^February 9,1967 at 10 a.m.)







THE 1967 ECONOMIC REPORT OF THE PRESIDENT
THURSDAY, FEBRUARY 9, 1967
C ongress of t h e U n it e d S t a t e s ,
J o in t E c o n o m ic C o m m it t e e ,

,

Washington D.C.
The joint committee met at 10:05 a.m., pursuant to recess, in room
S-228, the Capitol, Hon. William Proxmire (chairman of the joint
committee) presiding.
Present: Senators Proxmire, Talmadge, Symington, Miller, and
Javits; and Representatives Bolling, Reuss, Griffiths, Moorhead, Cur­
tis, Widnall, Rumsfeld, and Brock.
Also present: John R. Stark, executive director, James W . Knowles,
director of research, and Donald A . Webster, minority economist.
Chairman P r o x m ir e . The committee will come to order.
Our witness this morning is the very able Chairman of the Federal
Reserve Board, who is an old friend of the committee and a man who
has been sitting on the hottest economic policy seat in Government for
the last year or so.
You are welcome here this morning, Chairman Martin. Go right
ahead.
STATEMENT OF HON. WILLIAM McCHESNEY MARTIN, JR., CHAIR­
MAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYS­
TEM; ACCOMPANIED BY DANIEL H. BRILL, SENIOR ADVISER TO
THE BOARD AND DIRECTOR, DIVISION OF RESEARCH AND STA­
TISTICS; AND ROBERT SOLOMON, ADVISER TO THE BOARD AND
DIRECTOR, DIVISION OF INTERNATIONAL FINANCE
Mr. M a r t i n . Senator, may I start by congratulating you in assum­
ing the chairmanship of the Joint Economic Committee, and assure
you that the Federal Reserve System wants to do everything in its
power to help the committee in pursuing its work.
Chairman P r o x m ir e . Thank you very much.
Mr. M a r t i n . Monetary policy is unique among the economic tools
available to Government in the promptness and flexibility with which
it can be adapted to changing economic circumstances. This capacity
for prompt, flexible adaptation has been essential over the past year
and a half— and it has been amply demonstrated. Within this short
period, monetary policy had first to play a major role in moderating an
excessively rapid expansion that was generating strong upward price
pressures. And when— within the year—the pace of expansion was
brought into better balance with the growth in resources, financial




387

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THE 1967 ECONOMIC REPORT OF THE PRESIDENT

restraint was relaxed and policy turned promptly toward encouraging
increased flows of money and credit.
The timing of changes in policy, as well as the degree to which poli­
cies of restraint or ease may be carried, are necessarily matters of judg­
ment. There is still much to be learned about economic stabilization
policies, both fiscal and monetary, in a high employment environment.
Nevertheless, the difficulties encountered should not be allowed to
obscure the rapid and favorable response of the economy to changes
in the direction of monetary policy. For example, since indications of
abating inflationary pressures last fall made it possible for monetary
policy to be redirected toward ease, interest rates have come down
swiftly, with some rates already below their levels of a year ago;
bank credit has expanded at a vigorous rate; inflows of savings to
thrift institutions have picked up very substantially; the housing out­
look has brightened considerably ; and resumption of more orderly
and balanced economic growth is in prospect. The experience of the
past year and a half should serve as a warning against underestimating
the resilience or responsiveness of the U.S. economy.
Nor should we overlook the substantial gains recorded by the econ­
omy last year, despite our valid concerns for those sectors of the econ­
omy that did not share fully in the advance. The year 1966 was one
of considerable economic achievement. Our gross national product
rose by 5% percent in real terms, well above the long-term growth
trend. More than 3 million workers were added to the Nation’s pay­
rolls, and the capacity of our factories grew by almost 7 percent.
Moreover, for the first time in over a decade, the United States was
able to achieve substantially full utilisation of its growing resources.
Unemployment fell below 4 percent, the lowest level since 1953. And
unutilized industrial capacity declined to the lowest level since 1955.
This was an impressive performance, one in which we all can take
some satisfaction.
But the record was not unblemished. Indeed, in pushing forward
under forced draft, some serious strains and distortions emerged in the
structure of production, finance, and our balance of payments— flaws,
which if not corrected, could seriously hamper our ability to sustain
rapid economic progress. Let me touch on the most important of
these, for there are lessons to be learned by policymakers in all
branches of Government from the failures as well as the successes of
economic policy.
First, as we approached full utilization of resources, demand pres­
sures manifested themselves in a strong and pervasive rise in costs and
prices. In an economy where many wage contracts are geared to
cost-of-living changes, yesterday’s price increases become tomorrow’s
cost pressures. It may prove difficult to avoid, in 1967, some reflec­
tion m costs and prices o f the failure to restrain adequately the infla­
tionary pressures of 1966.
Second, the excessively rapid pace at which domestic demands grew
meant thafc they could not be satisfied from domestic sources alone.
Our imports of materials and finished goods— particularly capital
goods— surged. And although U-S. exports continued to rise sorae^
what faster than their long-term uptrend, our favorable n^t balance
on international trade was seriously reduced— by almost one-fourth.




THE

1967 ECONOMIC REPORT OF THE PRESIDENT

389

Third, rapidly rising demands by Government for defense needs
and by business for capital investment programs preempted a large
share of our physical and financial resources. Homebuilding was
elbowed to the rear of the line; residential construction activity was
reduced far below the levels needed to meet our long-term housing
needs.
No country can long sustain economic progress if wages and prices
keep leapfrogging each other, if it continues to lose ground in inter­
national commerce, or if it permits serious imbalance in the composi­
tion of output. The task of stabilization policy last year was to strike
at the root cause of these distortions and imbalances— an overrapid
pace of expansion of aggregate demand.
The need for moderating expansion became evident even before 1966
began, as acceleration in defense outlays was added to the stimulus to
private spending provided by earlier monetary expansion and the tax
reductions of 1964 and early 1965. In the final months of 1965, eco­
nomic activity spurted— but so did prices. The rate of increase in the
■GNP deflator— which measures the extent to which the dollar growth
in GNP is a result of rising prices rather than rising output—doubled
in the fourth quarter of 1965.
Moreover, increasing evidence was becoming available to suggest
that demand pressures would intensify further. Restraint was needed
and needed promptly.
As the current report of the Presi­
dent’s economic advisers puts it, “A ll in all, the economy exceeded rea­
sonable speed limits in the period from mid-1965 through the first
quarter of 1966.”
In response to intensification of inflationary pressures, Federal Re­
serve policy moved toward greater restraint. This was signaled by
the announcement in December of an increase in the discount rate from
4 to 4^/2 percent. To prevent an abrupt constriction in the flow of
-credit, the maximum rate banks could pay for time deposits was raised,
and reserves were provided generously through open market opera­
tions over the subsequent year-end period, weeks usually marked by
turbulence and crosscurrents in financial markets.
Net reserve availability was reduced gradually in early 1966, and
increasingly, banks were forced to turn to the discount window to ob­
tain additional reserves. Their borrowings from the Federal Reserve
rose from an average of about $400 million in January to about $700
million by June.
A t certain critical times, however, such as around the March-April
tax period and again around the midyear tax period, nonborrowed
reserves were supplied to banks in substantial volume to help moderate
the temporary but intense money market pressures being generated
by enlarged corporate needs for funds to meet accelerated taxpayments.
W ith business loan demand strong, failure to provide additional re­
serves to banks at these times would have prompted more rapid
liquidation of bank holdings of securities; the consequent rise in in­
terest rates would have accelerated the outflow of funds from thrift
institutions to financial markets. It would also have prompted even
more widespread and aggressive efforts by banks to attract consumer
savings into time deposits. Such efforts would, have intensified the
developing shortage of mortgage money at a time when financial
supervisory agencies lacked the flexible authority— granted by Con75-314— 67— pt. 2------ 11




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1967 ECONOMIC REPORT OF THE PRESIDENT

gress later in the year— to limit excessive competition for savings
funds.
Nevertheless, in the absence of greater fiscal restraint, the basic
economic situation continued to oblige the Federal Reserve to maintain
an overall posture of monetary restraint. Prices were continuing to
rise rapidly; in the second quarter of the year, the GNP price deflator
increased at over a 4-percent annual rate. Successive surveys of busi­
ness plans for capital spending indicated that the exceptionally strong
advance in business captal outlays was likely to continue. Pressures
on financial markets mounted as businesses sought credit at banks and
in capital markets to finance current needs and prospective capital
spending programs, and enlargement of the Federal Government’s
financing requirements added to these pressures.
To limit expansion of bank credit and moderate bank competition
for savings, the Federal Reserve raised reserve requirements against
time deposits in June and again in August, and reduced the maximum
rates banks could pay on certain maturities of time deposits. Com­
mercial banks found it increasingly difficult to compete effectively for
large blocks of corporate liquid funds, as market rates on competitive
instruments rose to— and subsequently above— the ceiling rates on
large denomination certificates of deposit.
Some banks with branches abroad were able to compensate, in part,
for reduced availability of domestic sources of loanable funds by bor­
rowing through their branches in the Eurodollar market. This ab­
sorbed dollars that might otherwise have flowed to foreign monetary
authorities, and as a result, the U.S. balance of payments on an official
settlements basis moved into substantial, though temporary, surplus
in summer.
But not many banks had direct access to foreign sources of funds.
The Federal Reserve’s general policy of restraint on domestic credit
expansion, as well as its specific attempts to diffuse the impact of
restraint, were evidenced in a declining share of total credit flows pass­
ing through commercial banks. By the third quarter of 1966, com­
mercial banks were able to supply only 7 percent of the funds raised
by consumers, corporations, and governments, down from about 25
percent of the total in the first half of the year, and over 40 percent
of the total in all of 1965.
Viewing credit flows in broader perspective, all financial intermedi­
aries— banks as well as thirft institutions— were falling behind in the
competition for savings flows; investors preferred the higher yields
available through direct investment in market securities. Consumers
as a group, for example, allocated over one-fourth of their net financial
savings flows last year to direct purchases of securities, compared
with the less than 3 percent invested directed, on average, from 1961
to 1965. Corporations, too, diverted funds to market instruments,
and drew down their holdings of negotiable certificates of deposit and
other cash assets as external financing- became more costly and lees
easily obtainable.
The diversion of savings flows away from financial intermediaries
severely limited the availability of funds to those borrowers most
dependent on institutional sources of financing. Particularly affected
were builders and home buyers, since ordinarily the great bulk of the
financing of construction and purchase of homes in the United States
is supplied through financial institutions.




THE 1967

ECONOMIC REPORT OF THE PRESIDENT

391

Institutions specializing in mortgage finance, by and large, did not
possess the financial resources or flexibility to cope with large and
sudden shifts in savings flows and still maintain a flow of commitments
and funds into the housing industry. The bulk of the liabilities of
savings and loan associations and mutual savings banks are payable on
short notice, while the bulk of their assets are of fixed yield, and turn
over slowly. These institutions have been relatively slow in develop­
ing a structure of liabilities which would permit them to offer higher
returns in order to immobilize, for fixed periods, the most highly
interest-sensitive funds. Moreover, only a limited volume of loanable
funds could be obtained from liquidating assets or borrowing from the
Federal home loan banks to supplement diminished savings inflows.
Rigidities in our financial system, therefore, helped focus on home­
builders and home buyers much of the initial impact of the financial
restraint needed to curb inflationary credit flows. But as the year
progressed, flows of credit to other borrowing sectors became more
limited. State and local government borrowing began to be curtailed
as large commercial banks, previously very active buyers of municipal
securities, reduced their purchases to husband available funds. Con­
sumer credit lenders, finding funds more expensive to acquire, began
screening out some marginal borrowers. Credit extended to foreign
borrowers by American lending institutions was sharply curtailed,
even below the limits established in the voluntary foreign credit
restraint program. Even domestic business firms, which previously
had been most successful in increasing their external financing, were
experiencing constraints on their borrowing ability, particularly at
banks.
In addition to the earlier Board actions aimed at limiting the diver­
sion of funds from the mortgage market, the presidents of Federal
Reserve banks addressed a letter on September 1 to member banks
urging moderation in business loan expansion in the interest of achiev­
ing a more balanced economic and credit expansion. The letter assured
System members that banks losing deposits and adjusting their posi­
tions through curtailment of loan commitments would be able to obtain
accommodation through the discount facilities of the Federal Reserve
for longer periods than would be required if adjustments to deposit
losses were to be accomplished through disposition of securities. The
longer lived availability of Federal Reserve discount credit would thus
permit member banks to adjust to deposit losses without adding to the
pressures on construction finance or on markets for State and local
government securities.
A similar kind of contingency planning had earlier been introduced
with respect to nonbank thrift institutions and commercial banks not
members of the Fed<
^
~ :em. Some of these institutions
sources of emergency credit.
have only limited
Arrangements were activated, therefore, to permit Federal Reserve
banks to provide credit assistance to any such institution that might
suffer sudden withdrawals that could hot be met by resort to its usual
sources of funds. This facility was riot expected to be needed, and has
never in fact been used; it represented simply an assurance that pro­
tection existed against the remote possibility of exceptional drains of
funds that could not be accommodated through normal adjustment
procedures.




392

THE

i d 67 ECONOMIC REPORT OF THE PRESIDENT

When, in late September, Congress enacted legislation granting the
Federal Reserve and other financial regulatory agencies temporary
additional authority for establishing maximum rates payable on
deposits and shares, the Federal Reserve acted promptly to reduce the
veiling rates commercial banks could pay on consumer-type time
deposits. This was part of a coordinated effort by the regulatory
agencies to limit further escalation of interest rate competition among
-depositary institutions for consumer saving.
A reduction in the overall degree of monetary restraint was not pos­
sible, however, as long as the pace of aggregate economic activity con­
tinued to outstrip the growth in resources, and prices remained under
strong upward pressure. Federal spending contributed to the rising
pressures on the economy, as expenditures increased much more
rapidly than revenues. The Federal Government’s budget, on the
national income accounts basis, moved from a surplus position in the
spring to a deficit after midyear. Through August, industrial pro­
duction and wholesale prices continued to rise rapidly, spurred not only
by the sharp acceleration in defense spending but also by continued
large increases in business outlays for capital equipment and a rebound
in consumer spending, particularly for durable goods.
In September, several fiscal actions were proposed by the President,
and subsequently enacted by the Congress, that helped share the task
of containing inflationary pressures in the economy. The suspension
of the investment tax credit and accelerated depreciation provisions
was directed at one of the major expansionary forces in the economy,
business capital outlays. Moreover, the President’s announcement of
intended reductions in lower priority Federal expenditures indicated
another area where action to moderate inflationary pressures would
be taken.

The monetary and fiscal actions undertaken to convert an overexuberant economy to one expanding at a slower but healthier rate
were successful. By fall, business plans for capital spending were
being tailored to a more sustainable rate, any new orders for durable
goods began to level off. The rise in prices began to slow, too,
principally in reflection of larger supplies of agricultural products,
but also because demand pressures for some materials were subsiding.
Responding to these signs and portents of abatement in inflationary
pressures, monetary policy promptly moved to relax the degree of
credit restraint. By November, the provision of reserves to the
banking system through open market operations began to increase,
and in December, the Board announced that the special discount
arrangements outlined in the September 1 letter were no longer
needed. Bank credit, which had contracted over the summer and
early fall, began a vigorous expansion in December that has continued
through the early weeks of 1967. The expansion in bank credit in
December was at a 9-percent annual rate, and preliminary estimates
put the January expansion at around 15 percent*
Market interest rates have declined substantially from their late
summer peaks. For example, yields on new prime corporate bonds
havt fallen by about a fall percentage point and delines in Federal,
State, and local bond yields ruin from a half to a full percentage
point. At the moment, bond yields are at their lowest levels in over a
year.




THE

1967

ECONOMIC REPORT OF THE PRESIDENT

393

Even more dramatic have been the declines in some of the more
sensitive short-term or money market rates, such as those on Treasury
bills. In some instances, these rates have fallen by as much as 1 ^
percentage points* For example, the 6-month Treasury bill rate has
fallen from a peak of just over 6 percent to just over 41 percent
/&
recently. Some rates which characteristically adjust more sluggishly
to changes in general credit conditions, such as mortgage yields and
bank lending rates, have shown less downward movement thus far,,
but in varying degree they have also turned lower.
There are encouraging signs that the economy is responding well
to these changes in financial conditions, undertaking orderly correc­
tive adjustments to last year’s excesses. Overoptimistic estimates
of market demands in 1966— typical of emerging inflationary ex­
pectations—had induced business to produce far beyond current sales
requirements. As a result, inventory accumulation was large through­
out the year, and stocks began to pile up in exceptionally large volume
in the final months of 1966. Efforts are currently being made to
bring production into line with sales in many industries, providing a
Moreover, as the^ pace of industrial activity has slowed, imports
have begun to subside. With export growth maintained, there are
signs that the U.S. international trade balance is on the mend again.
This is indeed a welcome development at a time when our balance on
international capital flows shows signs of slipping.
Further, flows of savings to thrift institutions have resumed with
vigor. The net inflow of funds to savings and loan associations
showed substantial improvement in November and December, and
high inflows appear to have continued in January. Similar inflow
gains are being reported at mutual savings banks and in time deposits
at commercial banks. It would appear that the shortage of funds
for the housing industry is well on its way to being alleviated.
The task of economic policy in the period ahead is to support con­
tinued full utilization of resources, while assisting the economy in
restoring the price stability and international trade trends that graced
the expansion from 1961 through mid-1965. It will not be an easy
task, possibly not one we can accomplish within so short a span as
a year. But with monetary policy responding flexibly to changing
pressures on the economy^ and with the President’s tax proposals a
bulwark against a repetition of surges in demands that marred the
economy’s performance in 1966, we can look forward with greater
confidence to a better balanced expansion in 1967.
Chairman P r o x m ir e . Thank you very much, Mr. Martin.
First, I want to congratulate you on a clear and candid statement
and a helpful and enlightening statement.
Since you put a great deal of emphasis at the end, particularly, oa
the tax increase proposed by the President, the 6-percent surtax which
you say would fee a bulwark against excessive demand, I wonder if
you would feel that it would De equally helpful if? instead o f the
increase in taxes, there was a commensurate reduction in spending
with the net same effect on the budget, or is there something about a
tax increase psychologically and for other reasons, technical reasons,
that might be more helpful I




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th e

1967 ECONOMIC REPORT OF THE PRESIDENT

M r . M a r t i n . I would think that if it is possible to reduce expendi­
tures, it would be equally satisfactory. I do think there is the psy­
chological point of paying for the war in Vietnam, which at some
time ought to be considered. It seems to me that we have to pay for
those expenditures in one way or another.
Chairman P r o x m ir e . O f course, we can pay for those expenditures
by making sacrifices in other programs.
M r . M a r t i n . In other programs, and if that can be done, that
would be equally satisfactory. You either have to reduce expenditures
or increase taxes to deal with the problems that, seem to me, confront
us.
Chairman P roxmire . N ow we are moving into a different kind of
an economic situation in 1967 than we had m 1&66 in economy. The
indicators, which were very expansive in early 1966, seem to have lev­
eled off a great deal. This is true of automobiles. It is true in many
other areas of industry. Inventories are high in relation to sales
and so forth.
Under these circumstances, I wondered what emphasis you would
put on the fact that the monetary policy is a mixed tool. It is more
subtle and sophisticated than many of us realize. I know you under­
stand that fully.
What I have in mind especially, is the impact of tight money in
pushing up some aspects of cost last year. The report of the Council
of Economic Advisers says the following:
Mortgage Interest rates, which had remained quite stable in preceding years,
rose by 12.4 percent in 1966 alone. As shown in table 4, these higher financial
costs accounted for were one-third of the total advance in the prices of services
during 1966.
Now in view of the fact that services was the biggest element along
with food increases, in prices in 1966, in view of the fact that it is clear
that monetary policy cannot restrain demand in food, we don’t eat
less because interest rates are higher, doesn’t it seem that even in 1966
that the impact of tight money in keeping prices down, which I agree
the net overall was positive, may not have Been as clearly deflationary
as has been argued by some ?
Mr. M a r t i n . Well, it was not as satisfactory as we would have liked
it to be, of course, but I think it is important for us to concentrate on
the future rather than the past.
Chairman P r o x m ir e . Yes. Go ahead.
M r . M a r t i n . But I would just like to put this in the perspective
as I see it, which is that it seems to be that we would have been wiser
if we had been following a more restrictive monetary policy from mid1965 on. Also, if we had reduced expenditures and increased taxes,
we would have had a better and smoother flow of funds through the
economy than we have had.
Chairman P r o x m ir e . But the fa c t is, when your Board does tighten
credit, it does have the effect of pushing up the cost of borrowing
money, pushes up the cost of mortgage interest and other borrowing
costs which are an element in cost. A t the same time it does restrain
demand and lessen pressure elewhere. The reason I have asked this
is because it has a great deal of pertinence for the future.
It is my understanding that in the present economy we have pres­
sures on demand, and in the coming year more likely cost pressure on




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395

)rices from the cost side of the economy, especially in view of the
arge number of wage settlements involving 3.1 million workers,
involving such militant labor groups as the auto workers and the
truckers and so forth. This could push up costs considerably, if added
to that we have a situation in which tight money pushes up costs too,
and if the demand element in the economy is not as pressing on prices
as before.
I am wondering if it isn’t especially desirable now to continue as
much ease, even if the Congress does not pass the President’s tax
proposal.
Mr. M a r t i n . I want to point out that the Federal Beserve started
to pursue an easier monetary policy before the tax proposal was made,
and we have been moving in this direction quite apart from these
other considerations for the very reasons that you are talking about.
W e think the legacy that we are dealing with is an overhang of in­
ventory which was caused by the inflationary pressures that got ahead
of us in the early stages of last year, particularly in the first and second
quarters. This is the legacy that we are dealing with, and if it were
not for that, I think that we would be in a much stronger position than
we are today. W e are going to have to deal with this during this
current year.
I think we are making some very commendable adjustments, but
with banks having reached a very high loan/deposit ratio, it is not
easy, until they restore their liquidity, to get them to resume lending.
Naturally, they want to avoid overextending themselves. But we have
been pursuing an easier monetary policy, definitely, since the latter
part of November, and we have been moving in that direction in the
early weeks of this year.
Chairman P r o x m ir e . I certainly welcome that and I agree. What
concerns me, however, is that some analysts say that the policies you
have followed so far are easy for those of us who are in politics and
run for office to approve, but it is going to be harder to pursue these
policies now because of the international payments situation. You
point out in your next to the last page that the capital inflows that took
place last year may be subject to reversal, if we drop interest rates
now.
Now if we recognize that that pressure to keep interest rates up, and
perhaps to be a little more hesitant in reducing short-term interest
rates especially, then it might be incumbent upon the Congress to fol­
low an expensionary fiscal policy. I f for international payment rea­
sons our monetary policy has to be tighter than we would like it to
be for domestic reasons.
Mr. M a r t i n . Well, I don’t think there is quite the sharp division
between the balance of payments and the domestic economy that fre­
quently is made. I think we have to be concerned with having a high
level of economic activity and high levels of employment at home.
What we have to really concern ourselves with is that we don’t want
either high interest rates or high taxes. This is not something that
we are seeking at the present time. W hat we are seeking is a balance
here. It is clear in my judgment that we have been trying to do too
inuch too fast, and we have had spending plans converging on labor
shortgages and on practically no efficient unutilized resources, in such
a way that you caa’t possibly supply additional funds to the market

!




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without having an increase in spending that will be totally out o f
balance with the savings of businesses and individuals, which the
economy would need and require.
Chairman P r o x m ir e . What concerns me is your capacity to really
restore the construction industry, especially the homebuilding indus­
try, for several reasons. One reason is because it is so much harder
to get long-term rates down. It takes longer to do it.
No. 2 , 1 am told by some people in the homebuilding industry that
the money is there. It is coming in.
M r . M a r t i n . Right.
Chairman P r o x m ir e . However, the demand doesn’t seem to be
there, and if we are going to get the demand there, it is hard to get it
there if we are going to increase taxes, if we are going to follow a
restrictive policy fiscally. So it is not easy as you have said so often,
I think very persuasively. You can't push a string. You might
lower these interest rates some but unless we have demands for homes
it is going to be hard to revive that industry.
M r . M a r t i n . It is going to be hard to revive it but I think it will
come. The rigidities in the housing market are what we have to deal
with here. It is not as flexible as other areas of the market. The
thrift institutions, the financial intermediaries that channel funds
into housing are not as flexible in the use of these funds as they might
be, and I think it is very important that we cooperate in every way
with the builders and the building industry to improve the secondary
mortgage market, and to get a more flexible balance of funds in the
industry.
Chairman P r o x m ir e . Isn't it true as it has been reported that the
situation in other countries, in Europe particularly, is such that the
lower interest rates there would seem to be more feasible than they
have been in the past, and that for that reason, with the good work
of Secretary Fowler, in working with foreign finance ministers, that
this might be more promising if we could persuade some of these coun­
tries to moderate their interest rates and get away from the kind o f
high interest competition we have had.
Mr. M a r t i n . I think Secretary Fowler’s visit t/> Chequers and the
group that have been participating in this have unquestionably per­
formed a useful service in tackling this problem, but we must never
forget that interest rates can’t be ordained. You can’t just pull levers.
Chairman P r o x m ir e . That is why I say isn’t it true that the domestic
situation in these countries is such with less pressure on resources.
M r . M a r t i n . That is right.
Chairman P r o x m ir e . So that interest rates m a y be a b le to moderate
there.
Mr. M a r t i n . I think that it depends on eimromjient. The danger
is that you can get the idea that you can just have a meeting and l o w e r
interest rates. This, I don’t think is possible. I f the conditions in the
countries are such that they can, and I think they are at the moment*
Senator Proxmire, then this can be a very helpful exercise.

I think the interrelationship of all of these countries is such that
when they restrain or when they expand, it has an effect on other coun­
tries, ana that all of us have got to take into consideration the unite#
effects of these moves. Therefore, I think any closer cooperation W*
tween finance ministers and central bankersin theWestern World thafc
we can get is going to bebeneficial.



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397

Chairman P r o x m ir e . Thank you very much. Congressman Curtis ?
Representative C u r t is . Thank you, Mr. Chairman.
It is a pleasure to see you, Mr. Martin, under these circumstances.
I recall our hearings back in December 1965. Perhaps things were a
little different.
I want to call your attention to the section in the President’s Eco­
nomic Report, chapter 1, dealing with money and credit. I would be
curious to know whether you feel that this is a fairly accurate account
o f monetary policies and the issues that seem to confront us ?
Mr. M a r t i n . I do indeed. I have read that very carefully and I
think it is a very satisfactory account.
Representative C u r t is . I do, too, because it is, in my judgment, en­
tirely different from the approach in the speeches made by the admin­
istration back in December 1965, even continuing through calendar
1966, and I am most pleased to see this kind of an account there. It
is balanced. I think it explains a great deal of the problem, and I
would say in effect it praises the monetary policy that was followed
given the economic circumstances.
Mr. M a r t i n . I have no quarrel with the statement that you refer to.
Representative C u b it s . H alf jokingly, I asked Chairman Patman
whether you had written that section. You didn’t write it, did you ?
Mr. M a r t i n . I had nothing to do with writing it.
Representative C u r t is . However, I find that the administration
witnesses whp have appeared before this committee apparently haven’t
read this section or they don’t agree with it.
You are not an administration witness. You are representing an
independent board, is that correct ?
M r . M a r t i n . Y es, the Federal Reserve System,
Representative C u r t is . That is right, I hope it remains that way.
M r . M a r t i n . Which is independent within the Government, but
not independent of the Government.
Representative C u r t is . That is right. The administration wit­
nesses, speaking of those who, and rightly so, should reflect the policy
o f the executive branch of the Government, have characterized last
year as one of fiscal restraint. Do you feel that there was adequate
fiscal restraint, and if so, why indeed was the monetary policy so
tight?
Mr. M a k t i n . W ell, I have to be perfectly blunt on the matter. I
•don’t think there was adequate fiscal restraint. This is a matter of
judgment, but I don’t think that there was.
Representative C u r t is . I have seen in the newspapers and elsewhere
remarks that the administration is asking for a tax increase this year,
this 6-percent surtax, in order to get the Federal Reserve to follow an
easier monetary policy. Is this interpretation true in your judgment,
and does the Federal Reserve need this kind o f inducement to follow
an easier monetary policy ?
Mr. M a r t i n . N o . There is no deal, no agreement of any sort with
respect to an easier monetary policy, but the tax increase here is de­
signed to be a defense against what might occur again in late 1967, and
I think it is a very prudent and intelligent move that the President
and the administration have made in introducing it. I f it turns out
that it isn’t needed, why then I think that we will in the course of
grants find that out. EWt I think adtmally we are still dealing with




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THE 1967 ECONOMIC REPORT OF THE PRESIDENT

problems of inflation. W e do have this overhang of inventory, which
in my judgment has been brought about by letting inflation get ahead
of us in the late 1965 and 1966 period.
Representative C u r t is . I am not asking you this to get you involved
in this issue, but from a monetary standpoint wouldn't expenditure
restraint of an equal amount to what is expected from the tax increase
do the same thing?
M r. M a r t i n . This would do exactly the same thing.
Representative C u r t is . That is the course I would much prefer to
see us take, and, I think, the course of more prudent judgment. This
leads me into another area, namely, debt management.
Wouldn’t more of the Federal debt in the longer maturity area. 5
years and beyond, assist somewhat in developing easier monetary
policies— both in tempering interest rates and in treating the problem
of increasing the money supply in accordance with anticipated eco­
nomic activity ?
Mr. M a r t i n . I think this committee is familiar with my views on
this. I think we would be wise to remove the 4 % -percent interest
ceiling on the longer term maturities. I f this had been done, I don’t
believe we would have had a bill rate at 6.04 this summer. I think we
would have had lower interest rates across the board and better struc­
ture and a better setup for the entire debt if that had been possible.
Representative C u r t is . And also, I would argue, for the consumer
and the businessman who is in the market for investment capital.
M r . M a r t i n . That is correct. I want to reiterate every chance I
get that the Federal Reserve is not in favor of high interest rates any
more than we are in favor of high taxes. W e would like to see interest
rates as low as it is possible to have them, because in my considered
judgment, you will have the largest amount of capital formation that
way. But interest rates cannot be dampened or controlled if you are
oing to try to do too many thins at the same time, and are going to
ave spending converging on what amounts to skilled labor shortages,
and no efficient unutilized plant and equipment capacity.
Representative C u r t is . I am very disturbed, Mr. Martin, by the
aggregate figures on the marketable debt, which is about $218 billion.
Almost 50 percent of it is in maturities of 1 year and less— $105 billion
as of late December.
And then that which is 5 years and less is a total o f 77 percent of the
marketable debt. I think this is a grave imbalance. Would you
comment ?
Mr. M a r t i n . W ell, I personally think we would have a better debt
structure if we had more of it at longer term than we have. But I
think the Treasury has been making neroic efforts to do that and I
think one of the things that has made it difficult for them is this fourand-a-quarter-percent interest ceiling.
Representative C u r t is . Almost impossible, because the Secretary of
the Treasury said the last time they marketed any securities beyond 5
years’ duration was May 1965, so there has been no opportunity except
through the debt participation certificate device-----Mr. M a r t i n . Under current conditions it is impossible.
Representative C u r t is . Now that leads me to another area of great
concern— the international balance of payments. In Morgan Guar­
anty Trust Monthly Survey of last month they were pointing out that

g




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399

one reason that our balance of international payments looks a bit bet­
ter was because a great deal of foreign capital, which was really in
the short-term area, and really would have been in 1-year or less secu­
rities, actually moved into some securities that were just beyond the
1-year maturity date. The warning was that because of the way we
compute the international balance of payments we should be aware of
the fact that this probably is really short-term money that could go
out just as fast as it came in. I wonder if you could comment on that.
M r . M a r t i n * Yes. I think that that is something that we have to
be concerned about. I think that one of the interesting things is that
over the last three and a half years we have financed our deficit almost
entirely by our outflow of gold. W e have not been borrowing as some
of our foreign friends like to say we have; we have not been using
our deficit position to borrow. W e have been treating it just the same
as any other country will treat its balance of payments, and we have
been financing it by an outflow of gold.
Now this, of course, concerns us, and we would hope— we are well
aware of the fact that part of the reason we have been able to do this
has been that higher interest rates here have caused a reflow of funds
from abroad. Last summer at one point over $2 billion came back.
This could easily go in the opposite direction.
Representative C u r t i s . Particularly if we were to achieve our policy
of trying to get interest rates lower for the domestic economy.
Mr. M a r t i n . W e would hope, as Senator Proxmire said earlier,
that this would be done, not on a unilateral basis, but that the interest
rates— differentials— around the world would be lower. I think the
same comment I made about our own domestic interest rates is true
abroad. I think as low interest rates as we can have is the desirable
thing to have, provided those interest rates are not being used to
promote inflation.
Representative C u r t i s . My time is up. Thank you.
Chairman P r o x m ir e . Congresman Reuss ?
Representative R eu ss* Thank y o u , Mr. Chairman.
Chairman Martin, I want to thank you for getting up to us yester­
day the advance page proofs of the Fed’s annual report, and that of its
Open Market Committee. I have had a chance to look at them, and
they make fascinating reading.
Let me first ask a series of questions having to do with the policy
actions of the Federal Open Market Committee.
Last October the Congress passed a tax increase law suspending the
investment tax credit and also changing the depreciation allowance.
Thereafter, on November 1,1966, the Open Market Committee had a
meeting and determined to maintain its policy of monetary restraint.
That is a correct reading of the record ?
M r. M
tim e .

a r t in .

Y e s , th a t is a b o u t c o r r e c t.

I t m a d e n o c h a n g e a t th a t

Representative R e u s s . Then on November 22, 1966, the Open Mar­
ket Committee in its record took five pages to describe the current
economic state of the Union, without any mention whatever of the tax
increase which Congress had enacted in October, and then went on
for other reasons, apparently, to moderate credit restraint. Is that a

fair statement of the record?




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M r . M a r t i n . W e did moderate credit restraint on November 22. I
want to point out we probably would have done it on November 1
except for the fact it was an even keel period for the Treasury. In
other words, the Treasury was facing a financing there, and we do not
as a rule make changes if we can help it, when they are going to finance,
you see. W e want to be as helpful to them as we can. W e do not
try to make overt changes during such a period.
But I think the record of November 1 will show that we were tend­
ing in this direction at that time. W e carried through on November
22 with the official change.
Representative R e u ss. I don’t mean at this time to go into all of the
reasons, which are well set forth in the policy record o f why on Novem­
ber 22 you did ease credit. The fact that I happen to have agreed
with that action is also irrelevant here. My question was whether,
in the five-page record of policy action published in your annual re­
port, there is any mention of the tax increase by the Congress, and your
answer is “ no, there isn’t.”
M r . M a r t i n . I d o n ’t k n o w w hether there is o r n o t, b u t I th in k you
h a v e g o t a p o i n t ; it w o u ld h a v e been w ise to m en tion it, i f w e d id n ’t
m en tion it.
B u t I am sure th a t th a t w as an o versigh t as f a r as th a t
is concerned.
Representative R e u s s . Then the next meeting of the Open Market

Committee was on December 13.
Mr. M a r t i n . Might I just interrupt, Mr. Reuss ?
Representative R e u s s . Yes.
Mr. M a r t i n . And say that Mr. Brill tells me we did mention it
on November 1.
Representative R e u s s . Yes, it is mentioned briefly on November 1,
but vou did not take action to ease credit on November 1.
M r . M a r t i n . The reason was primarily— I am not speaking for all
my associates, but the reason primarily in my own mind was the Treas­
ury financing on November 1, you see, the “even keel” considerations.
Representative R e u s s . Yes. Then, on December 13, you issued a
directive, continuing your easing of credit— and here the policy record
takes seven pages— and I find not a word about the tax increase. I f
I have overlooked anything, I would be delighted to have it called to
my attention.
M y point, which I have probaby telegraphed by now, is simply this:
Is it really a very likely assumption that, if Congress votes another
increase in taxes next July 1, this will play any more part in the Fed’s
deliberations than the formal record shows was played in the Fed’s
deliberations after the last tax increase ? And if the record is a true
index of what was in the Fed’s mind, there were a great many things
in the Fed’s mind in taking these salutary and wholesome actions other
than the tax increase. Is there any reason to suppose it would be any
different next July if we voted a tax increase ?
M r . M a r t i n . I wouldn’t for a moment want to forecast what condi­
tions will be next July, but we will certainly consider every aspect of
conditions, just as we did in November. The tax increase would be one
of the factors to be taken into account.
Now on this tax increase, we have to realise that when we come to
the budget that you are talking about— Ifetfg not ar£ue dfcout whefchefr
it is the administrative budget or the cash budget or the national in­




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401

come accounts budget for the moment; let’s just take the administra­
tive budget— you have a deficit of $8 billion; roughly. I f the tax in­
crease is not enacted, that goes up by $4.6 billion. I f they don’t sell the
participation certificates, it goes up another $5 billion. I f they don’t
get the postal rate increase it goes up another $700 million. These are
all things we have to take into consideration.
(Chairman Martin submitted the following for inclusion in the
record:)
The record of policy actions of the Federal Open Market Committee includes
five separate references to suspension of the investment tax credit, either specifi­
cally or by referring to the “fiscal program announced by the President” or “fiscal
policy measures * * * recently enacted by the Congress.” The references may
be found in the policy record entries for the meetings of September 13, October 4,
and November 1.
Representative R e u s s . Your point is well taken. May I now turn to
the record of the policy action of the Federal Reserve, with particular
reference to the meeting of July 15, 1966, where I was most interested
to learn the Federal Reserve Board turned down recommendations
of various of the Reserve banks, to increase the discount rate from
4/ percent to 5, and in some cases to 5*4 percent.
12
Again, though it is not relevant to my question, I approve of the
vote of the Federal Reserve Board in turning down that discount rate
increase. But what concerns me is the whole business of the announce­
ment effect of discount rate changes.
As one reads the record of the Board meeting on July 15, 1966, one
can't but be struck by the self-torture that the Board undergoes by
the supposed necessity of setting discount rates. It worries— and I
would too if I were on the Board— at the announcement effect of a
discount rate increase.
There is some evidence in the record that the Board did not under­
take an increase in the discount rate last July because of the so-called
announcement effect. Reading the record over the years as I have, I
find other occasions when it seemed to me that the announcement effect
of a discount rate increase produced a result that the Fed would not
have particularly wanted.
Now to my question. Isn’t it time for a thoughtful reexamination
of our discount policy? I can see certain defects in the way we do
it now. As I have said, the announcement effect frequently produces
a result counterproductive to what the Fed in its judgment would
have wanted. At other times, the overhang of an announcement effect
keeps the Fed from doing what it otherwise would have done. Com­
pounding this is the Fed’s habit, which I am not undertaking to
criticize, of maving the discount rate in rather a wide swing, half a
percentage point, which is a biff change, because quite understandably
it doesn’t want to make a lot oflittle shivering^ changes in the discount
rate. It uses it much as a Treasury does when it contemplates devalua­
tion of the currency. “W e might as well do this right, boys, so we don’t
have to do it again m a few weeks.”
In the light of this, isn’t there much to be said for the suggestions
made by Warren Smith and other economists that the Fed would be
better off if it said “From now on, we are trying the discount rate to
the Treasury bill rate, perhaps adjusting it weekly, monthly, or
quarterly” !




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THE

1967 ECONOMIC REPORT OF THE PRESIDENT

And when the Fed wishes to announce something, it will use the
English language and announce it. It probably won’t want to do this
very often, but when it has something to say, it will say it in English,
not in the language of flowers that your discount rate change gives
you.
I am sure this concerns you and your associates. And let me say now,
because the time you are doing to have to answer it in this morning is
necessarily very brief, that I would appreciate it if in addition to what
you are able to respond this morning, you would file at this point in
the record as complete and thoughtful a statement as the Board of
Governors cares to make, with such additional views and dissents as
the Governors may feel. Now, would you respond, sir ?
Mr. M a r t i n * My response to this would be that we are making a very
careful study of the discount mechanism within the System at the
present time. This is under Bob Holland, who is our specialist in this
and who is the Secretary of the Open Market Committee now. He
has been meeting with the discount officers of the 12 Reserve banks and
others, and we have been reviewing this entire matter. As you stated,
it will take a long time to go into the various aspects of it, but we hope
to have that study completed before too long and give you the whole
study.
Representative R e u s s . Meanwhile, pending the completion of the
study, I would appreciate it if you could give me, and if the members
o f your Board could give me, the benefit of their thinking at this time,
recognizing that it would be on a preliminary basis.
M r . M a r t i n . W e will do the best we can with it, but it is a very com­
plicated and difficult research problem.
Representative R e u s s . I am glad you recognize, as I do, that it
doesn’t look as if it is perfect the way it is done now. Maybe we ought
to consider improvements.
Mr. M a r t i n . Let me say, perhaps this is a needless comment, but
never has the Federal Board in recent years claimed to be anywhere
close to perfection in its activities.
R ep resen ta tiv e R e u s s . T h a n k y ou .

(The following letter, responding to the request of Representative
Reuss, was subsequently submitted for the record:)
B oabd o p G o vern o rs,
F e d e r a l R e s e r v e S y s te m ,

Washington, D.C.fMarch 6,1967.
Hon.

H en ry

S. R e t t s s ,

House of Representatives,
Washington, B.C.
D e a r M r . R e u s s : This letter is in response to your question, at the time of
my testimony before the Joint Economic Committee on February 9, concerning
the review of our discount mechanism.
The Federal Reserve System has been engaged, for a little over a year, in an
intensive and far-ranging examination of its discount operations and policy.
This study represents the first such investigation since the early 1950’s, at which
time Regulation A, governing the discount operations of the Reserve Banks,
was revised to its present form.
The period following the Treasury-Federal Reserve Accord of 1951 saw the
development of the Government securities market to an extent which permitted
the bulk of monetary policy actions to be carried out in that market. At the
same time, most banks held ample supplies of these highly liquid Government
securities. These holdings were an aftermath of war financing and enabled
banks to make most adjustments in their reserve positions by sales of these
readily marketable assets.




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In this environment, the discount window served only a marginal role as a
supplier of reserves. It was designed to give banks assistance over the peaks
of temporary* emergency, or seasonal needs for funds that exceeded the dimen­
sions that the banks themselves were capable of reasonably meeting out of their
own resources. To foster this kind of bank use of the discount window, chief
reliance was placed upon the tradition against bank borrowing, buttressed as
when necesary by disciplinary contacts by discount officers. Given this kind
of discount policy, open market operations could be undertaken with a new degree
of vigor and precision, secure in the knowledge that only marginal reserve addi­
tions would be introduced through the discount window—in effect, just enough
to lubricate the many joints in the banking machinery.
The financial environment has changed markedly in the past decade* and
increasing evidence suggests that the discount mechanism may be in need of
modernization. Banks no longer hold large amounts of Government securities.
In recent years non-Federal debt has increased far more rapidly than Federal
debt, and bank portfolios have reflected this development. The supplies of liquid
assets available for reserve adjustment have been further curtailed by the rise
in the total of public deposits which typically must be collateralized by the hypo­
thecation of these assets.
In the absence of ample supplies of liquid assets, many banks find themselves
adjusting their reserve positions more and more through the issuance of short­
term liquid liabilities. This can be seen in the rapid growth of the Federal
funds market, the intense competition for certificates of deposit, and the heavy
reliance of some banks on the Eurodollar market. Meanwhile, the preponderant
System dependence upon open market operations for the execution of monetary
policy, while still working generally well, has at times involved market strains
of a type that might have been ameliorated by a different kind of discount
window assistance.
It was in the light of these developments, criticisms, and questions coming
from both within the System and without, and the general belief that the tools
of monetary policy should be periodically examined to evaluate their effectiveness
in developing financial conditions, that the current study of the discount
mechanism was undertaken. Participants in the study include the broadest
cross-section of interests, opinions, background, and geographic assignments.
The operation is headed by a Steering Committee composed of members of the
Board and Presidents of Federal Reserve Banks. Under this Steering Com*
mittee was established a high-level staff Secretariat charged with the respon­
sibility for conducting research and developing proposals for consideration by
the Steering Committee and, in turn, by other principal System policy-making
bodies*
Approximately two dozen separate research projects are presently in various
stages of completion. These projects cover a wide variety of issues, some
exploring the past history of the discount mechanism, others examining the
discount window and other aspects of the financial system as they operate and
interact today, and still others evaluating various changes and improvements
which have been proposed in the light of the economic environment today and
that expected to exist in the foreseeable future. One segment of these studies
is examining the discount mechanisms employed by central banks in the other
major industrial countries and evaluating the guidance they can offer for our
own window. In this connection, the officials of these central banks have been
contacted both by letter and in some cases by personal visits from our staff.
The views of a number of outstanding academic economists have also been
obtained in connection with this study. One academic seminar on proposed
changes in the discount mechanism has already been held, and another is
contemplated shortly. In addition, a few academic economists have been com­
missioned to prepare papers on particular aspects of the subject
At the end of a year of concentrated effort on this ambitious undertaking,
significant progress has been made. However, the time is only now approaching
When the results of this research are being interpreted and evaluated in terms
of policy alternatives. Hence it is premature to do more than touch 011 possible
findings of a policy nature.
Nevertheless, to try to be as responsive as possible to your inquiry, I ran report
that several possible implications of the findings have already begun to emerge,
some of a general nature and others pertaining to more specific areas. Perhaps
the most significant possibility is that the discount mechanism could be con­
verted to a more active role. It could be more useful both to the Federal Reserve




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1967 ECONOMIC REPORT OF THE PRESIDENT

and to the member banka This is likely to entail at least some increase in the
proportion of reserves supplied through the discount window.
A great deal of time and effort is being invested in the study and consideration
of the control mechanism for the new window. If the more active role now
contemplated for the discount mechanism is finally instituted, the present degree
of reliance upon the tradition against bank borrowing will no longer be feasible.
Therefore, a wide variety of alternative means for influencing bank borrowing
actions is being examined. Included are some more positive variants of the
primarily administrative control exercised today, preponderant reliance on the
discounts rate as advocated by some academics, various proposals for quantita­
tive controls, and possible combinations of these methods too numerous to list.
Careful attention is being paid to the tied discount rate proposal that you
mentioned in the hearings. In this connection the experience of the Bank of
Canada between 1956 and 1962 is being evaluated, and the ideas of those aca­
demic economists advocating a tied rate are being studied. As you mentioned,
a tied rate system can serve to minimize the kind of announcement effects that
often attach to discretionary discount rate changes, even when the latter simply
represents an action to maintain the rate in reasonable alignment with market
rates. But there are also some serious difficulties that would confront any tied
discount rate arrangement in this country. Some particular problems in this
respect were outlined in some detail in the answers given by the Federal Reserve
to the Commission on Money and Credit.1
With a banking system as diverse and fragmented as that of the United
States, it is essentially impossible to identify any one rate which represents the
cost of managing reserve positions in the absence of discounting. Yet to be an
effective and equitable penalty, the discount rate would have tx be tied to such
>
a rate. In addition, the discount window will very probably continue to serve
purposes (e.g. emergency credit assistance) for which a penalty rate is inap­
propriate or at be®t irrelevant. It should also be noted that a tied discount
rate, unlike a fixed rate, exercises no moderating influence on money market
fluctuations. Furthermore, it is by no means certain that the announcement
effects of a discretionary change in an otherwise fixed discount rate are not
oftentimes a constructive policy influence, or that such an influence could be
effectively duplicated by varying the margin of the discount rate over the market
rate to which it was tied. Each of these points at issue will have to be care­
fully weighed—along with the drawbacks o f the present method of discount
rate determination and announcement—in the light of the latest research before
any definitive judgments as to future discount rate policy can be formulated.
One early conclusion, suggested by review of both Federal Reserve experience
and the discount mechanisms employed by various other central banking systems,
is the wisdom of maintaining a degree of flexibility in the design and operation
of the discount window to make it adaptable to changing circumstances.
While few of the specifics of the new discount mechanism have yet become
clear, it has been almost a foregone conclusion that the window will continue to
supply emergency credit assistance. This is recognized as a basic responsibility
of the Federal Reserve in its role as lender of last resort. Work in this area
has been chiefly aimed at developing a better understanding and articulation
of the System’s responsibilities and objectives, and at discovering the most
efficient and equitable means of providing emergency assistance, as regards both
the institution requiring such assistance and the financial system in general.
In closing, I might mention that the document attached as an anwndix to this
letter contains several answers to questions that reflected the thinking going into
and growing out of the 1955 revision of the Board’s Regulation A concerning use
of the discount window. Many of the aurrocmding1 circumstances have since
changed considerably, as described in the earlier part bf this letter: therefore, the
specifics of these answers may be to some extent outdated. Nonetheless, the
general philosophy underlying these answers is still subscribed to, and they
may be read in this light.
We will continue to pus* forward diligently with this discount study, and
we shall be glad to forward the results to you when it is competed.
Sincerely yours,
W m . M cC . M ab ttp t, J r .
1 The Federal Reserve antI the Treasun/: Answer* to Questions From the Commission on
Money and Credit, Prentlce-Hall, Inc., 1963, pp. 140-147.




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Chairman P r o x m ir e . Senator Javits ?
Senator J a v it s . Mr. Martin, may I join with the committee in wel­
coming you here. W e had a little contretemps, Mr. Martin, with
your associate in Government, Secretary Fowler. Secretary Fowler
would have us believe that your action in raising the discount rate
in 1965 was a calculated and deliberate action by the Federal Reserve
Board following general policy of the administration, rather than
as it was very clearly an independent act by the Federal Reserve Board
because it found an economic situation in which the administration had
not acted, and therefore it had to act. Now which is correct ?
M r . M a r t i n . Well, I wouldn’t want to enter into a controversy with
the Secretary of the Treasury, with whom I have worked very success­
fully and whom I like very much. I would simply point out that
in this matter of coordination, there has been no problem of informa­
tion or of communication. There have at times been differences of
judgment, and there was a difference of judgment at that particular
time.
Now the Federal Reserve has a responsibility, as I see it, under
the present law, for defending the dollar. Our independence is
nothing that we flaunt, but we do have a responsibility to discharge
our duty as we see it. As I testified earlier here, I think it would
have been wiser if we had moved earlier rather than December of
1965.
There were differences of opinion, differences of judgment, honest
differences between individuals on poilcy. I, therefore, think this
was j ust a difference of judgment.
Senator J a v it s . Mr. Martin, the reason I asked you this is because
I think we have the right to know what the Federal Reserve would do,
if we don’t raise taxes, because obviously in 1966 you waited for an
increase in taxes, and it wasn’t forthcoming, so you acted. Now
suppose we don’t raise taxes. What are you going to do then ?
M r . M a r t i n . Well, it will depend entirely on the course of the
economy.
Senator J a v it s . But you will act independently again.
M r . M a r t i n . W e will indeed. When I say “act independently^” we
are making every effort at all times to coordinate our activities with
the administration, and at any time we act independently, it is not
because of any desire to flaunt our authority. It is purely out of
the belief that this is our duty under the law.
A s I testified in December of 1965, there was a problem of financing
at the time. Even within my own Board, there were some differences.
I just want to emphasize my conviction that markets don’t wait for
kings or presidents or prime ministers or secretaries of the Treasury
or Chairman of the Federal Reserve Board. They have to be dealt
with at the time.
Senator J a v it s . N o w you are, as I understand it, because it is a
necessary element of my question, in favor of the 6-percent tax
surcharge.
Mr. M a r t i n . That is correct.
Senator J a v it s . Are you in favor of waiting the 90 days that
Gardner Ackley said we could wait, in order to look over the economic
situation ?
Mr. M a r t i n . I would be in favor of enacting it right now.
75-314—67— t. 2----- 12
-p




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1967 ECONOMIC REPORT OF THE PRESIDENT

Senator J a v i t s . Right now. Is it fair, I want to ask you ? Suppose
we don’t enact it right now. What does the Federal Reserve Board
have in mind to do about it ?
M r . M a r t i n . A s I said earlier, this is a problem of expenditure
control, of paying for the war. I am not criticizing the Defense
Department or anyone else for the difficulty in getting accurate figures,
but the expenses have burgeoned on us, and we haven’t been able to
reduce them. I hope that the overhang of inventory from the inflation
that got ahead of us in 1965 and 1966 can be adjusted early this year
in such a way that we will have a resumption of both housing activity
and other activity in the last half of 1967. It may be that if that
works out, a tax increase would be desirable as a means of preventing
a recurrence of what happened last year when almost the entire brunt
of this was borne by monetary policy.
There were some fiscal actions. I am well aware of the fact that the
Treasury did speed up tax collections. Unfortunately, the speeding
up of tax collections put additional pressure on the money market, and
made it a very difficult period to handle. I have no question of their
desire to cooperate with us, and we will continue to cooperate with
them in every way that we can.
Senator J a v i t s . Now the argument for the 90-day, wait-and-see
proposition is that we may be facing an economic recession, and on the
classic theory that at that point you certainly don’t increase taxes.
A lot of people feel we should wait 90 days. Now do you or the Board,
whichever you can speak for, see any indications of a recession facing
us which might be ascertainable within that period ?
Mr. M a r t i n . I am worried about the overhang of inventory in rela­
tion to sales, which was built up in a good many lines. I am not ready
to forecast what the last half of 1967 is going to be, but I believe that
the adjustments are being made in this overhang now, and I am
optimistic about the economy.
Senator J a v i t s . So you don’t really think that we are justified on
that account, because of fear of a recession, in waiting the 90 days, oi
any period.
M r . M a r t i n . There would be differences of opinion within the Fed­
eral Reserve Board and in the staff of the Federal Reserve Board on
that. I do not.
Senator J a v it s . You do not. Now, finally, I would like to tell you
this, if it does your heart any good, that this strange path trod by the
Secretary of the Treasury goes like this. In 1966, the Council of
Economic Advisers said:
The Administration regretted that the discount rate increase last December
interrupted that pattern, to wit, clearly fiscal and monetary policy must be
closely cordinated, and effective coordination has prevailed in the past five years.
Nonetheless, the Secretary of the Treasury, testifying here the other
day, said:
I think that the Administration’s economic policy as a whole in 1966, including
our prudent use of selective fiscal tools as supplementary to general and severe
monetary restraint, brought the economy through a trying time of transition and
uncertainties with minimum damage, and so on.
Now that is quite a shift from the report of 1966, and I just thought
that you ought to know the basis that made me say what I did. I have
just one more question, if I have time. Are you concerned about the
rate of capital spending in the second half of 1967 ?



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M r. M a r t in . I think the rate o f cap ital sp en d in g in the second h a lf
o f 1967 as presently p rojected is m uch m ore reasonable than it was in
1966. B u t I th in k it cou ld bu ild up v ery qu ickly.

Senator J a v it s . Would you favor, under those circumstances, antici­
pating as an alternative to a tax increase, the restoration of the seven
percent investment tax credit ?
M r. M a r t in . I happen to be one o f those w h o w ou ld like to see the
7 percent investm ent tax credit a perm anent p a rt o f ou r m achinery.

Chairman P r o x m ir e . Would you say that again ?
Mr. M a r t i n . I said I happen to be one of those who would like to see
the 7-percent tax credit a permanent operating part of our economy.
I think a good many of my own staff and a good many others will dis­
agree with me on this. But I think it is very desirable.
Senator J a v its . Without regard to this tax increase.
Mr. M a r t i n . That is correct.
Senator J avtts. Whether we pass it or not. Thank you.
Chairman P r o x m ir e . Senator Symington!
Senator S y m i n g t o n . Thank you, Mr. Chairman.
Chairman Martin, it is good to see you here, a friend and constituent.
Some said on the Senate floor that it would affect the credibility of this
administration if you were reappointed to your present position. I
want you to know that if you are not reappointed to this position, in my
opinion, it would be the greatest single thing the administration could
do to reauce the confidence of business about its sincerity in preserving
the integrity of the economy.
Mr. M a r t i n . I appreciate that, Senator.
Senator S y m in g t o n . Years ago I read a book by Gunnar Myrdal on
the Negro problem. He said that first, the white people make the
Negro clean their shoes, then criticize him for being a bootblack. You
have become a comparable whipping boy. First, they pass the problem
of inflation over to you, and don’t do a thing about it from a fiscal
standpoint. You do your best to handle it monetarily, which is all
you can do; and then they criticize the actions you take.
I would ask a question I asked Secretary Wirtz, about the high cost
of the Vietnamese war, which according to the Senate Appropriations
Committee staff, is now some $2.5 billion a month.
I asked one member of the administration how long he thought we
could go along with this type and character of expense in Vietnam.
His answer as, “Forever, based on the percentage it was of the gross
national product. Secretary Wirtz said to us;
Let me say again I don’t believe anybody is ever justified in military expendi­
tures on the basis that you do not need to worry about it as long as it stays
within a certain percentage of the gross national product.
Would you agree with that statement?
M r. M a r t in . I agree.
Senator S y m in g t o n . In a talk I made on the cost of the Vietnamese
war recently, I said:
A government as with an individual or a business, can only improve its living
standards through additional borrowings so long as it is trusted by its lenders.
Would you agree that is true ?
Mr. M a r t i n . I d o.
Senator S y m i n g t o n . A member of the committee just mentioned
the omission of a word or thought in one of your discussions in your




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1967 ECONOMIC REPORT OF THE PRESIDENT

Board. I have just read a book by perhaps the leading apostle of the
“new economics.” The word “gold” is not mentioned. Do you think
the amount of gold we have to pay our current liabilities redeemable
in gold, which has now fallen to about 10 percent of what we owe, is
important ? Is it important for us to have the gold stock necessary
to pay our debts ?
M r . M a r t i n . I do indeed. I think it is.
Senator S y m i n g t o n . What worries me, if all these people would
say that gold wasn’t important— but we say it is very important, and
that we plan to correct the loss, and will establish policies that will
result in no further loss of gold. But each year we lose more gold.
Now when we get into this justification of the high cost of Govern­
ment expenditures, especially the war, on the grounds of its percentage
of the gross national product, I have here a quotation from an article
written for the Harvard Business Review by Dr. Robert W . Stevens,
formerly senior economist of Standard Oil of New Jersey, now profes­
sor of international business at Indiana University. I would appre­
ciate your comment.
He said:
Whatever may have happened to the world dollar shortage, it is a fact of life
that economic, political, and military attitudes, once well established, certainly
do tend to persist. Today when our economy still remains unrivaled in the
world, if the popular premise that economic strength always confers financial
strength is sound, then people might still think it is “natural” for the United
States to be running an international payments surplus, provided various fric­
tions and temporary obstacles to its achievement could be removed. But the
simple argument from basic economic strength to continuous financial strength
is not valid, and there is no natural payments balance.
A country’s balance of payments at any time depends on many things, only
one of which is the productive power of that country's economy.
Would you agree with those observations ?
M r . M a r t i n . I would indeed.
Senator S y m i n g t o n . N o w you mentioned the importance, from the
standpoint of the Federal Reserve Board’s activities of preserving the
integrity of the dollar. Some people who are getting burned because
of high interest rates; are lobbying pretty hard. They might think of
what would happen if the dollar went to pieces, to a very large per­
centage of the American people—those folks with life insurance, with
pension plans, a great new concept of union activity, not to mention
social security and all retirement plans; that is, if there was major
depreciation m the value of the dollar comparable to what has hap­
pened in most other world currencies in recent years.
Wouldn’t such depreciation be a very serious, almost catastrophic
development from the standpoint of the average wage earner?
Mr. M a r t i n . I don’t think there is any question of it. I think de­
pendable money, which retains its purchasing power, is the bulwark
of a strong country, and any country that loses that has lost its
underpinning.
Senator S y m i n g t o n . Purchasing power is the base yon might say.
M r. M

a r t in

. T h a t is r ig h t .

Senator S y m i n g t o n . One final question. Everybody today is a
“ Keynesian.” Some stress structural employment, s o m e public w o r k s
expenditures; some lowering taxes. But the basic theory of Keynes,
was it not, was in times of prosperity to increase taxes and reduce




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409

Government expenditures; and in times of nonprosperity vice versa?
W e are not pursuing that policy, are we ?
M r . M a r t i n . W e have failed to compensate. W e have been rely­
ing too much, in my judgment, on deficit finance without ever having
a surplus. I think that you have got to have a balance. W e should
use deficit finance under certain circumstances, but if deficit financing
becomes permanent then I think it is just a matter of time before you
do undermine your currency.
Senator S y m i n g t o n . These disciples of Keynes perhaps haven’t
read everything he wrote on the subject of the importance of the in­
tegrity of the dollar. Many years ago, he said:
Lenin was certainly right. There is no subtler nor surer means of over­
turning the existing basis of society than to debauch the currency. The process
engages all the hidden forces of economic law on the side of destruction and
does it in a manner which not one man in a million is able to diagnose.
Would you agree ?
Mr. M a r t i n . I would indeed, and I would like to interject here
what I said in a recent talk I made in London. I had the privilege
of knowing Lord Keynes, and I had several long discussions with him.
Before the end of the war he was convinced mat the main problem
of the postwar world was going to be unemployment.
Later, when I sat at the Bretton Woods meeting in Savannah with
him, I had a 2-hour conversation with him, in which he explained to
me that his views had completely changed, and he was convinced
that the problem of the postwar world was going to be dealing with
inflation. He recognized that inflationary surges world bring in­
evitable adjustments from time to time, putting two and three people
out of work when otherwise only one person would have been
unemployed.
He told me that he wanted to do some work on this. I think
he was going to do a book or do some similar work on it. Perhaps I
am overstaying my time here, but I would say that one of the great
sorrows of my life is when he had a heart attack at Savannah, and
then another heart attack in April and passed on. I think he has
been misquoted a great deal with respect to his attitude toward
inflation annd deflation.
Senator S y m i n g t o n . Thank you, Mr. Chairman. My time is up.
I also had the privilege of knowing Lord Keynes. In conclusion, I
sure hope you stay on this job. You know more about money prob­
lems than any o f my colleagues, or for that matter anybody else in
this Government. You have been a great public servant. I f the
President is wise enough to send your name to the Senate, I am sure
you will be confirmed for another rough time.
Chairman PRoxmRE. Congressman Widiiall ?
Representative W idnall . Thank you, Mr. Chairman.
Mr. Martin, let me first congratulate you on your healthy recovery
from being tarred and feathered in December o f 1965. It is good to
see you before us, and you are an excellent witness, as always.
You have partly answered this question that I am aibout to ask
you now, but I would like & more full answer. W hat was the impact
on the financial market and interest rates last year 6 f the adminis­
tration sales Of participation certificates and the larger acceleration of
tax payments?




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M r . M a r t i n . It added additional pressures to the market, at a
time when the market was already under strain, and therefore it was
a contributing factor to the rise in interest rates.
Representative W i d n a l l . Has the coordination of economic policy
between the Federal Reserve and the administration improved in your
view since the increase in the discount rate in December of 1965 ?
Mr. M a r t i n . I think our coordination has been good right along.
I think, as I said earlier, information and communications has been
100 percent, and I think since the December action perhaps all of
us have worked even harder to see that we were fully evaluating the
views of the Board and the Treasury and the Council. I think we
have worked very hard and very successfully on it.
Representative W i d n a l l . Does this mean you have met more fre­
quently than in the past ?
Mr. M a r t i n . I would say not much more frequently. W e have
these meetings that have been mentioned in testimony before you, con­
sisting of the Secretary of the Treasury and the Chairman of the
Council of Economic Advisers, the Director of the Budget and my­
self representing the Board. They have met on an average of about
once every 5 weeks during 1966, and that was true of 1965.
Representative W i d n a l l . Would you favor the removal or the re­
duction of the gold backing now required for the Federal Reserve
notes?
Mr. M a r t i n . I would not want to come up at the moment for it,
but I think ultimately we may have to remove it. During the hear­
ings on the legislation that repealed the gold cover requirement as
to deposits but retained it for Federal Reserve notes, I testified that
I did think it had some disciplinary effect on our activities. As time
has gone on, I have come to wonder whether that displinary effect
was as useful and as practical as I thought is was. My general posi­
tion on this right along has been that gold is here to use, not to hoard.
I would hope that within the next couple of years we will have an
improvement in our balance of payments. I f we succeed, gold will
flow back.
Representative W i d n a l l . So you are having a con stan t review of
the situ a tio n n o w , an d e v a lu a tin g the v alu e of K eeping it as it is?
M r. M

a r t in .

T h a t is r ig h t.

Representative W i d n a l l . How do you regard the proposals which
have been advanced under which the United States would continue
to sell gold at $35 an ounce, but would alter its buying policy either
by not buying gold at all or by refusing to buy at $35 an ounce, or at
any other predetermined price ?
Mr. M a r t i n . W e have considered this at great length, and my own
view is that this would be a mistake, that this would be tantamount to
devaluation. I think it would not serve the purpose that individuals
that are proposing it think it will.
Representative W i d n a l l . In the long range it still would have a
very adverse effect, you think ?
M r . M a r t i n . I do.
Representative W i d n a l l . N o w is it true that late last year the Treas­
ury borrowed from the Federal Reserve for the first tune since 1958,
and also there was only one borrowing, or has the Treasury resorted
to the Fed on other occasions since that time ?




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411

Mr. M a r t i n . That is the only time. But I see no reason at all why
they shouldn’t come in to us when they are down as low as they were
in their balance. That is the reason we have this authority.
Representative W id n a l l . When did that take place ?
Mr. M a r t i n . That was on December 9.
Representative W id n a l l . In the overall picture, how do you size
up the balance-of-payments outlook for 1967 ?
M r . M a r t i n . It is a little early to put your finger on it. I am not
overly optimistic about it. I do think that there has been an improve­
ment in our trade surplus, with the reduction of inflationary presures,
and in the long run the only way we are really going to get a satis­
factory balance of payments is to improve our trade surplus. There­
fore, I attach a great deal of importance to this improvement.
On the capital flow— where, as Mr. Curtis pointed out earlier, we
had an inflow that was partly due to the interest differential last
summer—unless there is a more general adjustment in interest rates
than is presently foreseeable, we may lose some of those capital inflows,
and this may put additional pressure on that aspect of the balance of
payments.
I would say that we have no right to be either pesimistic or optimistic
about the balance of payments on February 9, today, of 1967. But it
is a continuing problem, and it is one that is going to require constant
and assiduous work.
Representative W i d n a l l . And certainly one of the most important
areas to watch, because we were helped so much within the last few
months by the inflow of funds from overseas, because of our high in­
terest rates, and it could go the other way very easily, if they don’t
reduce in line with our own reduction at the present time.
M r. M

a r t in .

T h a t is rig h t.

Representative W id n a l l . It seems to me that we are now exhibiting
in some areas a more rapid reduction than we expected, I believe, on
some short-term borrowings, by as much as 1% percent. W hy has this
happened so rapidly, rather than a gradual reduction?
Mr. M a r t i n . I think it is too baa that we have had swings as sharp
as this in either direction. But I worry a little bit about moving so
quickly. I don’t really think there is anything to be unduly alarmed
about here. I think our principal problem, as I keep reiterating, is
the overhang of inventory that a lot of firms have at the present time.
I think this is due to the inflationary buildup that occurred in the
second and third quarters of last year.
Representative W id n a l l . From the witnesses who have appeared
so far before the committee, I gather that there is more of a realiza­
tion on the part of the administration than they have been willing
to admit in the past that monetary and fiscal policy have a place going
along together, rather than operating in separate directions. Many
o f us have felt for a period of years that there wasn’t the proper
cordination between monetary and fiscal policy in order to achieve
the results that we wanted.
I am very hopeful from what I have gathered from some of the
witnesses before us that there will be that coordination and we can
achieve the result which we could achieve much more easily with that
coordination of effort.
Thank you, Mr. Chairman.




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M r . M a r t i n . I am in complete accord with that, and I can assure
you that the Federal Reserve is going to do everything in its power to
see that its monetary policy is coordinated with the fiscal policy of the
Government. W e have no desire to be obstreperous. Our desire is
entirely constructive, and we are sorry that some misinterpretation
has been put on our action in 1965, to the effect that this was our
intention.
Representative W i d n a l l . Thank y o u .
Chairmaji P r o x m ir e . Congressman Bolling?
Representative B o l l i n g . Thank you, Mr. Chairman.
Mr. Martin, I would like to join with my colleague from Missouri
in his comments with regard to your long and useful public service.
I have had the privilege of being on this committee for a good deal of
that time, and while I haven’t always agreed with you, I have admired
your capacity, your integrity, and I think above all, your stamina.
I hope, too, that you will continue in this position, because I think
that a great deal of the confidence that some of us here and others
in the country have in the stability of the economy is based on your
ability to be independent and to stand up against extremely difficult
burdens that sometimes administrations and almost always Congress
has put upon you.
Mr. M a r t i n . Thank you, Mr. Bolling.
Representative B o l l i n g . N o w you have indicated that your concern
about the economy at the moment was these inventories that accumu­
lated as you indicated in the second and third quarters. You are at
the same time optimistic that they will be worked off in such a way
that we will have— I don’t know exactly how to say this and I don’t
want to put words in your mouth— a return to what, expansion in the
third ana fourth quarters of this year ?
Mr. M a r t i n . That is correct.
Representative B o l l i n g . Assuming that your estimate of the situ­
ation turns out to be correct, that we do work off the inventories, that
we do have a return to expansion, and a third thing, that the Congress
will talk a good deal about saving money but that it will not save any
out of the budget— in effect, the budget or more will be appropriated—
what then might be the effect on the economy of the failure by the
Congress to enact the tax increase proposed by the President ? Would
there be an enormous pressure on the monetary authority perhaps
similar or even greater than the one that existed during the months
o f pressure last year ?
Mr. M a r t i n . That is my judgment, and let me put this to you if
I may, Mr. Bolling, in a simple way that appears to me. Not every­
body agrees with me quite on this, but I think that when you have full
employment and you have no unutilized plant and equipment capacity,
and the savings of businesses and individuals are unequal to meet the
demand for credit, that the pressure is put on the central bank to
create money, and if we create money under those circumstances, that
spending is bound to result in higher prices.
This is the root cause of inflation. I see no proble&i at all in the
central bank supplying additional money to the economy, until we
get to the area or full or virtually full employment, with no efficient
unutilized plant and equipment capacity. I f at that time you print




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413

money— which is the simple way of putting it— it can do nothing but
cause a rise in prices.
Representative B o l l i n g . I might say I am entirely in agreement
with that. My observation after a number of years on the committee
is that the failure in coordination, if there be a failure in coordination,
between monetary and fiscal policy, grows almost entirely out of the
unwillingness of the Congress to accept the other half of Keynesism—
that is, in times of prosperity and pressures on the economy, one must
use a compensating fiscal policy. This is why for a number of years
I have favored giving to the President, within very specific limitations,
in effect the power to raise and lower taxes promptly, because only
thus do I see the kind of flexibility in the fiscal end that could really
effectively and quickly coordinate with the monetary end. I hope that
I will live long enough and that we both will stay here long enough
so that we will see that kind of a situation, where instead of the Fed
being a whipping boy for all those who are unwilling to take what is
allegedly a politically unpopular position, it will be a partner, an in­
dependent partner in a coordinated policy operation.
Thank you, Mr. Chairman.
Chairman P r o x m ir e . Senator Miller ?
Senator M i l l e r . Thank you, Mr. Chairman.
Chairman Martin, I wish for the record, to be associated with my
colleague, Senator Symington, in his comments regarding you as a
person who should be retained.
You stated that the policy on participation certificates last year
tended to aggravate the high interest situation, is that correct?
Mr. M a r t i n . That is correct, yes.
Senator M i l l e r . Then it would follow that the proposed sale o f
several billions of dollars more of participation certificates as set forth
in the President’s budget would also tend to aggravate the high intere^
rate problem.
M r . M a r t i n . Well, the conditions in the money market are different
now, Senator.
Senator M i l l e r . I recognize that, but it was an aggravating situa­
tion last year, so would it not follow that it would be an aggravating
situation this year ?
Mr. M a r t i n . It will be. Unquestionably, it is an additional item
that has to be financed, you see. The Government does have to pay
its way.
Senator M il l e r . That is right. And would you also say that the
Government financing of the budget deficit as set forth in the Presi­
dent’s budget would also have an aggravating influence on the high in­
terest rate problem ?
Mr. M a r t i n . O h , yes; any additional borrowing adds to interest
rate pressures.
Senator M i l l e r . Now I believe you said in response to a question
by Senator Proxmire that we have a decision to make of either re­
ducing expenditures on the one hand or increasing taxes on the other.
But isn’t there a middle ground, which is being used right now, and
that is to not do either or those, or not follow either o f those alter­
natives sufficiently so that we take purchasing power away from the
people by inflation.
Mr. M artin. That is correct.




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Senator M i l l e r . I take it that you are not in favor of taking pur­
chasing power away from the people by way of inflation.
M r . M a r t i n . I am dead against it.
Senator M i l l e r . That being so, M r . Chairman, how are we going
to avoid doing that if we have the tax increase that is proposed and
still end up with a budget deficit of $8, $9, $10 billion this year?
M r . M a r t i n . Well, we have ultimately to balance our budget. This
is the problem. O f course, there are different budgets. I am not going
to get into the three budgets. I happen to agree with the economists
that it is the national income accounts budget that is the one we ought
to be concerned about. W e do need a lot of education on this budget.
Senator M i l l e r . Secretary of the Treasury Fowler testified here the
other day that the administrative budget is the one we need to worry
about insofar as financing a deficit is concerned.
In other words, it is the $8 or $9 billion administrative budget
deficit which is going to have to be financed, and since there is a
relationship between that and inflation, I would think that insofar as
the financing of the deficit is concerned, you would be very concerned
about the administrative budget.
M r . M a r t i n . And I am. This is why I applaud the President’s
action in seeking a tax increase. I f you take an administrative
budget deficit of $8 billion and you do not get this tax increase, the
deficit goes up by $4.6 billion right away, and if you didn’t sell all
the participation certificates it is another $5 billion, and if you don’t
get this postal rate increase through it is another $700 million, so that
we are talking about some pretty large figures.
I think at some point, deficits have to be brought under control.
I thing the Secretary is quite correct when he talks about this tax
being designed to pay for the war in Vietnam, and to keep the budget
in reasonable relationship.
The Government has to pay its way. When it runs a deficit it
has to either raise taxes to cover it, or it has to borrow, and if it
borrows it is putting pressure on the money market to be sure.
Senator M i l l e r . And in turn, over a period of time at least, that
brings about a foundation for inflation.
M r . M a r t i n . Exactly.
Senator M i l l e r . Then would it be fair to say that in evaluating
the budget, which calls for a small tax increase on the one hand, but
it also on the other hand calls for a budget deficit of rather a substantial
figure, that this represents sort of a straddle position that purchasing
power will be taken away in part by increased taxes and in part by
inflation ?
Mr. M a r t i n . I would hope not. I would hope that the improvement
in the economy would produce the revenues. W e did have an increase
in revenues last year. W e were moving in the right direction there,
with the acceleration in the economy. It was only when we got a GNP
deflator of 4 percent that we were losing the advantage of rising
income.
Senator M i l l e r . May I say I share your hope, Mr. Chairman, but
is that hope a very rosy and optimistic hope ?
Mr. M a r t i n . Only time will telL
Senator M i l l e r . Now in your statement you call attention to some
economic facts, and state: “This was an impressive performance, one
in which we all can take some satisfaction.”




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415

I wonder if you could give us an evaluation of how much this per­
formance is attributable to the war in Vietnam, and the increase in
defense expenditures running up to $2 or $2y2 billion a month ?
Mr. M a r t i n . I find the Vietnam economic problem a very confusing
one. I couldn’t agree more that it is not the relationship of the war to
the gross national product that counts, but what concerns me is the
disruption in the flow of production that comes from having to grab
certain items of a strategic nature for the Defense Department under
certain circumstances.
Now I don? know how you evaluate this type of thing. This gets
t
into the broad problem of guns and butter, and it is a very difficult
thing to be sure you are right on. I have been worried about the Viet­
nam war and rising expenditures, but not so much about that aspect
of it as I have ben about what happens when somebody has a produc­
tion line here and somebody comes and grabs from this production
line some item that is vital to the war in Vietnam. W ar is a very, very
“ discombobulating” activity in the economy. Despite the people who
say to you “Well, if we had peace in Vietnam wouldn’t this cause a
collapse in the economy?” I would far rather deal with the problems
o f peace in Vietnam than I would to have to continue to deal with the
disproportionate, unbalancing factors in production that come from
even a small— relatively small in terms of gross national product'—war
such as we have.
Senator M i l l e r . I am sure your view on that point is shared by all
of us up here. But I thought perhaps you were hinting at the relation­
ship between the greater defense outlays due to the war in Vietnam,
and the economic facts you set forth early in your statement, when
later you referred to the “acceleration in defense outlays which added
to the stimulus in the private spending.”
Mr. M a r t i n . I think it did, you see, because it built up faster cer­
tainly than I anticipated it would, and faster than a good many of my
colleagues at the Board thought this would happen* That is no criti­
cism of the Defense Department. That is just a fact of life that it did
build up very fast* But it made it very difficult to assess policy.
Senator m i l l e r . But without the $2'i/ 2 billion a month of defense
spending, certainly which has occurred in the last 12 months——Mr. M a r t i n . We would have had a very different situation than we
have now.
Senator M i l l e r . You also made a statement that “ As the pace of
industrial activity has slowed, imports have begun to subside.” That
is the first full paragraph.
M r. M a r t in . B ig h t.

Senator M i l l e r . I don't quite follow that. I wonder if you would
explain why.
Mr. M a r t i n . Well, there was pressure to build up these stocks on
the assumption that you would be able to sell them at higher prices.
People were unable* to get deliveries in this countiy, so they were going
abroad and importing their goods. When they found that the stocks
were larger than they could effectively handle, in some instances, they
stopped the imports and went back to the domestic supplier.
Now this has certainly occurred here in the last couple of months*
How long it will continue, I don’t know.
Senator M il l e r . I f prices continue to go up, due to inflation, this
would tend to counterbalance that.




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THE 1967 ECONOMIC REPORT OF THE PRESIDENT

Mr. M a r t i n . That is right.
Senator M i l l e r . Thank y ou , M r . Chairman. M y time is up.
Chairman P r o x m ir e . Mrs. Griffiths?
Representative G r i f f i t h s . Thank you very much.
It is nice to see you again. I will say that the first time that I ever
saw you, you came before Banking and Currency, and it was one of
the most interesting sessions I ever observed, with Mr. Patman as
chairman. I was so enthusiastic, I went back and read the hearings and
debates on the Federal Reserve Act.
I would like to ask you, can you see, foresee a time or the circum­
stances under which both an interest rate rise and a tax increase would
be necessary or an interest rate decrease and a tax decrease?
M r . M a r t i n . An interest increase ?
Representative G r i f f i t h s . And a tax increase.
M r . M a r t i n . And a ta x increase. I would th in k -------Representative G r i f f i t h s . Or to have both of them go the other
way. Under what circumstances would it be desirable?
Mr. M a r t i n . Well, it would be under supply-and - demand conditions
where there was a shortage of savings on the one side, and no way of
balancing it in the marketplace. Interest certainly is a reward to
the saver as well as a cost to the borrower. I think there could be a
period, a short-lived period, where that might happen but I don’t think
it would continue any length of time.
Representative G r i f f i t h s . How would you coordinate? What
would be the mechanics of such coordination? Supposing that such
a time arose? For instance, an interest-rate increase bears heavily
upon some elements of the economy and is not really noticeable in
others, whereas a tax increase or decrease would affect other groups.
The fact that they paid high interest didn’t really slow down invest­
ment in capital goods, but the suspension of the investment credit tax
slowed it down. So how would you go about coordinating? With
whom would youf «*-1 , and how would it be done ?
k
Mr. M a r t i n . Well, we would have to have a coordinated staff con­
ference or conferences on this, and I think we would have to make a
general evaluation at the staff level of what would be the effective way
to deal with this. This would be a difficult situation that you are
suggesting here.
Representative G r i f f i t h s . And yet, don’t you really think that it is
much worse for us to have a fiscal policy going one way and monetary
policy going the other way ?
Mr. M a r t i n . W ell, I don’t think that is necessarily so. I think that
the two ought to complement each other. That is the ultimate way to
solve it. But you could have a situation of overfull employment and
overutilization of resources, and under those circumstances you could
probably have a tax increase and rising interest rates.
Representative G r i f f i t h s . One of the arguments that was made for
the tax decrease originally was that it would promote many people
depositing money, foreigners depositing money in American banks,
and thereby help the balance of payments. You have pointed out
that American based banks brought money back from their foreign
branches to solve the problem. Did it re?ttfy work out the way it was
anticipated it would work out? Did we really have a larger inflow of
investments in this country, or saving deposits in this country, once
the interest rate was increased ?




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417

M r . M a r t i n . We had a very large inflow last summer from the
Eurodollar market. It was well over $1 billion in the third quarter of
1966.
Representative G r i f f i t h s . Was it money of foreigners in foreign
institutions, or was it money of Americans from American institutions
abroad ?
Mr. M a r t i n . I think it was both American and foreign money.
Representative G r i f f i t h s . I f it were the money of Americans, there
would be other tools by which you could achieve the same result. You
could repatriate that money, is that not true ?
Mr. M a r t i n . That is right. Mr. Solomon points out to me Ameri­
cans were also borrowing extensively abroad last summer.
Representative G r i f f i t h s , But part of their own money was coming
back.
Mr. M a r t i n . Part of their own money was coming back. They
were also borrowing abroad extensively. For a lot of capital expendi­
tures by American corporations, borrowing was undertaken m the
foreign capital markets.
Representative G r i f f i t h s . But there are other tools available by
which we can repatriate American money, if we sharpen them up, than
to increase the interest rate over here.
Mr. M a r t i n . Y o u are talking about direct------Representative G r i f f i t h s . Well, you could do it ta x w ise , could you
not?
Mr. M a r t i n . Well, we have the interest equalization tax.
Representative G r i f f i t h s . There are other means t o bring it back.
Mr. M a r t i n . That is true.
Representative G r i f f i t h s . Now I would like to ask you, are you
developing tools or are studies being made by which you can tell us
accurately or with any degree of accuracy the difference between a 1percent interest raise, a rate of interest decrease, and a 1-percent tax
increase or decrease?
Mr. M a r t i n . W e are making studies of this at all times, Mrs. Grif­
fiths, but that is a very, very difficult measurement to make. The flow
o f funds is hardly amenable to any precise calculations with respect to
what a given change in interest rates under certain circumstances will
do.
I am very proud of the fact that at the Federal Reserve Board I
think we have a staff as good at making models of the economy as any­
body. I admit that I am still unpersuaded that these models are of
any value except as general guides. They do not give you the precise
answer.
Representative G r i f f i t h s . W e have up here & lot of laws that don’t
apply to the real world either. I would like to say that if the Govern­
ment had a happy combination of monetary and fiscal policy, first, we
have to set up some sort of institution by which the m o n e t a r y authori­
ties and those who are going to make the fiscal decisions nave some
communication, and to set it tip originally, you have to have some
facts on which to base i t So we need all of this in my opinion— we
need a beginning towards all of it, don’t we?
Mr. M a r t i n . W e do indeed, and in solving this problem I think
that we are in a pioneering field in one sense.
Representative G r i f f i t h s . Y es; I think so, too.




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M r . M a r t i n . And I th in k w e are g o in g to h a v e to continue to w ork
at it a gg re ssiv ely.
Representative G r i f f i t h s . O f course, just the tax decrease on the

theory that you get more money was a miracle.
M r. M

a r t in .

T h a t is rig h t.

Representative G r i f f i t h s . Nobody believed that. And now nobody
wants to increase the taxes, on the theory that you might decrease in­
flation. W e have had more letters on the tax increase than anything
else the President has suggested.
M r . M a r t i n . W e l l , I am in com p lete a greem en t w ith th e need fo r
fu r th e r stu d y in th is area.
Representative G r i f f i t h s . The letters are for decreasing and not

increasing. They like that theory.
Thank you, Mr. Chairman.
Chairman P r o x m ir e . I want to say before I call on Mr. Rumsfeld
that I am going to have to go and vote. I will be right back.
Representative C u r t i s . Would the gentleman yield ?
Representative R u m s f e ld . I would be glad to.
Representative C u r t i s . I think the budget shows he is asking this
for fiscal 1968 and it does not have an impact on fiscal 1967.
Representative R u m s f e ld . It lias a psychological impact.
M r . M a r t i n . Doesn’t it start July 1 ?
Representative C u r t i s . You said right now— that would be the rest
of fiscal 1967. Fiscal 1968 begins July 1.
M r . M a r t i n . I see what you mean; yes.
Representative R u m s f e ld . I think also there is the psychological
aspect, which is what I was interested in.
Mr. M a r t i n . Yes. Well, you have got a good point there.
Representative R u m s f e ld . W ith respect to your position on this
surtax, you just referred to the war in Vietnam in your response to
me. Do you base your position with respect to the tax increase on an
assumption that the war is going to proceed roughly at this level or
that it will be reduced somewhat or increased somewhat ? It must be
based on something.
M r . M a r t i n . I t is b ased on the b u d g e t a s n ow presen ted, and I am
not. in te rp re tin g th a t b u d g e t. I am ju s t ta k in g it as it is presented.
Representative R u m s f e ld . The reason I asked the question is be­

cause in the past, the budget estimates for the war in Vietnam have
been rather dramatically understated.
Mr. M a r t i n . That is correct.
Representative R u m s f e ld . And there were those as long ago as a
year agso who indicated that they were underestimated. The very
day they arrived at the Congress. Again this week and last month,
there were individuals who expressed the opinion that it is, again, be­
ing understated I know you have no crystal ball, just as I don’t have
a crystal ball.
M r. M

a r t in .

R ig h t .

Representative R u m s f e ld . But I think that it is a valid point. I
have a question about a theory or a proposal that has been advanced
that the price of gold be increased each year by some small percentage
which is less than the prevailing level of interest rates. The theory
is that this conceivably could increase liquidity and lessen the present
incentive of private parties to hold gold, and further, that it might re­




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1967 ECONOMIC REPORT OF THE PRESIDENT

419

suit in a release of gold from private hoards into official stocks. Ob­
viously, this w/ould take some international agreements. I would like
to know what your reaction to this theory would be.
Mr. M a r t i n . I am dead against a change in the price of gold. It
seems to me that if it is going to be used as a standard, that it should
not be changed in price any more than feet or inches are changed as a
measure of distance. I have been through this for many, many years.
I used to study under Irving Fisher at Yale, and he was a great pro­
ponent of the commodity dollar. I f you are going to make this sort pf
change, why you have to do it every 5 to 10 years or so.
Representative R u m s f e l d . I looked through a number of these
policy actions statements, and the ones that I noticed were unanimous.
W ere they all unanimous during the past year ?
Mr. M a r t i n . I don’t think so, Mr. Rumsfeld. For instance, in one
case at the end of the year, as I remember it, the vote was 8 to 4. Are
you talking about the Open Market Committee ?
Representative R u m s f e l d . Yes.
Mr. M a r t i n . Another vote was 10 to 2.
Representative R u m s f e l d . The ones I happened to see were unan­
imous and I was just curious to know what the pattern had been, in
the past year.
Mr. M a r t i n . On November 22 there were two dissents, and on De­
cember 13 there were four dissents, as I remember it. Yes, four dis­
sents, 8 to 4.
Representative R u m s f e l d . In your comments in responding to Sen­
ator Javits’ question, you seemed to me to indicate greater near-term
concern about the dangers of overheating the economy than the
dangers of a downturn in economic activity or a recession. First of
all, is this an accurate interpretation of your view, and, second, if it
is, is it at all based on the conviction or assumption that the adminis­
tration does not plan to make any substantial reductions in Federal
domestic spending during the next fiscal year ?
Mr. M a r t i n . Well, I feel that the adjustment process is proceeding
satisfactorily at the moment, but I have repeatedly today stressed the
overhang of inventories as a major problem.
Now we started to ease money because of a modest slowing up in
the economy, in November last year, and we are continuing on that.
W e will review policy from day to day and week to week, and we will
determine as we go along whether this is j ustif ied.
I have supported the tax proposal because I think that there is still
a very strong likelihood that we will get a turnaround before long
here, and unless the Vietnam expenditures are reduced or other Gov­
ernment expenditures are reduced, we can have another upsurge of
inflationary pressures.
Representative R u m s f e l d . From your prepared statement and
some of your earlier comments, I had the impression that you favored
the President’s request for a tax increase. Then in response to a later
question, you indicated that you, in fact, favored the tax increase now.
There is a difference.
Mr. M a r t i n . Is there a difference in the President’s proposal ?
Representative R u m s f e l d . A difference between the proposal and
an increase? I think so.
I think with respect to timing and flex­
ibility there is a substantial difference. My earlier impression was that




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you favored making the proposal as the President has done, but not
necessarily to have the tax, the surtax, passed now. But you do
favor the prompt action by the Congress ?
I think we all recognize that ultimately the liquidity of the world
will probably require some supplements to gold. Gold came about
as an evolution from barter. That is my simple way of looking at it.
In this evolutionary process we are going to have to continue some
relationship to gold as a measure. I f we were to change the price of
gold it would lose its usefulness as a monetary standard. In any event,
a change in the price of gold would be completely unacceptable.
Representative R u m s f e l d . Returning to this question of coordina­
tion between the Federal Reserve Board and the administration, I
asked Mr. Ackley the following question. I said :
Would yon say that from hindsight the Federal Reserve decision to increase
the discount rate in December of 1965 was as bad as was expressed at the time
by the Administration?
He responded by saying:
I think one has to distinguish carefully the nature of the Administration’s
complaint about the December 5 lowering of the discount rates. It was our
feeling then, and I think it remains our feeling that it would have been better
if the Reserve Board had waited until the end of December or early January
at that time. We could have made coordinated fiscal and monetary policy
decisions on the basis of then somewhat better at least information on budget
expenditures, and an opportunity for us to consider together what kind of tax
proposals the President wished to make in his January message. There is no
quarrel with the fact that the developments in late 1965 and the prospects for
1966, particularly after we received at the end of November and really early
December the forecast of plant and equipment expenditures made clear addi­
tional strain on the economy would require both monetary and fiscal.
I s a id :

You do not disagree with the announcement as to the timing of the Adminis­
tration and the opportunity to take steps.
H e s a id :

That is correct

Does this indicate a lack of coordination or, as you suggested, a
fundamental difference in the judgment that was made?
M r . M a r t i n . I t h i n k t h e r e w a s a d if f e r e n c e in j u d g m e n t a t t h a t
p a r t i c u l a r t i m e , a v e r y h o n e s t d is a g r e e m e n t . I s t a t e d e a r lie r , a n d I s o
t e s t ifi e d in D e c e m b e r o f 1965, a n d I w i l l r e it e r a t e it , t h a t in m y m i n d
i t w a s a m a r k e t p r o b l e m . I d o n ’t b e lie v e t h e m a r k e t c o u l d h a v e w a it e d
a n o th e r 6 w eeks.
Representative R umsfeld . Is this roughly the view that was ex­

pressed to you by the administration at that time, that Mr. Ackley set
forth here m his response to me f
Mr. M artin. W ell, yes. I wouldn’t challenge what Mr, Ackley said.
Representative R umsfeld . N o; he was talking from hindsight.
Mr. M ajrttn. Yes.
Representative R umsfeld . It wouldn’t be challenging him.
Mr. M artin . There is no question about it: I was working on this
to the best of my ability— and I have a Board to work with also you
know— I was working on this from late September on, I think it is
fair to say that I did not have any support from the Secretary of the
Treasury or the Chairman o f the Council of Economic Advisers or




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1 0 6 7 ECONOMIC REPORT OF TH E PRESIDENT

421

the Director of the Budget or the President, and I regret that very
much. It was not a happy position to be in. I f we had had agree­
ment, we probably would have done it 3 months earlier.
Representative R u m s fe ld . My time is up. I simply would like
to join the other members who have commented on the fine job you
are doing, Mr. Chairman.
Chairman P r o x m ir e . Mr. Brock?
Representative B r o c k . Mr. Martin, it is nice t o see y o u again, sir.
M r . M a r t i n . Thank you.
R ep resen tative B r o c k . I am p a rt o f a la rg e crow d o f y o u r fa n s
on th e h ill th a t are som etim es n o t qu ite as v o ca l as th e o th er side.
I would like to talk just in general terms with you about the economy
itself. I know we have seen statements by the administration that
they feel that the budget and the tax program indicate a restrained
approach, a very fine balance between the possibility of inflation and
the possibility of recession.
I think the concern that I feel, Mr. Chairman, is the possibility that
exists for both occurring at the same time. I don’t think this is
economically impossible. I think you can have inflation and recession,
particularly under a wartime situation such as we have in Vietnam.
I am concerned that this economy may be something like a sponge in
that you have certain defense related industries going up to full pro­
duction or perhaps somewhat in excess of that, and certain nondefense
related industries such as the credit sensitive industries— housing and
so forth— remaining in a very depressed state.
Is this a danger for us? Do you see it as a potential for 1967, or do
you agree primarily with the administration that we can hope for
the best of all worlds and a pretty good balance this year ?
Mr. M a r t i n . I am inclined to agree with the administration anal­
ysis here, and hope that the last half of 1967 will see us straightening
out these things. But you raise a very real point, and it is one that
worries me.
W e know that we can get some demand-pull and cost-push inflation
very quickly. This goes back again to my earlier comment with
respect to the war in Vietnam. I find wartime pressures, regardless
of how small the war may be in relation to gross national product,
very unfortunate in terms of their impact on various segments of the
economy, and the imbalances that arise as a result.
Representative B r o c k . Isn’t it a fairly logical development that
war should be a smaller percentage as our GNP has grown so tre­
mendously, and also as we have shifted more from a manufacturingbase economy to a greater emphasis upon services, which would not
be directly related to war expenditures in any sense of the word.
M r . M a r t i n . That is correct.
Representative B r o c k . W e can’t really equate apples and oranges.
This isn’t the same economy that we had in 1951, 1952, and 1953.
M r. M

a r t in .

T h a t is r ig h t.

Representative B r o c k . I s it your opinion, as it is mine, that we
have virtually come to the point where the inflation problem v ^ face
is more of a cost-push type than demand-pull? You mentioned your
concern with inventory accumulation and I have the same concern.
Certainly if you have excess inventories, you don’t have a demand-pull
inflation, but yet we did see an increase in prices. There still is not
75-314— 67—pt. 2------ 13




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WE

1.967 ECOlfOWC REPORT oap t b b p r e s i d e d

as great a leveling off as I would like to see in price increases, and isn’t
there a distinct possibility that with the contracts up for negotiation
this year of a strong impetus towards a cost-push type of inflation?
M r . M a r t i n . I don’t think there is any question about it* That is
the thing to watch.
Representative B r o c k . D o you honestly believe that taking pur­
chasing power away from the American consumer in the form of a
tax increase will affect a cost-push inflation?
M r . M a r t i n . N o t a t th a t p a rtic u la r p o in t, but I believe th a t it is a
m a tter o f pru dence in o v era ll b u d g et p o lic y th a t w e h ave to look to ­
w a rd m in im iz in g the size o f the deficit, a n d n o t th in k o f the bu dget
en tire ly a ll th e tim e as the m ean s o f e x p a n d in g o r con tractin g the
econ om y.
Representative B r o c k . I couldn’t agree more to that. I question,

what I am getting at is the type of tool, be it monetary or fiscal, mone­
tary lias a broader scope, and it includes several different types of
monetay tools and fiscal policy includes several different types. The
question I am trying to point out is whether or not a tax increase rep­
resents the right tool, given a cost-push inflation, as opposed to a de­
mand-pull inflation ? I question whether we are using the proper tool
for this particular problem.
Mr. M artin. I would go along with you that I question whether it
is necessarily the right tool, but I think it is essential that we apply
something to this.
Representative B r o c k . J agree. Could you suggest for us some a l­
ternative tools? I don’t mean to put you on the spot, Mr. Martin.
Mr. Curtis suggested cutting the expenditures, and of course, I think
you would share a concern m this area as I do.
M r . M a r t i n . Indeed.
(Additional material subsequently submitted by Mr. Martin, appears
following his testimony (p. 434).)
Representative B r o c k . Let me change the subject to something th at
is of great concern to me in light of yesterday’s debate in the House.
What is the impact on our monetary system of short-term refinanced
debt as opposed to long term ? The point I am trying to get at is this.
W ith our 434-percent ceiling on long-term interest rates, we have
effectively precluded Treasury from borrowing on the long-term mar­
ket. You simply can’t sell bonds at 4*4 percent today, and everybody
Knows it. Nobody will buy them. A s a result, a great percentage of
our national debt is now in less-than-l-year, and a good percent is in
less-than-5-year obligations, which means an enormous turnover must
be accomplished each year in refunding the debt.
Now what is this effect upon the monetary markets of the country,,
interest rates, the availability of money and so forth?
M r . M a r t i n . It keeps them more upset than I would like to see
them, because the short term flows are moving around like eddies in
the stream all the time, and it makes it more difficult for our operations
to keep the flow steady.
Representative B r o c k . Doesn’t it pretty well tie the hands of the
Federal Reserve System to just such action as you took in December
a year ago, an action which created some political repercussions, but
which also, because we did not use a combination of policies, comple­
mentary policies, both fiscal and monetary, create in my opinion cer­




THE 1967 ECONOMIC REPORT OF THE PRESIDENT

423

tain dislocations in the economy, particularly in the credit sensitive
industries of homebuilding, durable goods.
Mr. M a r t i n . No question about it, because the flow is at certain
times impeded by rigidities in the market. Now the thing that has
been so pressing from our standpoint with respect to housing has been
that the rigidities in the market place an undue burden on housing.
I f you have to restrain, something has to be restrained. I regret
that so much of it fell on housing, because I think our long-term
requirements for housing mean that we ought to have more housing.
R ep resen tative B r o c k . I agree w ith y o u . I do th in k there are
som e p retty g o o d sign s o f a resurgence n ow in th e a v a ila b ility o f
m on ey to sa v in g s an d loan s.
Mr. M a r t i n . Oh, I do indeed.
Representative B r o c k . And also in the homebuilding industry.
Mr. M a r t i n . And we hope this part due to our present policies.
Representative B r o c k . I do, too. I hope your present policies

don’t create another problem.
M r. M

a r t in .

R ig h t.

Representative B r o c k . Specifically in the international balance of
payments field, is it not true in funding debt on a short-time basis
that we are actually paying a higher interest rate than we would if
we could finance it on a long-term basis ?
M r . M a r t i n . Well, it depends on the size-----Representative B r o c k . I am talking about right now.
Mr. M a r t i n . Right now, yes.
Representative B r o c k . We are paying more money because we are
forced into the short-term market.
Mr. M a r t i n . I am absolutely convinced, as I said earlier, that the
6.04 rate on the 6-month bill that occurred during the summer would
never have occurred, if it were not for the 414 percent interest ceil­
ing, and the whole debt could have been financed at a lower rate.
Representative B r o c k . W e have discussed this before m y com­
mittee on previous occasions, Mr. Martin, but I just want to be sure
that your position hasn’t changed. You would be interested in the
Congress considering this particular problem, would you not?
Mr. M a r t i n . I would indeed.
Representative B r o c k . W ith a view toward------M r . M a r t t n . I would be enthusiastic for it.
Representative B r o c k . Thank you. One last comment. There have
been some of our political figures in Washington and elsewhere who
suggested that the Federal Reserve is making an unconscionable profit
on the interest that is paid to it on the bonds that you own. Would you
tell me, first, how many bonds are held by the Fed, U.S. Government
obligations, today ? Do you know offhand ?
M r. M

a r t in .

$ 4 4 b illio n .

Representative B r o c k . What is the annual interest yield on those
bonds to the Fed ?
Mr. M artin. Last year our earnings were about $1.9 billion.
Representative B r o c k . What were your expenditures o n t h e Federal
Reserve System ?
Mr. M a r t i n . Very, very small.
Representative B r o c k . Just a p p r o x i m a t e l y ? W as i t $ 2 0 0 m i l l i o n ,
$150 million?




424

th e

19 67 ECONOMIC REPORT OF THE PRESIDENT

M r. M artin . Yes.
I would say about $200 million.
Chairman P r o x m i r e . Perhaps you might supply it for the record.
M r . M a r t i n . I will put it in the record.
(The information referred to follows:)
E a r n in g s a n d E x p e n s e s of t h e F e d e ra l R eserve B a n k s in

1966 a n d 1965

Preliminary figures received from the Federal Reserve Banks indicate that
during 1966 their gross earnings amounted to $1,908 million. Distribution of
gross earnings was as follows: expenses, $207 million; payments to the U.S.
Treasury, $1,649 million; statutory dividends to member banks, $33 million; and
additions to surplus accounts, $19 million.
Under the policy adopted by the Board of Governors at the end of 1964, all
net earnings after the statutory dividend to member banks and additions to
surplus to bring it to the level of paid-in capital were paid to the U.S. Treasury
as interest on Federal Reserve notes.
Compared with 1965, gross earnings were up $349 milUon, or 22 percent. The
principal increases in earnings were as follows: on U.S. Government securities,
$329 million; on discounts and advances, $9 million; and on foreign currencies,
$8 million.
Expenses in 1966 were up $3 million, about 1.5 percent, and dividends, $1
million.
[In thousands of dollars]
Item

1966

1965

1,908,500
207,401

1,559,484
204,290

Current net earnings____________________________________________________
1,701,099
996
________________________________________
N et addition to current net earnings1

1,355,194
1,022

N et earnings before paym ents to U .S. T reasu ry________________ _______
D ividen ds p a id _____ _______ ______ „
____________________________________
P aym en ts to U .S. Treasury (interest o n Federal Reserve n o te s ).____________

1,702,095
33,696
1,649,455

1,356,215
32,352
1,296,810

Transferred to surplus——..___ _________________________ _________ _______

18,944

27,054

Current e a r n i n g s ____
_____

_____________________________________________________
_ ______________ _________ _______________________
_
Current expenses

i Inclu des net losses on sales o f U .S. G overn m en t securities o f $2,476,000 in 1066 and o f $9,000 in 1965.

Representative B rock. Let’s say somewhere in the neighborhood of
$200 million. What do you do with the balance of the interest?
Mr. M artin . Almost all of it is paid to the Treasury.
Representative B rock . You refund it to the Treasury?
Mr. M artin . Pay it to the Treasury.
Representative B rock . S o in effect you are repaying about 90 per­
cent of it, or a little less, back to the Treasury.
Mr. M artin . That is right.
Representative B rock . And there is no validity whatsoever to the
charge that the Fed is making a profit off of the Federal debt, is
there?
Mr. M artin . Oh, no.
Representative B rock . Thank you very much.
Mr. M artin . No, no, and our operations are never designed for
profit.
Chairman P roxmire . Mr. Chairman, I want to say that I am
shocked and surprised that you say that if you had your option, you
would favor, would vote for, or would support an increase in taxes
right now. You would impose the surtax today. That is what I under­
stood you to say to Senator Javits.
Mr. M artin . Well, I am afraid I didn’t put it very well. I wasn’t
suggesting to put the surtax on today, and I am glad you corrected it.




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425

Chairman P r o x m ir e . I understand, but may I then revise it ? Would
you say under present economic circumstances, budgetary circum­
stances and so forth, that you would feel that this is a time when we
should impose the surtax ?
M r. M

a r t in .

Y e s , I w o u ld th in k th a t is p roper.

Chairman P r o x m ir e . Now let’s take a look at the indicators. I have
asked the staff before asking that question to get me the information
on what the 30 indicators were showing: 19 of them have a trend one
way or another, the others are rather indefinite; 15 are down, only four
are up.
Consumer prices have been stable since October, 114.5, 114.6, 114.7,
which I think is a remarkable showing. And, of course, the lag in
wholesale prices which have been stable for almost an entire year
suggests stable consumer prices in the coming year. In February of
1966 they were 105.4; now they are 105.9. And recently they have been
dropping.
Then we go over to business sales and inventories. W e find that
since June sSes have been going pretty much on a level. In June they
were $86,957 million. Now they are $86,999 million, almost exactly
the same, fluctuating a little bit but in a growing economy this is an
indication it seems to me of a trending off.
Then we move over to new construction and, of course, we know that
has been in trouble. In September there was $73.4 billion; in Decem­
ber it was down to $70.4 billion. These are seasonally adjusted annual
rates. It is down below what it was in 1965. That is overall construc­
tion, not just housing.
Then the steel production has been dropping since September. In
September it was $2.6 billion; in December, $2.3 billion. It is approxi­
mately the same in the latest week in January for which we have
figures. Then you look at the total industrial production— the overall
industrial production. That was 158.0 in August, 158.7 in December.
In fact, it dropped from November to December.
The weekly hours of work, from 41.5 in September to 41.0 in Decem­
ber. Employment has been pretty much stable for a year. It hasn’t
dropped. Expenditures for new plant and equipment have been ris­
ing at a far slower rate as you know. Since the third quarter of last
year they have been going up steadily at the rate of about 5 or 6 percent
instead of the 16 or 17 percent that it had been going up for 3 years.
Corporate profits have been going down— $48.7 pillion in the first
quarter of the year, down to $48.2 billion now. That has been pretty
steady. Farm income is down.
So when you look at the whole picture, it would seem to me that now
to impose a tax increase under these circumstances, when the economic
indicators are down, would tend to slow down the growth of an
economy which has available resources, and would be a mistake, be­
cause it might increase unemployment and aggravate an unpromising
situation.
Mr. M a r t i n . I am afraid you have misunderstood me. I probably
haven’t spoken very clearly on this, Senator, but what I was trying
to say was I would favor the passage of this for imposition on July 1,
which is what I conceive the proposal to be.
Chairman P r o x m ir e . You see what I am concerned with now, so
you take that position I think that there is a lot of wisdom in it. I
would judge that Congress may not pass the tax increase if conditions




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THE 19 67 ECONOMIC REPORT OF THE PRESIDENT

in June are about what they are now. On the other hand, if condi­
tions are more expansionary, if prices have gone up, if industrial
production has resumed its rise, there is a much stronger argument
for a tax increase. But I take it from your earlier response that you
feel that if conditions are unchanged we should still have a tax in­
crease. Is that right ?
Mr. M a r t i n . I think that the prudent course is to perceive that
we ought to be doing something to close this gap by either reducing
expenditures or by increasing taxes. Assuming the imposition of this
tax as of July 1, whether it is passed now or 3 months from now is of
no particular concern.
Chairman P r o x m i r e . N o w it is this gap concept that concerns me,
because if we have a stable economic situation or a declining economic
situation, and not the growth that we had hoped for, we will have a
larger deficit, not a smaller deficit. Under these circumstances, should
we increase taxes?
Mr. M a r t i n . I think this ought to be very carefully considered;
yes.
Chairman P r o x m i r e . Shouldn’t the principal judgment be on the
impact on the economy, recognizing that after all if we have a serious
recession we will have a big deficit, a $20-billion deficit.
M r . M a r t i n . T h i s is o n e o f t h e e c o n o m ic q u e s t io n s o f o u r t im e . I
in s is t t h a t t h e p r o b l e m o f t h e n e x t 10 y e a r s is g o i n g t o b e h o w w e d e a l
w i t h t h e e c o n o m i c s o f f u l l e m p lo y m e n t .
Chairman P r o x m i r e . You put it very well in your statement when

you said we should have the fullest possible utilization of our resources
consistent with stable prices. Now if prices are fairly stable, our re­
sources aren’t being utilized, then isn’t it clear that we should follow
an expansionary fiscal policy Isn’t that a time when maybe a deficit
might not be a bad idea ?
M r . M a r t i n . Well? yes; but there has to be some relatiotiship to the
past deficits. This is this matter of perpetual deficit.
Chairman P r o x m i r i i . I don’t like perpetual deficits at all. I voted
against the tax cut in 1964.
Mr. M a r t i n . Y o u and I are in complete agreement on perpetual
deficits. We have talked on this before.
Chairman P r o x m i r e . This isn’t like the period of 1964 when un­
employment was already declining. We should have, under those
circumstances, a stable tax not have had a tax cut. By now the econ­
omy is going the other way and you propose a tax increase, not stable
tax rates?
M r . M a r t i n . We may have to do that, but I still-----Chairman P r o x m i r e . You say we may have to do that.
Mr. M arttn. I still think the prudent thing is to look toward the
imposition o f the President’s proposal on July 1. That is what I
have been try ing to emphasize.
Chairman P r o x m i r e . But shouldn’t that depend entirely on whfct
the economic situation is in June when it comes before us. and I mean
entirely, not on the budgetary situation but on the economic situation?
Mr. M a r t i n . I am not convinced that you can ignore the budgetary
situation.
Chairman P r o x m i r e . All right, let me ask you about something
else. There seems to be a direct conflict between the needs of the hous­




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1967 ECONOMIC REPORT OF THE PRESIDENT

427

ing industry and our balance-of-payments situation. I f you have to
follow a policy to keep capital from flowing out, of keeping short­
term rates from going down much lower, or even increasing them,
this obviously is going to mean that money will not flow from short
term into long term, so that under these circumstances you are going
to have to seriously limit the monetary policy. Whicn do you do?
We have a depressed housing industry, we have a balance-of-payments
problem. Would you favor under tnese circumstances perhaps even
tighter capital controls of some kind, or how do you resolve this
dilemma ?
M r . M a r t i n . I will cross that bridge when I come to it. We have
been dealing with this for a long time. I don’t have the answer.
Chairman P r o x m i r e . Y o u will cross the bridge or will you jump off
the bridge?
M r . M a r t i n . I may have to do both.
Chairman P r o x m i r e . You don*t see any way prospectively that we
can resolve this problem. You think we have used selective Federal
controls wisely. The President suggested a doubling of the equaliza­
tion tax.
M r . M a r t i n . We have the equalization tax, that is right.
Chairman P r o x m i r e . We may have to use even more stringent pol­
icies in order to overcome a most unfortunate situation. You recog­
nize, I am sure, the devastating impact on the housing industry of
high interest rates last year, and I mean devastating. It was a de­
pression wasn’t it of housing, of homebuilding?
Mr. M a r t i n . Well, it was a decline, a serious decline. I don’t know
how you measure how devastating it was, because some of this decline
did make it possible to correct some problems, such as overbuilding in
some areas. There has been a population problem in housing also.
There have been scone other factors. As I testified a year ago when
I was up here, I think the population trend is going to favor nousing
from here on out. I think it was against it a year ago. These are
some of the considerations.
Chairman P r o x m i r e . Let me ask you apropos o f using monetary
policy from an inflation standpoint, do you have any studies to show
just what prices are interest sensitive? I have already raised the point
m earlier questioning that the increase in the mortgage rate was a big
element in the increase in the cost of services. We m ow, at least I
assume—maybe I am wrong and you can correct me—that food prices
are not very sensitive to an increase in interest rates. The most rapidly
rising element other than mortgage interest last year was the cost o f
medical services. I would assume that those are not particularly re­
sponsive to interest rates. Do you have an analysis tnat shows what
happens when you follow a stringent monetary policy, restrain de­
mand, what prices do respond and what do not ?
Mr. M a r t i n . I don’t think we have any analysis that we would want
to pass on. Mr. Brill is the head of our research division. He works
in this field right along. I question very much whether we have any­
thing really o f value on this.
Chairman P r o x m i r e . D o you feel that it is possible to make a
useful study here that would tell us under what circumstances that a
stringent monetary policy would be wise and under which it would
not ? Clearly when the problem is food, medical services and so forth,




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THE 1 9 67 ECONOMIC REPORT OF THE PRESIDENT

and a cost-push situation, the argument is much weaker for a stringent
monetary policy, but it would seem to me that an analysis could be
very, very helpful.
Mr. M a r t i n . Mr. Brill says we submitted a paper on this to the
Commission on Money and Credit. We might dig that up, and also
see if we can’t do some more work on it.
Chairman P r o x m i r e . Wouldn’t it be helpful for the Board to have
their eye on this kind of thing ?
M r . M a r t i n . Oh, absolutely, and we do have our eye on it. There
is no question about that. The question is what you measure this by.
We have our eye on it.
Chairman P r o x m i r e . Y o u are very sensitive to the fact that there
is a lesser argument for stringent monetary policies in a cost-push
situation.
M r . M a r t i n . Oh, no question about it.
Chairman P r o x m i r e . One more question. You say in response to
Mr. Brock that prudence and budget policy to minimize the impact
of a deficit by using tax restraint. Now I would like to call your at­
tention to what happened in 1952,1953, and 1954.
Mr. M a r t i n . I am very familiar with that period.
Chairman P r o x m i r e . I know you are, far more familiar than I am,
because you were right on top of it and in the middle of the hot seat.
We had in 1952 to 1953 a rise in the cost of living of only 2 percent,
although we took off price controls in April of 1953. We had unem­
ployment drop from 3.1 percent down below 3 percent to 2.9.
Now in view of this, why should we feel that a 3.8 or a 3.9 percent
unemployment which we have now puts us in such a tense situation
that we have to consider invoking fiscal policy that would restrain us
when we obviously have a slack at this time ?
M r . M a r t i n . We obviously, in my judgment, have a different set
of circumstances. We were coming out of World War XI at that time.
Chairman P r o x m i r e . N o; that was the Korean war, 1952 and 1953.
Mr. M a r t i n . It was the overhang, you see, that we were dealing
with. I don’t know what the right rates are here. I have puzzled
with this a long time but I think there are basic differences. I think
that in the skilled labor area, we have more labor shortages recently
than we had at any time during that period, despite the difference in
the unemployment rates. This is purely j udgment.
Chairman P r o x m i r e . Thank you very much. Congressman Curtis?
Representative C u r t i s . Mr. Chairman, I do want to pursue this tax
discussion a little more, because this is something that we face in the
Ways and Means Committee. One thing I have been disturbed about
is the macroeconomist approach to tax policy as part of fiscal policy,
ignoring the details that go to make up taxes. Someone accused me
a few years ago of being a microeconomist. I didn’t even know what
it meant but I guess that is what I am, because I think that our Federal
tax rates are still too high, even after the 1964 cuts and the 1954 cuts.
By too high I mean that the rates are such that business judgment
is often made on the basis of the tax consequences rather than on
overall economic or business considerations. It does impede economic
activity. It is true, however, when we extract taxes from the private
sector it has some economic impact, but I am from the school that
believes we should try to have as minimal an impact as possible.




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Even if it is true that we are beyond diminishing returns in tax
policy, I think it would create some very serious damage if we were
to actually increase taxes. I put this on the record because this is one
reason why I move toward expenditure cuts as a solution to what
is an overall fiscal policy problem. We are going to have to finance
this budget. I f we don’t do one or the other, increase taxes or cut
spending, as you point out, we will have further deficits which then
impinge on the money market.
The macroeconomists had their way in this removal of the 7-percent
investment credit. I f anyone paid any attention to the details of it I
am sure he would realize that this credit is just about the worst kind
of thing that they could use to turn off and tlaen turn on again.
I must
too, for the record, that I feel, unlike your testimony, the
investment credit is unsound both economically as well as tax wise. I
might say another thing, too. On expenditure policy I am convinced
that improving our expenditure policy will go both ways. One: It
will cut down the deficit. But also weeding out unnecessary spending
is going to improve the programs. We flood the carburetor and
damage what we are seeking to attain in many of these expenditure
programs. I am simply taking this occasion to put these thoughts on
the record, because I think this will come into the discussion when the
Ways and Means Committee goes into this area of trying to figure out
what, if anything, ought to be done about financing the budget.
Now if I could get over to questions. I will preface this by some
remarks. The stock market I think is increasingly becoming a good
economic indicator. I have always felt the flow of gold was one of
the greatest economic indicators, if we follow it. Last year, as I
understand it, no new gold, additional gold from all the mined gold,
ended up in the hands of governments. To me this is a very disturbing
indication of hoarding on the part of individuals and institutions, ana
suggests to me that there should be considerable concern. Would
you comment on that?
M r . M a r t i n . Well, I regret the hoarding of gold that is taking place.
And as you say, there was practically nothing left o v e r last year
for monetary purposes. This is one of the reasons why I think we
ought to press our studies on international liquidity. I think that the
International Monetary Fund is an ideal place to work on this. The
administration is working quite hard in this a r e a . It seems to me
that this is a-----Representative C u r t i s . Well, liquidity might help that part of the
problem, but I was referring to this as an economic indicator. Why is
it that institutions, private institutions and people around the world
are in effect “battening down the hatches” ? I think we had better
look to see what they foresee, and this is what I say creates this
disturbance. Wlien I start looking at some of the indicators, I think
I begin to share this concern.
It seems to me our international picture is in a very delicate balance,
and certainly improving the liquidity or our methods of handling
international imbalances would be helpful. But I think most people
that I have heard would agree that this isn’t going to get at our
basic problem of a deficit in international payments and some other
world problems. Would you care to comment?
M r . M a r t i n . There is no comment I could make other than that
that is the problem.




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Representative C u r t i s . N o w one of the other thinks that will be
before Ways and Means almost as soon as we get back after raising
money—I might say here that the Democrats do that as well as the
Republicans around this time of year. Yesterday they tried to claim
that when Lincoln ran the second time he didn’t run as a Republican
but as a Union candidate.
The interest equalization tax is up again before the Ways and Means
Committee, and it has been proposed that the President be given
the power to double the tax. To me this is a very unwise approach.
O f course, I opposed it in the beginning. By the way, I was very
pleased to see an article by Jack Behrman, who was the former
Assistant Secretary of Commerce under President Kennedy’s admin­
istration. He is now teaching at the University of North Carolina.
He jjoints out in this article that our foreign investment comes back
within 2 years, so the impact of this on our international balance of
payments actually is not as great as is often said. Certainly in the
long run the restraints are deleterious, because as you mentioned, our
greatest asset in our international balance of payments is our plus on
trade and investment income. We have been getting a fine return on
our investments abroad.
What is the policy, if there has been any expression on the part of the
Federal Reserve, on continuing what was supposed to be a temporary
restraint on private investment abroad ?
Mr. M a r t i n . Well, it is our hope that the voluntary foreign credit
restraint program, which is our arm of this, you see, will not become
permanent, but we decided after considerable discussion this year to
continue it for another year and see how things develop.
Representative C u r t i s . Did you continue it simply because of the
equities involved, or did you do that as a basis of policy because you
thought the entire weapon o f restraining investment abroad was sound
economics for these times ?
Mr. M a r t i n . We thought that under the current circumstances, the
way it has been working, that it would be wise to give this a further try,
and we have been following it very carefully. You know we have one
of our Board members who works on this full time.
Representative C u b t i s . I know. Let me see if I am coming through
to you clearly. When we put the interest equalization tax into the law,
it was quite a job to try to hit other areas in the same way, and now
your program is part of a third area of control. But I think that it
relates more to the inequity o f hitting only one form of investment.
When we first applied the tax, bank loans increased as a way of getting
round it. Now the question is on direct investment. I am trying to
find out whether the Fed’s position is based on the fact that a principle
has been adopted, to my regret, by Congress and the President and you
are simply implementing that to create a more equitable situation, or
do you tnink that the law itself is sound, and that we ought to be
restraining foreign investments because of our problem with the
international balance of payments. Do you understand what I am
tryingtosayf
Mr. M a r t i n . I think I got what you are saying but it is not easy to
separate it. For the long term there isn’t any question we favor
foreign investment. It is an asset t© «s over the long term.




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For the immediate problem we have decided to go along with these
special measures, with the hope that the interest equalization tax, the
voluntary foreign credit restraint program—both the Commerce part
of it and ours—will not become permanent but will be temporary.
Representative C u r t i s . Let me ask it this way. I see my time is up.
The President has recommended that the interest equalization tax be
extended. Does the Fed go along with that proposal ?
M r . M a r t i n . Yes, I think the Fed does.
Representative C u r t i s . I am very sorry to hear it.
Chairman P r o x m i r e . Mr. Rumsfeld ?
Representative R u m s f e l d . Just to get this clear in my mind, your
position is that your coments in your statement with respect to the
President's tax proposal, and your support of that is based on basically
your concern about the deficit, and that your overall attitude is that
either of the two would be equally effective, whether it be a tax
increase or reduction in Federal spending.
M r . M a r t i n . That is correct.
Representative R u m s f e l d . N o w with that in mind, did you take into
consideration the President's proposal concerning changes in the Social
Security Act, and if yon did take it into consideration, did you make
the assumption that his budget makes that they will in fact be passed
at roughly the 20 percent level. And finally, does it make any differ­
ence to you, since it doesn’t bear directly on the question of deficit?
Mr. M a r t i n . Well, I wasn’t involved in any way in that.
Representative R u m s f e l d . I appreciate it, but you are making a
judgment on the tax proposal and this is in the same general area.
Are you assuming it will pass at the President’s requested level ?
Mr. M a r t i n . Yes, I am.
Representative R u m s f e l d . That is part of the assumption.
Mr. M a r t i n . Right.
Representative R u m s f e l d . Would it matter if it wasn’t passed at
that level in your position with respect to the tax? Say instead of
passing it at the average 20 percent level it were passed at 8 percent
with no increase in taxes, social security taxes. Since it doesn’t affect
the deficit, I would assume it wouldn’t matter.
Mr. M a r t i n . No, I don’t think it would matter in that respect.
Representative H u m s f e l d . I don’t think it would matter particu­
larly.
Mr. M a r t i n . Yes.
Representative R u m s f e l d . But with respect to your position on the
tax.
M r . M a r t i n * That is right.
Representative R u m s f e l d . I have been aware for many years of my
absence o f knowledge, but as a new member of this committee I have
been impressed with the broad areas where we as the society lack
knowledge and information, and the ability to effectively relate differ­
ent trends and activities. Are you satisfied, I would guess you would
agree with that statement from your earlier comment-----M r . M a r t i n . Right.
Representative R u m s f e l d . Are you satisfield that the country is
applying sufficient brainpower in these areas to try to see if we can’t
develop the ability to relate things more precisely ? Do you have the
feeling that generally in the country there is a good deal of attention




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19 67 ECONOMIC REPORT OF THE PRESIDENT

b e i n g p a i d t o m a k in g p r o g r e s s , o r t h a t w e a r e n o t s p e n d i n g s u fficie n t
e ffo r t a n d b r a in p o w e r o n it ?
M r . M a r t i n . I t h i n k w e a r e m a k i n g q u it e a b it o f p r o g r e s s r i g h t
n o w . I t h i n k i n th e a c a d e m ic f r a t e r n i t y , a n d -in b o t h g o v e r n m e n t a n d
b u s in e s s , t h a t t h e r e is m o r e a t t e n t io n b e i n g p a i d t o t h is t h a n t h e r e h a s
b e e n f o r a l o n g tim e .
Representative R u m s f e l d . I am glad to have that encouraging

comment. Thank you, sir.
That is all, Mr. Chairman.
Chairman P r o x m ir e . Mr. Brock ?
Representative B r o c k . Mr. Martin, to g o back to the questions of
both Senator Proxmire and Representative Curtis, Senator Prox­
mire suggested that one of our previous witnesses indicated maybe
it would be well for Congress to consider reinstituting the depletion
allowance.
Chairman P r o x m i r e . Investment credit.
Representative B r o c k . The investment tax credit at the rate o f 1
?ercent a month, starting say in July, so that we do not have the full
percent hanging over our heads until December 31, 1967. Is this
an approach which would be interesting to you ?
Mr. M a r t i n . I am really not competent in this area. It is a tax
problem. I think it may have some merit. It appeals to me as an
approach.
Chairman P r o x m i r e . I f the Congressman will yield at that point
I would like just to say your response reminds me of the question
“ How is your w i f e a n d the answer “ Compared to what?” You are
certainly competent in that area or in almost any area with regard
to economics.
Mr. M a r t i n . On the tax y o u mean?
Chairman P r o x m i r e . Yes, indeed. I disagree with you but you are
certainly competent.
Mr. M a r t i n . I try to keep out of precise details in the tax field in
my present job. I do have some knowledge of it, but I really do
not think that I ought to get involved in what is essentially the
Treasury’s business.
Representative B r o c k . Let me phrase it from a different point of
view. You do have a specific interest in our international balance-ofpayments position.
M r. M a r t in . I d o.
Representative B r o c k . Has it ever developed in discussions on the
investment tax credit that we might consider the possibility of al­
lowing extra inducement in this form to export industries, to ease
our balance-of-payments position?
Mr. M a r t i n . Oh, yes, and that has been considered actively in the
Treasury.
Representative B r o c k . Has any recommendation been made to t h e
Congress?
M r. M a r t in . N
b e e n co n s id e r e d .

o.

I

th in k th e y d e c id e d n o t t o d o it , b u t th is h as

Representative B r o c k . On the international problem a s you men­
tioned, this is of great concern. Someone brought up the subject of
gold hoarding. I f it is a fact that the production of gold today is
going into nongovernmental hands, in other words, it is going into




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sources which do not use it as a reserve behind currency of any descrip­
tion, doesn’t this tend to place even greater pressure on the dollar as
the primary medium o f international exchange ?
M r . M a r t i n . It does indeed.
Representative B r o c k , As Mr. Curtis was trying to bring out the
fact that perhaps this could be an economic indicator. I think more
than that, to me it is an international liquidity indicator. It would
tend to give me concern over the dollar as the basis and foundation
of international exchange in the coming 12 to 24 months. I think
that is unrelated to the question of interest rates in this country, for
example, but this is another pressure that can follow the dollar.
M r . M a r t i n . No question about it.
Representative B r o c k . What development is encouraging to you on
the international field insofar as international liquidity is concerned ?
Do you honestly think that we are making some progress in achieving
a greater liquidity, and isn’t this a problem, and doesn’t this also
relate to President de Gaulle’s position of wanting to go to a full
gold standard? Wouldn’t that create the darnedest chaotic situation
we ever saw specifically in light of this gold hoarding?
Mr M a r t i n . I think you have raised the issue very clearly here.
I think there is more attention being paid to this than in a long time.
In the Group of Ten, in the OECD, I think that they have been
gradually realizing clearly what the implications of the return to the
old-fashioned gold standard would be, that there are no countries
today that would permit an inflow or an outflow of gold to determine
their domestic money supply. I f you increased the price of gold
and got out of the dilemma at the moment by doing that, for a little
while it might operate, but then you would need fiduciary money on
top of it.
Now the reason I am encouraged about this is that I think the
International Monetary Fund is one of the real achievements of
Bretton Woods, and I think that the participants, in their activities,
are aware of this problem. The work on the liquidity problem has
not yet reached the stage where there is general agreement, but there
is general recognition of what the problem is. I think that is a
p r e c u r s o r t o g e t t i n g -------Representative B r o c k .

But the essence o f it is that you have some
optimism about the possibility for greater cooperation.
Mr. M a r t i n . I have indeed.
Representative B r o c k . Thank you very much.
Chairman P r o x m i r e . Thank you, Mr. Brock. And thank you very
much, Mr. Martin. You have been an extremely responsive witness.
We have heard you many times. You have always been good but
I don’t think you have ever been as concise and direct as you have
today. It is refreshing to have a witness who is both responsive and
concise and gives members o f the panel a chance to ask all tne questions
they wish.
Our witness this afternoon is the Under Secretary o f Commerce,
Mr. Trowbridge.
The committee will recess until 2 o’clock.
(WTiereupon, at 1 :10 p.m., the committee recessed until 2 p.m. of the
same day.)




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196,7 ECONOMIC REPOET OF THE PRESIDENT

(The following material was subsequently submitted in response
to Representative Brock’s questioning; see p, 422, preceding.)
Question. Is monetary policy less appropriate or less effective
under conditions of “cost push” or “demand shift” inflationary pres­
sures than under conditions of “demand pull” inflation? Is it pos­
sible to differentiate in practice as to when one or the other of
these situations is dominant?

SUMMARY
Business fluctuations in the United States since World W a r II, while differing
from one another in many ways, have bad features in common with respect
to the interactions of demands, output, costs, prices, and profits. The description
of these relationships provided below indicates that the problems of inflationary
pressures arise during the expansion phase o f the business fluctuations char­
f
acteristic of industrial economies, when demands are expanding. In the early
stages of a business expansion, production and employment are likely to increase
without generating widespread upward pressures on prices and costs. Con­
tinued expansion in demands eventually generates upward pressures on prices
and costs as output in some industries reaches high levels in relation to capacity
and unemployment is reduced. If the pace of expansion is moderate and com­
petitive conditions are maintained, increases in prices and costs are likely to be
confined to a relatively few markets. On the other hand, if demands expand
rapidly and expectations are ebullient, increases in prices and costs are likely
to become widespread.
With respect to the second of the two questions raised, once the process of
inflation is under way, i is usually not possible to determine whether the
t
dominant influence on prices stems from “cost push” or “demand shift.” Since
prices of goods and services represent costs to someone, increases in costs are
one of the ways by which inflationary pressures are transmitted through the
economy. At the same time, increases in some costs are promptly reflected in
income payments and thus exert an influence on demands. Through this in­
teraction of demands, prices, and costs, the inflationary process is initiated, and
once in operation, the demand and cost elements interact in such a manner that
they cannot be disentangled as separate and distinct forces.
In the chain-reaction process of demands, prices, and costs, the most direct
influence that monetary policy can exert is on demands for goods and services.
Through its influence on credit availability and on liquidity* monetary policy
endeavors to maintain a climate of demands and expectations during business
upswings that is conducive to a high rate of utilization of available resources
without widespread Upward pressures on prices and costs. Should upward
pressures nevertheless develop, monetary policy ean help to restrain them.
Appropriate monetary policy can limit the funds that may be made available
through bank credit to finance the expansion in demands stimulated by the in­
come effects of price and cost increases, by expectations, and by other forces*
W h e n business activity is high, prices generally are advancing, and the com­
munity expects continuing advances in prices, a monetary policy that restrains
the use of bank credit is an appropriate and necessary tooL Whatever the causes
or the means of propagating inflation, expansion of bank credit would influence
both spending and expectations and so would provide additional impetus to
the price-cost spiral. Under these Conditions, individual and group efforts to
hedge against inflation or to protect against it by tying contractual arrange­
ments to price indexes would tend t& aggravate inflationary forces.
In appraising the effectiveness of monetary policy, a number of factors must
be considered. The formation of policy, first of a l depends on current assess­
l,
ments of developing business and financial conditions and, despite improvements
in economic intelligence over the y&tq, it is net possible always5to judge
accurately the strength of the forces developing. Other activities of the Federal
Government, furthermore, have an impact on levels of production, employment,
and income, and thus they influence needs for greater or lesser degrees of
monetary ease or restraint. These policies, consequently, m a y complicate or
simplify the task and they m a y inhibit or enhance the performance of monetary
policy. Government policies that affect the functioning of markets and those
that directly affect prices— such as import duties and quotas and antitrust
policies— also bear on the effectiveness and results of monetary policy. The




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1967 ECONOMIC REPORT OF THE PRESIDENT

435

degree of market power exercised by private groups also ma y affect the sensi­
tivity of markets to current and prospective demands. If monopoly power were
widespread, it could have an influence on the effectiveness of both monetary and
fiscal policies in pursuing their goals.
NATURE

OF

COST-PUSH

AND

D EM AN D -SH U T

EXPLANATIONS

Controversy over causes of postwar inflation has focused mainly on develop­
ments since 1951. On the causes and nature of the episodes of inflation in the
earlier postwar years, there appears to be widespread agreement. World W a r II
left a legacy of accumulated demands for goods of all kinds, and methods e m ­
ployed in financing the war resulted in highly liquid financial positions. W h e n
wartime price controls were removed, effective demands at current prices were
considerably in excess of supplies in virtually every market.
W h e n the Korean W a r began in mid-1950, memories of war-induced shortages
and price increases provoked protective buying by consumers and businesses,
here and abroad. In both periods of inflation, costs as well as prices rose and
there were large shifts in the composition of demands, but the influence of
strong demands in originating and sustaining price advances was by far the
predominant one.
In the 1954-57 inflation, demands were not strong in all markets simul­
taneously, and the advance in prices was moderate in comparison with the warrelated experiences. In view of these circumstances, several interpretations of
the period since 1964 have emphasized the independent nature of costs. Another
interpretation has stressed rapid changes in the composition of demands. What
is common to these interpretations is that they have attributed primary im­
portance to rigidities or to autonomous elements in markets for goods and
services and have given little or no weight to the role of aggregate demands.
From these theses, further interpretation is drawn that use of general instru­
ments of restraint on aggregate demands in order to check such price increases
would be ineffective or would incur unacceptable social costs in terms of unem­
ployment of human and material resources.
The “cost-push” approach to the explanation of price inflation seems funda­
mentally to assume that costs are more or less independently determined by
market power and, therefore, little can be done about them. Prices are set
by administrative decisions to cover all costs, including a satisfactory margin of
profit, without regard to current or prospective demand conditions. Production,
is scheduled to conform to sales at these prices.
In such circumstances, i is said, Government policies— monetary and/or
t
fiscal— must operate to provide demand sufficient to assure m a x i m u m output and
full employment at the wages that are the result of labor-management agree­
ments and at the prices businessmen— and, sometimes, public agencies— deem
necessary. Otherwise, output and employment will be held or reduced below
attainable levels, but there will be no appreciable restraint on advances in price
levels and labor or other costs.
In practice, however, the extent to which the price of a product can be raised
is limited by actual or potential competition from other products or from im­
ports; these checks are strengthened by Government policies that operate to
restrain demands and prevent ebullient expectations from developing. C o m ­
petitive constraints on prices strengthen resistance to increases in co^ts and at
times may exert downward pressures as businessmen attempt to maintain or
increase profit margins. The influence on costs m a y take such forms as pro­
grams to raise productivity, various efforts to economize on the use of materials,
control 6t administrative and other types of salaried employment, or resistance
to increases in wage rates and fringe benefits.
The “demand-shift” explanation of the type of inflation experienced in the
1954-57 business expansion rests on a combination of factors. Inflation, it is
said, originates in the general excess demands which temporarily emerge as the
economy passes from recession to full employment, and from the excess demands
in specific sectors that often remain after the aggregate excess has been elimi­
nated. Inflation is perpetuated and spread throughout the economy, the argu­
ment proceeds, by the influence of costs in wage and price determination and by
the relative insensitivity of prices and costs to decreases in demands.
In this view, particularly as i relates to the 1954-57 business expansion, de­
t
mands increase and full employment is reached without generating upward price
and cost pressures. Then, a rapid shift in the composition of demands is re­
flected in excess demands in some sectors and insufficient demands in others.




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Because prices are more sensitive to increases than to contractions in demands, a
general rise results as prices advance in those sectors where demands are in­
creasing rapidly and decline by smaller amounts or not at all in those sectors
where demands are decreasing. General monetary and fiscal policies appropriate
to combat an inflation arising out of excess aggregate demand are not suitable, i
t
is contended, to combat an inflation arising out of excess demands in particular
sectors of the economy.
The composition of demands relative to the composition of available resources
has an important bearing on developments in business expansions. The prob­
lems of inflationary pressures, however, are likely to arise well before demands
and output reach the limits of capacity, partly because the use of marginal
production facilities raises costs. Problems of inflation certainly arise before
output reaches capacity in all major sectors because resources are not highly
mobile. In 1955 and 1956, for example, output was well below capacity in the
basic textile industries but very close to capacity in the basic metals industries.
As E. A. Goldenweiser wrote in 1941:
“It should be mentioned * * * that there is no clear-cut line at which an
increasing number of bottleneck advances in prices passes over into a general
inflation. The development of a number of bottlenecks in many leading com­
modities may be the introductory phase of a general inflation. It can occur long
before the entire country i operating at full capacity, because neither plant
s
capacity nor labor supply is completely mobile. The existence of unused ca­
pacity in some industries may not prevent great shortages of capacity in others,
and the presence of large numbers of unskilled workers without jobs may not
prevent grave shortages in many skilled lines. So long as these instances of
shortages are scattered and relatively few the situation i not properly described
s
as inflation and can be handled by nonmonetary remedies. But i m a y become
t
general long before full capacity is achieved. It should be kept in mind that i
t
is the available supply of goods and not the theoretically possible supply that
must meet a growing demand in order to prevent inflation.” 1
The demand-shift approach treats the milder, peacetime inflations of the sort
experienced in 1954-57 as something different in kind from the type often asso­
ciated with wars, whereas the difference appears rather to be one of degree.
The immobility of resources is more obvious in the former cases, but i i not
t s
confined to them. In the more severe inflations, immobility of resources also
limits shifts to areas of strongest demands, but its existence and influence are
concealed by the general excess of demands.
In an economy with high and rising standards of living and many other fea­
tures fostering change, demands are not likely to expand in such a way that their
composition is always in balance with the location and types of existing plant
and other resources. In business expansions, imbalances -are likely to exist, and
they are not likely to be precisely the same from one expansion to the next.
Such imbalances operate to attract the newly available resources (and savings)
into the sectors of strongest demand pressures.
PATTERNS OF PRICE AND COST CHANGES IN BUSINESS FLUCTUATIONS

Prices are determined by the interaction of a number of factors functioning
continuously in many different types of markets, and there is an unending
process of market adaptation to changes in the various factors. While business
fluctuations differ from one another in important respects, they all have features
in common with regard to the interactions of demands, output, costs, prices, and
profits. Reviewing the process of change during postwar business expansions
and contractions in this country, certain relationships and patterns of behavior
are discernible.
Periods of expansion
Early in expansions of business activity, prices usually are rising in markets
for “sensitive” industrial materials— that i , the materials whose prices are most
s
responsive to short-run changes in demand. For rubber, hides, and some other
sensitive materials, world production cannot be increased much (if at all) in
the short run in response to rising demands. As a result, increases in demands
are rather promptly reflected in price advances and m a y alter the international
flows of commodities.
1 E. A. Goldenweiser, “ Inflation,” Federal Reserve Bulletin, April 1941, p. 292.




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1967 ECONOMIC REPORT OP THE PRESIDENT

437

Production or supply can be increased in the short run for other sensitive
materials, such as scrap metals, wastepaper, copper, lead, zinc, and lumber.
Because increases in output are accompanied by rising costs per unit of output
or because of other conditions of supply, expansion in demands i reflected in
s
price rises which provoke increases in supply. Price trends for a group of these
sensitive materials often suggest the direction and strength of demands before
other types of data for the same time period become available.
Many foods and foodstuffs— including livestock, poultry, and some crops—
also conform to the type of market behavior described for sensitive industrial
materials. For these, however, the response of domestic demands to cyclical and
secular income changes i slight (the income elasticity of demand i low). Sub­
s
s
stantial changes in output may occur, however, mainly because of variations in
weather, swings in the hog and cattle cycles, or rising productivity. Conse­
quently, price fluctuations for these commodities usually reflect changes in sup­
plies to a greater extent than they reflect shifts in demands.
Agricultural commodities subject to Federal support programs are largely
protected from the price-depressing influence of large increases in production.
At the same time, the existence of stocks previously accumulated in the process
of supporting prices has limited in recent years the response of prices to a crop
failure or other events that reduce production and supply.
For most industrial materials other than those described as sensitive, supply
is expansible in the short run until some relatively high rate of capacity utiliza­
tion is reached. This i true for steel mill products, paper products, many chem­
s
icals, cement, brick, and other materials. In the early stages of expansion, vari­
able costs per unit of output are not likely to rise as increases in output are ac­
companied by gains in productivity and wage rates do not rise much. Fixed
costs per unit and average costs per unit decline, and profit margins as well as
total profits rise. Expansion in demands for these materials is accompanied
for a time by rising output and supply without widespread advances in list
prices. Absorption of freight and other concessions from list prices which had
developed during the previous recession tend to be reduced during the early
stages of expansion. These changes in actual prices are not reflected in the
established price indexes, which are based mainly on manufacturers’ published
price l s s
it.
The behavior of wholesale or manufacturers* prices of most finished industrial
products in the early stages of expansion i much like that described for the
s
second group of industrial materials— for similar reasons. Therefore, increases
in their prices early in expansions are likely to be restricted in scope.
Continued expansion of demands eventually generates upward pressures of
costs on prices of industrial materials in the second or nonsensitive group and
on prices of finished products. The upturn in costs is primarily a consequence
of higher levels of output in relation to available manpower and material
resources.
Contrary to the suggestion sometimes made that pressures of demand against
resources available to produce specific products cannot possibly contribute to
increases in their prices and costs until operations are at 100 percent of capacity,
costs of production often begin to rise before output approaches such high levels.
The plant and equipment existing in an industry at any time is of varying age
and efficiency. As demands expand, less efficient facilities must be used if output
is to be increased to f l the rising volume of orders. Partly because these
il
marginal facilities have to be activated, overfall productivity advance slows and
may actually cease or be reversed. This contributes, along with increasing wage
rates, premium payments for overtime, and advances in prices of some materials
consumed in the industry, to rising costs per unit of output.
Price- and cost-raising pressures of demands in specific industries, furthermore,
m a y become widespread enough to constitute a general problem before output
reaches high rates in relation to capacity in all major industries. Usually,
some industries are growing while others are not, and some regions are gaining
while others are losing business. A number of important bottlenecks may de­
velop even while unused capacity exists elsewhere. These developments also
contribute to a higher level of frictional unemployment of labor than might
exist otherwise. A judgment that output in the whole economy is at a high rate
relative to plant capacity does not require that there be no margins of unused
capacity, any more than “full employment” means that there are no persons
looking for jobs.
Given variations in the timing and intensity of demand and cost pressures
among industries, Governmental policies to further expand aggregate demands
7 5 -3 1 4 — 67— i»t. 2------- 14




438

the

1967 ECONOMIC REPORT OF THE PRESIDENT

in order to raise demands and output in those industries where capacity i not
s
being intensively utilized would intensify demand pressures on those industries
where output is already close enough to capacity to result in rising costs and
higher prices. Consequently, while a higher level of aggregate demand might
increase total output somewhat, i would also accentuate upward pressures of
t
demand on prices.
An additional and important aspect of these developments and relationships
is that an expansion of capital outlays is likely to be stimulated well in advance
of full utilization of plant capacity. Business enterprises always have some
capital replacement needs, and additional capital expenditures in most cases
reduce costs or increase sales potentials. Incentives to undertake new commit­
ments for expansion as well as for replacement are intensified if business m a n ­
agers expect higher levels of demand for their products from both secular growth
and cyclical expansion. Since i ordinarily takes many months before new
t
facilities can be acquired and efficiently integrated into the production process,
business managers must plan expenditures to increase capacity well before out­
put reaches the limits of their ability to produce.
Among the elements of cost, attention in recent years has been focused on
changes in labor costs, partly because wage rates have risen persistently and
labor costs are an important part of total variable costs. In major industries,
where changes in wage rates tend to be industry-wide, such changes occur at a
particular moment in time and they usually are widely publicized. On the other
hand, changes in productivity, which operate in the direction of offsetting the
effect of wage rate increases on labor costs per unit of output, occur over a period
of time. Also, the advances are likely to vary considerably from ptant to plant
and from one producer to another.
For many industries, average measures of productivity show more cyclical
variability than wage rates, rising in the early stages of expansion, leveling off
as output approaches capacity, and declining in the early stages of recession.
This pattern of change is probably accentuated by the short duration of the
business fluctuations of postwar experience. Many new facilities are put in
place late in expansion— or in the early months of recession— and there i some
s
time lag between installation and their efficient operation. When there is such
a lag, the resulting productivity gains m a y appear late in recession and early
in expansion.
Partly for this reason, unit labor costs tend to decline in the early stages
of expansion when productivity gains generally exceed increases in wages. As
expansion develops, unit costs turn up because productivity advance slows and
the rise in wages continues and possibly accelerates. In recession also, unit
labor costs typically rise in certain industries as output per manhour declines.
Meanwhile, capital consumption and other relatively fixed costs— by
definition— do not vary with the level of output On a per unit of output basis,
therefore, they show an inverse correlation with output, decreasing when out­
put is rising and increasing when output is falling.
Cyclical variations in costs per unit of output, which result in considerable
part from swings in production, are not accompanied by similar variations in
prices. Consequently, profit margins fluctuate more widely than labor and other
costs per unit of output, generally moving in the opposite direction. In the early
stages ol expansion, profit margins rise sharply; in later stages, they level off or
ff
decline;in recession, they decline decidedly.
The preceding review of price and cost influences indicates that in early stages
of economic expansion, production and employment are likely to advance with­
out generating widespread price and cost pressures. While wage rates and prices
of certain materials increase, margins of profits over costs widen and are likely
to approach their cyclical peaks. After expansion has progressed for a time,
however, upward price and cost pressures build up, primarily because output in
some industries has reached high levels in relation to capacity and unemploy­
ment has been reduced. As described earlier, less efficient plant facilities must
be used and productivity advance slows or is reversed. At the same time, re­
duced unemployment and enlarged profit margins intensify pressures for in­
creases in employee compensation.
With demands strong and output in some industries already at high levels in
relation to capacity, the subsequent behavior of prices and costs is strongly
influenced by the rate at which over-all activity has been expanding and by
expectations. If the pace of expansion has been moderate, competitive con­
ditions are maintained within most industries, between industries serving




THE

196 7 ECONOMIC BEPOBT OF THE PRESIDENT

439

common markets, and between domestic goods and goods produced abroad. In
these circumstances, increases in prices and costs are likely to be confined to a
relatively few markets and are unlikely to be very large.
On the other hand, i demands have been expanding rapidly and assessments
f
of prospects are highly optimistic, increases in wage rates and fringe benefits
are likely to be large and price advances extensive. Increases in wages will be
propagated throughout industry and may directly cause further expansion in
demands for goods and services. Price advances ma y indirectly contribute to
expanding demands by generating expectations of additional advances.
Increases in the price indexes will further contribute to cost increases through
escalator provisions of labor, rent and other contracts. Some State and local
taxes and fees may be raised to cover the rising costs of current services and
higher costs of school, highway and other construction. These taxes are also
reflected in the consumer price index used for escalation purposes. And thus an
interacting inflationary process of demands, prices, and costs can get in full
operation.
Implicit in this description of price behavior for industrial commodities is the
fact that relatvely few markets conform to an ideal competitive model. In
the competitive model, prices are determined by the interaction of buyers’ bids
and sellers’ asking prices in the market; the individual seller has no significant
influence on total supply and therefore has no discretion except with regard
to his acceptance or rejection of the going price or how much he will supply at
that price. This type of market behavior is approached most closely in markets
for livestock, some other agricultural commodities, and the industrial materials
earlier described as sensitive.
Markets for industrial commodities, on the contrary, are generally character­
ized by ‘imperfect” or “monopolistic” competition. Prices in these markets
‘
often are described as “administered.” In such industries, a producer must
make decisions regarding the pricing of the product— including all the pricerelated decisions asociated with quality, design, and selling techniques. These
pricing decisions are based on judgments of what sales would be at different
levels of prices, on calculations of what costs per unit would be at various levels
of production, and on the behavior of competing producers and products. Thus
pricing decisions take into account, in addition to demand, the range of forces
affecting production and costs, just as sales, production, and costs are influenced
by pricing decisions. Producers must attempt to find a price that is in harmony
with all the relevant short- and long-term demand and cost considerations, but
without knowing precisely what will most effectively accomplish this aim.
The fact that prices are set by the decisions of producers implies a degree
of market power— stemming from the nature of the product and the nature
of the production prosess— but i does not connote full monopoly power. On the
t
contrary, market forces— including competition within the industry and from
other domestic or foreign products or alternative sources of satisfaction— are
constantly working to alter past price decisions.
Rates for utilities, freight, public transportation, insurance, and postage
are also administered prices, as are reafces for many other business and
consumer services. Both the cost and demand conditions encountered in the
service industries vary widely. Some services are produced under conditions
affording opportunities for basic technological improvement and productivity
advance while for others such opportunities are limited. ^>me axe primarily
labor while others have a higher commodity content. Prices of some services
are very responsive to local labor market and related economic conditions while
others are subject more to nationwide forces. Some are regulated by public
commissions and s i l others are stipulated fees for public services. In par­
tl
ticular instances, service prices follow trends in wage rates fairly closely.
The result of most of these influences is that inflationary pressures in the
economy are transmitted to services via in c r e a s e s in costs* For the regulated
prices, advances m a y lag considerably behind the initiating causes and may
occur in many instances even after business; e x p a n s io n has given way to
recession.
P e r io d s of recetrtan

During contractions in demands and activity, changes in prices and costs and
in relationship between them are determined mainly by the duration of the
contraction and by developments in the preceding expansion. In a prolonged
and severe depression, accompanied by distress sales and substantial de­
creases in prices of existing assets, strong downward pressures develop on




440

THE

1967

ECONOMIC REPORT OF THE PRESIDENT

prices of currently produced goods and on wage rates and other elements of
production costs. Since a contraction of this severity has not occurred since
World W a r II, attention ma y be confined to the milder recessions experienced
since then.
In recession, prices of sensitive industrial materials generally decline. Con­
traction in domestic demands and decreases in prices may reduce domestic
supply by altering international commodity flows and/or by making marginal
operations unprofitable. For the nonsensitive materials, analysis is compli­
cated by the tendency of producers to change prices by varying concessions and
discounts from unchanged list prices. While i is known that net or actual
t
prices fluctuate more widely than l s prices, little information is available
it
to show the degree of change in actual prices.
List prices tend to be maintained in the early stages of contraction and if the
recession proves to be brief, recovery in activity begins before many list-price
cuts have been made. W h e n i becomes clear that demands are reviving,
t
the list price for a product on occasion is lowered to conform to actual trans­
actions prices— because the operation of new facilities or some other develop­
ment causes demand-cost relationships to be fundamentally different from those
on which producers had been basing their decisions.
In describing the behavior of nonsensitive materials during business ex­
pansion, it was emphasized that producers’ price decisions are based largely on
calculations of costs at various possible levels of output as well as on judgments
about demand. W h e n demands contract and production is reduced, many ele­
ments of costs do not decline. W a g e rates, for example, are maintained— or
m a y actually increase in some lines owing to the terms of long-run labor agree­
ments. The tendency of wage rates to be maintained was characteristic
also of the mild recessions of prewar years.
Even in an administered price market, individual producers, faced with
declining demands, have an incentive to reduce prices in order to increase sales,
if they think competing producers will not also reduce prices. This g o e s far to
explain the preference of producers for unpublicized price cuts— for price cuts
brought about through concessions rather than through reductions in list prices.
In certain situations, however, there may be incentives to publicize price re­
ductions by cutting list prices: a cyclical contraction in demand for a particular
material m a y be accompanied by competition from a new and lower cost source
of supply or a new substitute material, or i ma y be accompanied by a change
t
in the methods of production that appreciably reduces costs.
The recession behavior of manufacturers’ prices of most finished industrial
products is similar to that of the nonsensitive materials. To the extent that
prices of materials decline, however, downward pressures on prices of finished
goods are intensified. Prices of services tend to resist forces of decline in
recession. In many cases, they rise further because of the increases authorized
by regulatory agencies on the basis of earlier increases in costs, but the rate of
rise in average prices of services slows down.
To summarize, prices of many sensitive materials typically decline in re­
cession. These commodities have little weight in broad price indexes, however,
and their influence currently is much less than in the indexes available for pre­
war years. Declines in prices of some other commodities are likely to be
concealed in concessions from stable list prices. Still other prices, however, may
resist any downward adjustment to declines in aggregate demand in moderate
recessions.
If the previous expansion was accompanied by inflationary developments and
appreciable increases in levels of prices, the increases are not likely to be fully
erased during mild business recessions, giving rise to what has been called the
“ratchet effect.” I , however, price increases in the previous expansion were
f
small, they m a y be subsequently offset as the competitive pressures that develop
during recession, domestic and foreign, strengthen incentives to cut costs and to
reflect these reductions In the form of lower prices. This emphasizes the im­
portance of containing growth in credit and in demands for goods and services
during periods of economic expansion and of preventing a climate of expecta­
tions conducive to large and widespread advances in prices and costs.
DEVELOPMENTS SINCE

1954

The interpretations of the functioning of the market system which have led to
skepticism about the efficacy of general measures of public policy have been
supported almost exclusively by analyses of the 1954-57 business expansion. A




THE

1967 ECONOMIC REPORT OF THE PRESIDENT

441

comparison of developments in the period with the process described above will
tend to show that the originating causes of inflation in the 1954-57 expansion— as
in other periods of expansion characterized by inflation— were strong demands
and overly optimistic appraisals of prospects. Once begun, the inflation was
sustained by persistence of strong demands, by demand-price-cost-demand inter­
action, and by generation of widesj>read expectations of continuing inflation.
The business expansion that began in the spring of 1958 had not, through the
spring of 1960, led to large and widespread increases in prices, as producers
endeavored to hold down and reduce costs. Comparison of this period with
both the process described previously and with the 1954-57 experience shows
that the growth in final demands, while substantial, was reasonably well
balanced and moderate in relation to available resources.
The 1954-57 expansion
Recovery from recession began in the second quarter of 1954. Expansion of
consumer buying and residential construction activity was followed shortly by a
shift from liquidation to accumulation of inventory. This was a period of rapid
industrial expansion abroad, and foreign demands were contributing strength
to domestic markets.
Prices of sensitive industrial materials began to rise in the sj>ring of 1954,
as shown in the attached chart, and were back to the prerecession level by the
spring of 1955. B y that time, prices of some other materials and producers’
equipment also had been raised. Changes in wholesale prices of industrial
commodities from June 1954 to June 1955, and over succeeding 12-month periods,
are shown in the accompanying table.
Wholesale prices—Percent increase

June 1954 to June 1955 to June 1950 to June 1954 to
June 1957
June 1955 June 1956 » June 1957
~ ____
*..
Industrial commodities__
Materials
- . ________- — -______
Sensitive.
________--- ______ -O th er_____ _______ --- _______
Finished goods.
_______. . . ____
Consumer. _ . _______. . . . . ________
Durable, _____ _____ ___________
Nondurable__. . . . - . ................. *
Producers’ equipm ent. . . ___

1.8
2.4
1.3
.9
.3
.5
.2
2.1

2 5.4

4.9
5.4
5. 4
5.4
4.2
2.6
3.5
2.1
7.9

3.2
2.9
—2. 6
4.9
3.7
2.5
3.0
21
6.1

10.2
11.0
8.1
11.9
9.0
5.5
7.2
4.5
16.9

i
1 Well over half of the increases in this period occurred during the 2d half of 1955. The rate of increase in
prices in that period was faster than after the end of 1955 when the rapid shift in the composition of demands
is said to have become a major influence.
* The rise in this group began in March 1954* and from that time to June 1955 amounted to 7 percent
Source: Based on Bureau of Labor Statistics data.

Industrial production reached a new high in the spring of 1955 and continued
to expand, while the labor market tightened. Sales and output of autos far
exceeded previous records, under the influence of price concessions, radical
changes in design, and a shift in credit terms to considerably longer maturities
and lower downpayments. The volume of residential building was exceptionally
large, and production of other consumer durable goods and business plant and
equipment all advanced. Even though steel production reached capacity levels
and output of other primary metals was at peak rates, metals were in short
supply, and capacity was under mounting strain in many other important indus­
tries. Business profits after taxes increased considerably. This intensified in­
centives to expand capital investment and also provided some of the needed
funds, with the result that business investment plans rose sharply further.
These were the conditions and expectations in mid-1955, when some important
labor contracts were negotiated. Demands for large increases in wage rates and
fringe benefits were strong, and resistance to them was weak. In the auto, steel,
and certain other major industries, large increases were agreed upon, and these
liberal contract terms were negotiated for the most part without work stoppages.
Given the demand conditions and prospects of *the time, prices could be and
were raised to cover not only the increases in wage rates but also advances in
other costs such as those resulting from the sharp increase in hiring of non­
production or salaried workers. Costs of materials and supplies were also ad­




442

th e

1967 ECONOMIC REPORT OF THE PRESIDENT

vancing, Partly because of the lagged effects of the World W a r II and Korean
W a r inflations on the book values of the stock of real capital, depreciation
charges were higher in relation to sales than in earlier postwar periods of rising
economic activity. A widespread rise in prices of industrial commodities erupted
in mid-1955 and a price-cost spiral was set in motion.
By the spring of 1956, the rise in business capital expenditures— which had
been stimulated partly by the surge of consumer buying in 1954-55— reached
boom proportions. Total spending by government was also rising. Economic
activity abroad continued to increase and foreign demands for United States
products gained further in strength. Meanwhile, some categories of demand
were increasing less rapidly than earlier and s i l others, such as demands for
tl
autos and new houses, declined.
Curtailments in output in some of these lines in 1956 released resources and
thus permitted expansion elsewhere. Unemployment remained low. For the
most part, pressure of demands against capacity in basic industries was main­
tained. The capital goods industries depend on many of the same materials and
types of labor as are required in the auto industry* Similarly, industrial and
commercial construction use essentially the same labor and some of the same
materials consumed in residential construction.
In the industries producing basic metals, for example, the operating rate was
about 93 per cent of capacity in mid-1955, when the advance in prices became
widespread among industrial commodities. B y the end of 1955, the rate was up
to 97 per cent. N e w capacity was being installed in these industries during 1956,
and at least some of it became fully available for production during that year.
While rated capacity increased 4 per cent from the end of 1955 to the end of 1956,
output rose 3 per cent, so that the year-end operating rate was 96 per cent. Some
other industries producing basic materials also maintained very high operating
rates.
Expectations of continuing prosperity remained strong in 1956, despite de­
creases in sales of autos and housing. The decrease in automobile sales came
to be regarded as a normal falling-off from the extraordinarily high levels of
1955, and expectations in the industry and elsewhere were for a renewed rise
after introduction of new models toward the year-end. The capital goods boom
that began in 1955 continued through 1956 and into 1957.
Price and wage developments in 1956, then, were dominated by strong de­
mands, by shifts in the composition of demands for finished durable goods,
and by ebullient expectations. Prices of a few sensitive materials declined:
prices of lumber declined after February 1956 in response mainly to the de­
crease in residential construction; and in the spring of that year, copper prices
began to decline— from very high levels associated with strikes— as supplies
caught up with demand. Prices of most industrial commodities, however, con­
tinued to increase.
In lagged response to the inflationary developments begun in 1955, moreover,
the consumer price index began to rise in early 1956. This rise resulted in wage
increases based on escalation clauses in existing contracts and intensified de­
mands for other large wage increases. In the summer, long-term contracts
negotiated in the steel, aluminum, and some other industries, provided for
liberal annual increases in wages and fringe benefits and automatic cost-of-living
adjustments.
r In early 1957, prices of industrial commodities rose further— reflecting partly
a working through of earlier increases in prices of materials and other costs
and partly the fact that the expectations of inflation continued to be wide­
spread. Concurrently, rising prices were limiting sales, and inventories were
increasing. After nearly three years of expansion, the seeds of recession— in­
variably sown in a boom— were beginning to germinate.
B y th e a u tu m n o f 1 9 5 7 , w h o le s a le p r ic e s o f in d u s tr ia l c o m m o d ities h a d risen
a b o u t 1 0 p e r c e n t fro m t h e e a r ly 1 9 5 4 le v e l, th e t o ta l w h o le s a le in d e x 7 p e r
cen t, a n d t h e c o n su m e r p r ic e In d ex 6 p e r c e n t G iven t h e str e n g th o f d em a n d s
a n d t h e o p tim is tic n a tu r e o f e x p e c ta tio n s , in c r e a s e s o f th e se m a g n itu d e s o v e r
a three- to fo u r - y ea r p e r io d a r e p erh a p s n o t e x tr a o r d in a r ily large. N e v e r th e le ss,
t h e r is e In p r ic e s w o u ld h a v e b een la r g e r h a d m o n e ta ry p o lic ie s n o t b een re­
str ic tiv e . D e v e lo p m e n ts th r o u g h t h e p e r io d e m p h a siz e t h e n e e d f o r v ig o r o u s
e ffo r ts to c o n ta in t h e g r o w th i n d em a n d s f o r c r e d it a n d f o r g o o d s a n d s e r v ic e s
d u r in g p e r io d s o f eco n o m ic e x p a n sio n a n d to p rev en t t h e g e n e r a tio n o f a c lim a te
o f e x p e c ta tio n s c o n d u civ e to w id e sp r e a d a d v a n c e s in p r ic e s a n d co sts.




THE

* 9 6 7 ECONOMIC REPORT OF THE PRESIDENT

443

The 1957-58 recession
In the early autumn of 1957, more than three years after the upturn in bus­
iness, expansion gave way to recession. A capital equipment boom by its very
nature cannot be indefinitely prolonged. Exceptionally high rates of capacity
expansion, rapid rise in equipment prices, and reduction in business liquidity
eventually weaken incentives to make additional outlays. A decline in business
capital spending will usually entail a period of inventory liquidation for capital
goods industries, with reduced employment in these industries. Secondary
effects of these developments are reductions in business inventory holdings, e m ­
ployment, incomes, and demands generally. The recession that began in the
autumn of 1957 was of this type— although other elements were present, in­
cluding cutbacks in defense ordering and contraction in foreign demands for
U.S. exports.
Recession was not accompanied by widespread liquidation of credit and distress
sales, however, and the basis was soon formed for recovery and renewed ex­
pansion, in part because of the increased availability and reduced cost of credit.
Policy actions had operated to restrain the use of bank credit for speculative
purposes during the expansion, and then operated in recession to encourage
expansion in bank credit and increase the liquidity of the economy.
During the recession, prices of sensitive industrial materials declined, as the
chart shows, with the average returning to the early 1954 low. While i is likely
t
that various forms of concessions from l s prices developed for other industrial
it
commodities, list prices generally were maintained and, in fact, were raised fur­
ther for some commodities. The failure of l s prices to decline may be attributed
it
in part to continuance of expectations of rising prices, to additional increases in
costs arising out of commitments made during the preceding boom, and to the
brevity of the recession.
Expansion since early 1958
W h e n recovery in business activity began in the spring of 1958, average levels
of prices were appreciably higher than in early 1954— when the previous recovery
began. Expectations of continuing upward creep in prices remained wide­
spread. The reality of expectations of inflation became obvious not so much in
the behavior of commodity markets but in a further advance in common stock
prices to new highs and a continued increase in land values. Moreover, interest
rates turned up promptly and long-term rates which had declined only moder­
ately in the recession, quickly approached or reattained prerecession highs.
The pattern of demands, production, productivity, prices, and profits through
the first year of expansion was similar in many important respects to the com­
parable period of recovery from the 1954 low. Consumer buying expanded rapid­
l , housing starts closely paralleled the rise of 1954-55, and liquidation of in*
y
ventories slowed down and then gave way to accumulation toward the end of
1958. Constant dollar gross national product reached a new high in the fourth
quarter of 1958 and industrial production exceeded the 1957 prerecession peak
by March 1959. Prices of sensitive industrial materials responded to expanding
demands, rising about as much in the f s year of economic expansion as in the
it
comparable period of 1954-55.
However, growth in final demands was less rapid than in the comparable period
of 1954r-56. Consumer buying of autos rose less sharply— for a variety of reasons,
including higher prices and no important further easing in credit terms on con*
trast to the marked liberalizing of terms in 1955. Moreover, merchandise im­
ports rose substantially while exports changed l t l . In recent years, there
ite
has been a considerable improvement in the ability of other industrial nations
to satisfy their own requirements and also, partly because of price advances in
this country, to compete with American manufacturers of many materials and
finished products in domestic markets as well as in markets abroad.
Consequently, while consumption of materials in manufacturing reached a new
high in the spring of 1959 and inventories were being accumulated at a rapid rate
(stimulated in part by the expectation of interruptions of supply by strikes),
the margins of capacity over output for most major materials were somewhat
greater than in mid-1955, and greater than during any other period of high-level
activity since World W a r II. The margins were not large, but their importance
was magnified by the fact that they existed simultaneously in several industries
whose markets overlap. Government policy actions and policy pronouncements,
furthermore, lessened the expectation of rising prices. Altogether, there was
more uncertainty in the outlook, and prospects were for more intensive
competition.




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THE 1967 ECONOMIC REPORT OF THE PRESIDENT

445

From the spring of 1959 to the spring of 1960, therefore, developments were
quite different from those in the comparable period after the spring of 1955.
One of the most obvious differences was the development of strong resistance to
cost increases as manufacturers were less confident of their ability to pass them
on in the form of higher prices. Specifically, strong resistance to demands for
increases in wages and fringe benefits in the steel and other industries, as
reflected in prolonged work stoppages, resulted in generally smaller increases.
Gains in productivity, meanwhile, were as large as or larger than in the earlier
period. Salaried employment, which had declined more in the 1957-58 recession
than in previous recessions, increased less rapidly than in the 1954-57 expansion.
Advances in prices were limited, and wholesale prices of the various groups of
industrial commodities were nearly stable.
A FT E R N O O N SESSION

Chairman P r o x m i r e . The committee will come to order.
I might explain, Mr. Secretary, that we had a very late hearing this
morning. It lasted until after 1 o'clock. The result is that the com­
mittee members are slow in coming back. We certainly welcome you
to this committee and congratulate you as the Acting Secretary of
Commerce—do I have the right title ?
Mr. T r o w b r i d g e . That is right, Mr. Chairman.
Chairman P r o x m i r e . In any case, you have the authority of the
office and all. You have a fine statement here. You may go right
ahead, and we will be happy to hear you.
Mr. T r o w b r i d g e . Thank you very much, Mr. Chairman. With your
permission I will submit this statement for the record in its entirety,
and in order to save time I would like to just go over some of the
high points of the statement.
Chairman P r o x m i r e . Very good. You might indicate the page you
are on, to the extent that you skip, and so forth, so I can follow you.
Mr. T r o w b r i d g e . Yes; I certainly will.
STATEMENT OF HON. ALEXANDER B. TROWBRIDGE, ACTING- SECRE­
TARY OF COMMERCE; ACCOMPANIED BY WILLIAM H. SHAW,
ASSISTANT SECRETARY FOR ECONOMIC AFFAIRS; EDWARD K.
SMITH, DEPUTY ASSISTANT SECRETARY FOR ECONOMIC POLICY;
LOUIS J. PARADISO, ASSOCIATE DIRECTOR, OFFICE OF BUSINESS
ECONOMICS; AND ROBERT L. McNEILL, DEPUTY ASSISTANT SEC­
RETARY FOR TRADE POLICY, DEPARTMENT OF COMMERCE

Mr. Chairman, I am grateful to be given this opportunity to testify
on the Economic Report of the President.
The great value of the Economic Reports and the hearings held upon
them as they are transmitted to the Congress has been demonstrated
over time. The work of the Council of Economic Advisers and the
Joint Economic Committee has become more valuable with each pass­
ing; year since the enactment of the Employment Act of 1946.
Business, labor, government, and the public at large have come
more and more to recognize that we are not at the mercy of inexorable
economic forces which propel us from boom to bust and back again.
We have obtained an increasing control of economic forces, not by way
of direct controls which we have avoided and must continue to avoid,
but by use of general fiscal and monetary instruments, and more im­
portantly by understanding how our economy works, where it is, and




446

THE 1067 ECONOMIC REPORT OF THE PRESIDENT

where it is likely to go, in the light of the policy decisions we wish
to make. We have learned to look ahead.
The increasing flexibility of our responses to changing events has
been demonstrated. In the face of uncertainty, flexibility is necessary.
The quicker we are able to adjust the less we need fear uncertainty.
Today we are operating with an economy which has moved forward
since 1961 to close the gap between actual and potential output. The
gap was closed last year. Now we have to operate in an economic set­
ting which will preserve balance while the economy grows at a more
moderate pace. But balance in total demand and supply does not mean
balance for every element within these grand aggregates. We have
to watch each element and the balances in each sector carefully. But
we should be thankful we are concerned with specific imbalances and
not with problems of total imbalance, with all that the latter implies
for spiralmg inflation or deflation.
I f we have to live in a world of uncertainty, it is better to have un­
certainty at full employment than to have the harsh certainty of boom
or bust.
We should welcome a situation in which business cycle prognostic
cators are kept in a continuous ferment. In the long run we hope to
put them out of business anyway.
T

he

C

urrent

Status

of t h e

E

conomy and

R

ecent

S hifts

In my judgment, the President’s Economic Report presents a cogent
analysis of recent economic developments and a clear appraisal of the
economic prospects and problems which we are likely to face in the
year ahead.
^
Over the past year the economy has forged ahead at an exceptionally
high rate. Real output recorded another sizable gain— 5 .5 percent. A
major accomplishment was the reduction of unemployment to a rate
o f less than 4 percent, the first time since 1953 that such a low rate has
been achieved. Civilian employment in 1966 increased by an average
o f 1.9 million with all major groups in the labor force benefiting in
varying degrees. The purchasing power of our people, as measured
by real disposable income |>er capita, advanced by 3.6 percent.
But our overall accomplishments were by no means uniform, either
by industry or by groups o f persons. The homebuilding industry, for
example? suffered a severe setback and many groups m our society
are still m an impoverished or otherwise underprivileged status. And
we cannot forget the sacrifices being made by thousands of our men in
the Armed Forces fighting the war in Vietnam.
Furthermore, the rapid expansion has resulted in some serious im­
balances which must be corrected in the coming months in order to
achieve a sustainable and healthier economic growth. In some sections
of the economy, the combination of a relatively tight supply situation
and rising costs brought on serious inflationary tendencies, thus inter­
rupting the relative price stability that we had enjoyed in the preced­
ing 6 years. Fortunately, in the latter part or 1966, some easing
of the industry imbalances and price distortions was already evident.
Indeed, the fiscal measures taken in 1966 and the monetary restraints
o f the Federal Reserve Board became increasingly effective in the later
months of the year. The economy cooled down to a more sustainable




THE

1967 ECONOMIC REPORT OF THE PRESIDENT

447

rate of growth. As the attached table and chart 1 show, the growth
in real GNP in the first quarter of 1966 was at an annual rate of 6
percent, and by the fourth quarter the pace of advance had slowed
to a little over 4 percent. But despite the reduced pace, the unemploy­
ment rate was maintained at less than 4 percent.
The slowing of the economic tempo came in the private sector as
the rate of business fixed investment slowed, consumers' durable
demand slackened, and housing activity continued to decline. At the
same time inventory accumulation proceded at a high and nonsustainable rate, particularly in the fourth quarter of last year. This easing
of the economic pace has had salutary effects by moderating rates of
capacity operations and by lessening price pressures.
According to McGraw-Hill estimates, the rate of manufacturing
capacity utilization in December 1965 was 89.5 percent. During 1966
manufacturing capacity was increased by 8 percent. Manufacturing
output over the year rose more than 6.5 percent. As a result the rate
of capacity utilization in December 1966 was down to 88 percent. This
lessened the pressure on industry to increase capacity and is one of
the factors accounting for the current and pospective slowdown in
the immoderate pace of fixed investment outlays.
Furthermore, the slowing economic tempo contributed in part to
some moderation of the pace of price movements. Wholesale prices
for 1966 as a whole were 3.2 percent higher than in 196®. As the year
progressed these price movements came to a virtual halt and, in the
last 3 months of the year, actually declined 1 percent. Consumer
prices were 2.9 percent higher in 1966 than in 1965; but food prices
receded during the last few months of the year.
As 1966 drew to a close, there were still some problem areas. Hous­
ing activity continued at depressed levels. Inventory accumulation
was at a disturbingly high rate. Cost pressures on prices were being
felt in many sectors. Certain skilled and professional workers were
stilll in short supply relative to demand.
Clearly, further progress can be made in 1967 in correcting exist­
ing imbalances. While we must recognize the problems ana makfc
further progress in correcting them; we must not let our concern with
them obscure recognition o f the major accomplishments of 1966 The
important point is that both employment and personal income have
continued to make steady and impressive gains. In December of last
year, civilian employment was 75.2 million (seasonally adjusted) up
1.8 million from December 1965. The employment gain has more
than kept pace with the increase in the civilian labor force.
The major sources of demand which pushed the economy upward
in 1966 were nonresidential fixed investment which rose more than
$9.5 billion, and Federal Government purchases which rose itiore thin
$10 billion.
As to the other sources o f demand, the charts clearly show the mixed
picture which prevailed in 1966. Consumer purchases of durable
goods rose much less than in 1965, expenditures fdr residential struc­
tures dropped 23 percent from the first to the fourth quarter, and net
exports fell sharply. On the other hand consumer purchases of
nondurables and services rose 8.S percent, dnd State and local gov­
ernment purchases increased by nearly $7 billion.




448

THE

1967

ECONOMIC REPORT OF THE PRESIDENT

This, then, is the general picture of the economy as it developed in
1966, and as it looks today. The expansion is moderating, and it
is our task to see that this present less vigorous, but more sustainable
pace, is maintained. At the same time we must see that those sectors
which did not fare well last year participate more fully in the
eneral progress of the economy, while those sectors of excessive
emand which gave us problems last year continue to grow, but at
a slower and healthier pace.

f

P rospects

and

P r o b l e m s C o n f r o n t in g U

s in

1967

A prerequisite for intelligent planning by the Government as well
as by business is a reasonably accurate forecast of economic activity.
However, as we know, economic forecasting is still an art involving
the use o f a combination of sophisticated techniques and the experience
and judgment of the forecaster.
The Economic Report forecasts for 1967 an overall growth rate of
4 percent in real GNP, a price rise of slightly more than 2.5 percent,
and a rate of unemployment averaging about the same as in 1966 —
a little below 4 percent. On the oasis of the information we now
have, these appear to be reasonable expectations.
A year ago, the Economic Report forecast for 1966 an advance in
real output of 5 percent, but it turned out to be 5.5 percent. The de­
gree of escalation in Vietnam and its impact on the private economy
was not evident in January of last year, and the forecasting of war
expenditures is inherently difficult. Partly as a result of the much
larger rise in GNP which occurred in 1966, actual Government reve­
nues were far above those estimated; at the same time, Government
expenditures greatly exceeded the forecasts made a year ago.
There are some specific aspects of the report which are very imSortant as we look ahead, and I would like to review them in greater
etail.
Purchases o f goods and services by the Federal Government have
risen sharply over the past year, mostly due to the acceleration of
spending for the Vietnam operation. Chart 2 shows the recent spurt
in defense purchases compared with prior years when such purchases
were rising. For calendar year 1966 as a whole, defense purchases
amounted to $60 billion—a rise of $10 billion from 1965. The budget
implies a further rise of about the same size in calendar year 1967.
In the fourth quarter o f 1966, the annual rate of defense purchases
was $65.5 billion, $5.5 billion higher than the average for the year
1966.
We know that unfilled orders of companies producing defense pro­
ducts have risen sharply over the past year. These orders are cur­
rently equivalent to nearly 11 months of the rate of shipments, com­
pared with a little over 10 months ago. Thus, it may be expected
that defense purchases will continue fairly strong in the first half o f
this year witn a slowing in the second half of the year. I believe
that this pattern of defense spending is realistic, unless, of course, a
significant change should occur in the Vietnam situation.
We should be aware, however, of the implications of any marked
deceleration in the pace of defense purchases later this year. While
it is true that defense production would continue at an exceptionally




THE

1967 ECONOMIC REPORT OF THE PRESIDENT

449

liigh rate, a tapering off in the rate of advance in defense purchases
could mean little or no further increases in job requirements of the
defense-oriented industries* Providing an offset, in case such a de­
velopment should occur, would be the moderately expanding Federal
nondefense programs and expenditures, as now contemplated in the
President’s budget, such as higher social insurance benefits and en­
larged grants-in-aid to State and local governments.
In addition, the President has instructed agency heads, under the
leadership of the Chairman of the Council of Economic Advisers, to
review priorities for programs and fiscal and monetary measures
which will assure a flexible response to the opportunities peace will
present, and assure continued growth and prosperity in our economy.
Chart 3 shows the recent upsurge in investment outlays. In the
past 3 years alone these outlays have totaled $210 billion. The excep­
tionally high rate of investment in 1966 was not sustainable and, as I
noted earlier, a considerably slower pace of advance in investment is
now proceeding.
As chart 4 indicates, the rate of manufacturing capacity utilization
had begun to drop in the fourth quarter. But perhaps the major
factor affecting investment decisions has been the suspension last year
of the investment tax credit and the accelerated depreciation allow­
ances. In view of recent business intentions, the council has estimated
an increase of less than 4 percent in capital outlays in 1967. This is a
rather small increase and implies a leveling off in such outlays. But
if the effect of the tax credit suspension is substantial, the leveling could
be relatively brief, since this proved incentive for investment is
scheduled to be restored next January 1. I f a weakness not presently
foreseen should develop here, it would be possible, of course, to con­
sider an earlier removal of the suspension.
One aspect of the 1966 developments which is of particular concern is
the admittedly excessive overhang of inventory. As chart 5 clearly
shows, inventories have fluctuated widely over the postwar period, but
last year inventory additions were exceptionally large. While most
industries geared their inventory needs to their current operations, the
booming capital goods, industry and the defense products companies
increased their inventories on the basis of their sharply rising backlogs
of unfilled orders. In the fourth quarter of 1966, the annual rate of
business inventory accumulation was $14.5 billion, one of the largest
quarterly increases of the postwar period. Some adjustment is in
order, indeed, may have already started. Sharp repercussions on
employment and income seem unlikely, however, since the smaller
inventory requirements of the slower advancing capital goods and
defense industries could be offset by increases in demand in other
sectors such as consumer nondurables and services and housing.
Nevertheless, the course of inventory investment must be watched
closely.
I need not review the well-known troubles of the housing industry.
But the picture is already beginning to brighten. With some easing
in interest rates and a less restrictive monetary policy in recent months,
the flow of funds into savings and loans associations is improving.
The FNMA and the Federal home loan banks are providing further
stimulus. In addition, the less vigorous demand for funds to finance
capital goods should increase funds available to housing. Certainly,




450

the

1967

ECONOMIC REPORT OF THE PRESIDENT

there is no lack of demand for housing, particularly in view of the more
rapid growth in new household formations which is expected this year.
On balance, it seems more than reasonable to expect accelerating
improvement in housing activity, particularly after midyear.
The demand for consumer durables, particularly automobiles, is
being influenced by both economic and noneconomic factors. Last
year’s 9.0 million new car sales, the second best year, followed the
record high sales of 9.3 million in 1965. While it is difficult to prove
conclusively, it would appear that the auto sales of the past 2 years
were somewhat high in relation to expectations based on consumer
incomes, car prices, and other factors. An adjustment more in line
with the economic factors is now taking place, and auto companies are
gearing their production schedules accordingly.
Consumer expenditures for nondurable goods and services com­
prised over 78 percent of the disposable personal income in 1966. In
the past, these expenditures have been closely geared to personal income
after tax, as is shown in chart 6. Since there is little reason to believe
that this close relationship will change in the coming year, they are
expected to advance along with the anticipated gain in personal
income.
The council has forecast that overall prices will rise more moderately
than the 3-percent increase of last year. It is true that recently the
inflationary forces have abated, as is shown in chart 7. But many
basic labor contracts are to be negotiated this year. Labor is reluctant
to negotiate on the basis of the long-term average productivity gain,
especially in view of the sharply rising consumer prices experienced in
the past year and a half. I f wage settlements significantly exceed the
long-term average productivity gain, profit margins of many industries
will be squeezed, thus putting pressure on such industries to raise prices.
Corporate profits hate flattened out in the past 6 months and with some
further tapering in the advance in sales—particularly in those
industries which account for a large proportion of profits such as autos
and capital goods—profits may be squeezed later.
There is also the question of the productivity gain which may be
realized this year. The 1966 productivity increase in the private
economy was 2.8 percent, slightly below the long-term trend of a little
over 3 percent per year. The 1967 gain may be somewhat higher than
the 2.8-percent gain of 1966 in view o f the large capital outlays of the
past 2 years, which will bring in a substantial amount of more efficient
productive facilities this year.
Thus, the 1967 price picture is not at all clear. Nevertheless, the
expectation o f a more moderate rise than in 1966 seems warranted,
particularly if, as it now appears, food prices advance more slowly
than last year. Prices of consumer services are sure to continue
strongly upward. But the extent of the overall price movement will
depend to some extent on the degree to which the unions restrain their
demands for wage increases and the extent to which businessmen try to
hold the line on prices.
In summary the economic picture is mixed, more so this year than it
has been for some time. But the economy majr be expected to proceed
in a more balanced and orderly fashion than it did last year. Infla­
tionary pressures, we expect, will continue to abate. Easier money
and lower interest rates, already being felt, should help to revitalize




THE 1967 ECONOMIC REPORT OF THE PRESIDENT

451

housing. Consumer demand should be strong as incomes advance,
and if social insurance payments are raised by the Congress, Govern­
ment expenditures will increase, with State and local governments
making a large contribution to the rise.
There remain a number of uncertainties notably in the areas of plant
and equipment spending, inventory adjustments, and automobile
purchases.
The President has wisely proposed that a 6-percent surcharge on
personal and corporate incomes be made effective July 1. This will
come at the proper time to steer the economy toward a more balanced
and sustainable growth.
Given our present expectations, and assuming the policy changes to
take place, this adds up to a rising pace of economic activity throughout
the year ahead.
I am, on balance, cautiously optimistic in economic outlook. And
I am optimistic also in the sense that I believe we have the tools to
influence our economy in the direction o f stability when instability
threatens. This is the import of our mixed outlook: and the package
of responses to it, which have been admirably set forth in the Presi­
dent’s Economic Report.
Let me now turn to some matters of importance to the Nation’s
economy, which are of particular interest to the Department of
Commerce.
F

oreign

T

rade

U.S. foreign trade reached new record highs in 1966.
TJ.S. exports—excluding military grant aid—rose to $29.4 billion.
This was $3 billion or lOpercent higher than the 1965 total—a rate
of growth well above the 7-percent average achieved during 1961-65.
Imports, however, increased by nearly 20 percent to $25.6 billion.
The 1966 rise was double the average import growth rate in the
preceding 5 years.
Thus, although exports showed great strength, the gross export
surplus declined, from its 1965 level by $1.5 billion to $3.8 billion.
A further expansion of U.S. trade is in prospect for 1967, with
exports advancing almost as strongly as last year and imports rising
at a considerable reduced rate. Unlike 1966 when our foreign pur­
chases expanded at double the pace shown by our foreign sales, the
growth rate for imports is expected to fall.
Exports o f manufactured products are expected to continue at a
brisk pace. Unfilled export orders for U.S. machinery point to a
further rapid increase in shipments well into the first half. Con­
tinued technological progress will enable the United States to main­
tain its generally strong competitive position in several important
fields. We may double the 1966 rate of increase in transport
equipment exports.
There should be good gains in agricultural exports for the second
year in a row. Last year’s sharp rise, mainly in wheat and feed
grains, will not, however, recur in 1967.
Imports are expected to increase much less strongly that last year
in line with the more moderate pace of our economy* Imports of
consumer goods should move up more slowly. Business purchases
o f foreign equipment are likely to be similarly affected by the much




452

the

1967 ECONOMIC REPORT OF THE PRESIDENT

more moderate increase in spending on new plant and equipment.
And as high inventories are drawn down, purchases of foreign indus­
trial supplies could slacken appreciably. Moreover, a repetition of
the unusual 1966 growth in focil imports is not anticipated.
Co m m e r c e P rograms

for

T

rade

E

xpansion

An important stimulus to further expansion of U.S. exports in
1967 will be stepped-up Government efforts in the export expansion
field. Commerce will continue to improve its market research and
other services to the U.S. foreign trade community and endeavor
to bring new firms to new and existing world markets.
We will get more firms to use our oversea centers and match
more new firms with established exporters in providing oversea dis­
tribution channels under our “ piggyback” program. More foreign
retailers will be encouraged to stage America Weeks programs.
C ooperation B

etween

T

B

rade

usiness a n d

E

G

overnment

on

xpansion

Cooperation with the business community is an essential ingredient
of our program in the Department. It is reflected in continuing
consultations with all parts of the business world—merchants, manu­
facturers, and bankers—small as well as large, and throughout the
country.
The work o f the National Export Expansion Council (NEEC)
affords a good illustration. Composed of business executives in the
field of international trade, the council serves in an advisory role in
the promotion and expansion of U.S. exports. It also provides
leadership and guidance to the 42 regional export expansion councils.
Its work has assumed increasing importance m view of the pressures
on our international balance of payments. It has contributed to new
ideas and Government policies that help American business to become
more competitive internationally.
Its recommendations on export financing led to improvements in
the U.S. export credit and insurance facilities such as (a) a 15- to 25percent reduction in certain Eximbank and FC IA fees and charges
and liberalization of maturities of transactions eligible for Exim­
bank guarantees and FCIA insurance; (b) an expanded program of
credit guarantees, including guarantees of long-term commercial bank
loans to foreign buyers; (c) greater discretionary authority to pro­
vide guarantee coverage of export credits; and (d) a new Eximbank
discount facility for export paper, with incentives for commercial
banks to provide financing for U.S. exporters.
T

ravel

P

romotion

Tourism is big business and tourism is growing. But our travel
deficit increases. It rose about $130 million in 1966, to over $1.8
billion. Our gain in oversea visitors has averaged 18 percent since
1961, but we need to gain about 25 percent yearly to hold even in the
oversea account. We need to reduce the travel deficit in order to help
our balance o f payments.




THE 1967 ECONOMIC REPORT OF THE PRESIDENT

453

We hope to increase our efforts to attract tourists this year, espe­
cially business travel, as trade and travel go together and we have
requested more funds to bolster the operation of the U.S. Travel
Service. Countries such as Mexico and Greece invest more than $5
to attract each foreign visitor. We spend 50 cents.
The President has stated in the Economic Report that “ the most
satisfactory way to arrest the increasing gap between American travel
abroad and foreign travel here is not to limit the former but to stim­
ulate and encourage the latter.” The President intends to appoint a
special task force drawn from industry and Government to advise on
how best we can stimulate foreign travel to the United States. We
will welcome this advice and the Department will promptly act on it.
V

oluntary

P

rogram

Secretary Fowler has already discussed balance-of-payments de­
velopments and the programs designed to deal with the problem of
the U.S. deficit. I will not duplicate that discussion, but will com­
ment briefly on the Department’ s role in carrying out the President’s
balance-of-pa/yments program.
Secretary Connor made a most significant contribution in formu­
lating policies in this area, and we owe him a great debt of gratitude
for enlisting the cooperation of the business community in an effective
joint effort. The wide extent of voluntary participation in that effort
has been a fine tribute to his leadership.
Business leaders realize that they have an especially vital interest in
maintaining the strength of the U.S. dollar and in forestalling resort
to radical measures. They are willing to lend their help in a balanceof-payments effort that avoids controls on international trade and
continues to foster the healthy development of the world economy.
Their investments abroad have continued to increase.
We must rely on the industrial and commercial sector of the econ­
omy for the foreign earnings to cover the bulk of our costs of foreign
operations, both public and private. While we have always emphasized that the Department of Commerce program applies to this
entire sector, we have asked only a selected list of some 750 companies
to report regularly on their balance-of-payments transactions.
In the first 2 years of the voluntary program, these companies
were able to expand their annual average balance-of-payments con­
tributions by about $1.3 billion, largely through increased exports and
repatriation of foreign earnings. In addition, they have made note­
worthy efforts to contribute on capital account or limit the adverse
effects of their own foreign investment programs* Their initial con­
tributions in 1965 included repatriation of mor^ than $400 million in
short-term assets held abroad. Subsequently, they made unparalleled
arrangements to borrow abroad in order to finance the rapid expansion
o f capita! expenditures by their foreign affiliates and thus limit U.S.
capital outflows.
In the 2 years 1965 and 1966, long-term foreign borrowing by the
U.S. companies and their foreign affiliates has averaged about $1
billion more than in the preprogram year 1964. This borrowing,
undertaken at high cost, made it possible for the companies to hold
their direct investment transactions in developed countries below the
levels we had suggested as targets for the 19G6 program.
75-314— 67— pt. 2------- 15




454

THE 19 6 7 ECONOMIC REPORT OF THE PRESIDENT

We have asked the companies to look carefully at investment pro­
posals and to eliminate marginal projects, but we have not suggested
the cancellation of projects vital to the competitive strength of U.S.
business abroad. This year we have tightened our direct investment
target somewhat, although in most cases the suggested level of out­
flows plus reinvested earnings in developed countries remains at or
near the level occurring last year. The implication is that the growth
in capital expenditures by foreign affiliates in developed countries
should be financed abroad. This is not, in my mind, an unreasonable
expectation. American businesses are adaptable. However, for in­
dividual companies it may require some sacrifices, especially if it
should prove more difficult to raise needed funds in tne European
capital markets.
In view of the outlook for continued high levels of military expendi­
tures abroad and a possible halt or even reversal of some of last year’s
capital inflows, there is a need for offsetting increases in contributions
in other areas to proceed at an even more rapid rate in 1967. We hope
that the reporting companies will be able to increase their overall net
contributions on major selected transactions by $2 billion this year
compared to an annual average increase of $1.3 billion in 1965 and
1966. The increase in contributions must come largely from expand­
ing exports and increases in U.S. income from foreign investments.
At the same time, these improvements on current account would be
safeguarded from offsetting increases in capital outflows through the
application of the direct investment target.
We are ever mindful of the fact that the voluntary program is by
no means a permanent solution. It has helped to improve the balance
o f payments and had some favorable side effects, such as the accelerated
development of the European capital market. But it was not de­
signed as an element of a basic adjustment process. In current cir­
cumstances, however, faced with the special costs of the Vietnam
situation, we found it reasonable to ask for an extension of the volun­
tary program. The American businessman has responded and will
continue to respond to the interests of the Nation.
K

ennedy

R

otjnd

The substantial reductions in trade restrictions sought by the United
States in the Kennedy round should contribute importantly to ex­
panded international trade. These negotiations which formally
opened in 1963 must be concluded in the very near future as the Presi­
dent’s authority to negotiate reductions in U.S. duties expires with the
Trade Expansion Act on June 30, 1967.
Issues that are both thorny and difficult of settlement remain to be
resolved in the Kennedy round.
In the industrial area we need a consensus between ourselves and our
negotiating partners as to what can be accomplished in the important
sectors of chemicals, steel, pulp and paper, aluminum, and textiles,
as well as in the important machinery sector.
The field o f agriculture has its uncertainties, too. The EEC is
being asked for liberalized access for its imports of agricultural prod­
ucts. One hopeful area for agricultural progress is in the area of
grains where discussions aimed at a multilateral agreement are
progressing.




THE 1 9 67 ECONOMIC REPORT OF THE PRESIDENT

455

In addition, there are problems of achieving general reciprocity,
since there is unevenness in the offers of the United States as compared
with those of some of our major trading partners.
The answers basically lie with the EEC. The Ministers are to meet
again early in February* It is our firm hope that they will agree to
clear mandates for their representatives so that conclusions may be
negotiated in the weeks to come. Time is short. I f we see renewed
flexibility and adaptability on all sides our hopes for the future of
liberalized trade in the free world will be confirmed. The opportunity
must not be lost.
T

rade

P

references for

D

e v e l o p in g

C o u n t r ie s

Regardless of the outcome of the Kennedy Bound, the developing
countries are very likely to press even more vigorously than before for
international answers to their trade problems. The developing coun­
tries are urging the developed countries to adopt a one-way, generalized
system of trade preferences by all industrialized countries applicable
to importation of processed and manufactured goods from all develop­
ing countries.
The United States has expressed serious misgivings about such a
system and has questioned whether the advantages would really out­
weigh the disadvantages. Nevertheless, the United States is willing
to explore all alternatives respecting this issue and together with senior
trade policy officials of the United Kingdom, France, and the Federal
Republic of Germany is engaged in a study of trade problems between
developed and developing countries.
The aim of this study, which is being sponsored by the Organization
for Economic Cooperation and Development, is to formulate construc­
tive and concertea policies for encouraging increased export earnings
by the developing countries. Thus far, the group has concentrated its
attention on tne preference issue and has been examining ways of deal­
ing with the practical problems which would inevitably arise if new
preferences were to be extended to the developing countries. The
results of these discussions will have an important bearing on the out­
come o f the United Nations Conference on Trade and Development to
be held next year.
E

a st-W est

T

rade

A third trade problem urgently requiring our attention is EastWest trade.
Two-way trade between the free world and Eastern Europe, includ­
ing the U.S.S.R., has increased substantially during recent years to
about $12.5 billion in 1965. Over half—$7.7 billion—o f this trade has




456

THE

1967 ECONOMIC REPORT OF THE PRESIDENT

been with Western Europe and the United Kingdom. However, I am
encouraged by our 1966 trade which I believe will exceed $350 mil­
lion—one of the highest levels attained in almost two decades. Under
favorable circumstances, I can foresee substantial increases in our trade
with Eastern Europe in goods and technology for peaceful uses.
Major increases in our trade will not be possible, however, until we
remove the political and commercial obstacles involved in our con­
tinued denial of most-favored-nation tariff treatment of imports from
most Eastern European countries. For its part, Eastern Europe must
improve substantially its export products and its ability to market
them in the United States.
The administration sought authority to extent most-favored-nation
treatment as part of broad bilateral commercial agreements to be ne­
gotiated with these countries under the proposed East-West Trade
Relations Act which Secretary Rusk submitted to the Congress last
May. President Johnson has clearly indicated that he will seek
similar authority from the present Congress. I fully support the
need for such authority and believe the resulting commercial agree­
ments would in many ways facilitate improved commercial relations
with these countries and lead to worthwhile increases in peaceful trade.
Mr. Chairman, this completes my statement. Let me thank the
^committee again for the opportunity to appear before you.
Thank you.
{The tables and charts referred to follow:)
T a b l e 1.— A 3-year performance of selected major economic measures
Quarterly changes1 in—
Real
Real G N P disposable
income
1064:
1st quarter.*................... ..
2d q u a rter........................
3d quarter......... .....................
4th quarter.............................
1965:
1st quarter.............. ...........
2d quarter.................... —
3d quarter....................... —_
4th quarter.............................
1066:
1st quarter... ....................
2d quarter......... ......................
3d quarter........... ....... ...........
4th quarter-------------- -------

Percent

5.6
0.0
4.8
1.6
8.8
4.8
6.8
8.4
6.0
2.0
4.0
4.4

Percent

8.0
10.0
5.2
3.2
4.8
4.8
12.4
6.4
4.0
- .4
4.0
4.4

Civilian
employ­
ment
Millions

Wholesale Consumer Rate of
price
price
unemploy­
ment
Percent

2.2
1.7
1.0
2.0
1.8
2.4
.8
4.6
0
2.2
.7
4.2

i Quarterly changes at annual rates; based on seasonally adjusted data.
Source: U.S. Department ot Commerce and U.S. Department of Labor.




- 0 .4
- 2 .0
1.6
.8
2.0
4.0
2.8
2.8
5.6
2.0
4.0
- 2 .8

Percent

1.2
.8
1.6
1.6
.8
2.8
1.6
2.0
2.8
4.4
3.6
3.2

Percent

5.5
5.3
5.1
5.0
4.8
4.7
4.5
4.2
3.8
3.9
3.9
3.6

THE

CHART

]

1967 ECONOMIC REPORT OF THE PRESIDENT

GROSS NATIONAL PRODUCT

Billion $ (ratio scale)




Qw lr l y.

b>j

Adjwte< at Annual A m

457

458

'TTTO 19 0 7

CHART 2 . —

1948'

e c o n o m ic

bepoet

op

the

p r e s id e n t

GOVERNMENT PURCHASES OF GOODS AND SERVICES

1950




1952

1954

1956

1958

1960

1962

Qwortariy, Itcapnnly AdjiwNdL at Annual Hot*

1964

1966

1968

THE 1967 ECONOMIC REPORT OF THE PRESIDENT

CHART 3 . —

1948

DYNAMIC SOURCES OF PRIVATE DEMAND

1950

1952

1954

1956

1958

1960

1962

Quarterly, S«OMnally Adjwtod. at Annual Rato

U . Pw t o
.S piiw f

459

Offica of




■
la

1964

1966

1968

460

CHART 4

the

1067 ECONOMIC REPORT OF THE PRESIDENT

MEASURES OF UTILIZATION

Percent

Quarterly, S * nonoBy Adjusted

1948

1950

1952

1954

b ---------- --------------------------------------

1956

1958

.1960

Quarterly -------------------

-

1962
-------

1964
— , |«

-

1966

1968

M o n th ly ------- ’ |

leeeeiwHy Adjusted

U.S. Daporrmf rt al Commcrca, Offic* •# IwiiMw Econowla




D«io:

of Labor, F«4tr«l R tm ^

THE

CHART 5 .—

1967 ECONOMIC REPORT OF THE PRESIDENT

CHANGE IN BUSINESS INVENTORIES

Billion $

NET EXPORTS OF GOODS AND SERVICES
Billion $




461

462

the

1 8 6 7 ECONOMIC REPORT OF THE PRESIDENT

criAu 6.-CONSUMER SPENDING ON NONDURABLES
AND SERVICES MOVES WITH INCOME
Billion $ (ratio teal#}

PM
lK l

Quarterly, Swienally AdjmtedL at Annuar Rat*
U.S. Otpafflnwii

Conmare* OWc* of lodnM i Economic!




THE 1967 ECONOMIC REPORT OF THE PRESIDENT

CHART 7 . —

1944

463

PRICES IN WHOLESALE AND RETAIL MARKETS

1950

1932

1954
Annual

1956

1956

1960

1962

1964
Monthly

Incfox, 1957-59—100
130 ------------------------------------------------------------------------------------------------------------------------




1966

196#

464

THE

196 7 ECONOMIC REPORT OF THE PRESIDENT

Chairman P r o x m i r e . Thank you very much, Secretary Trowbridge,
for a very comprehensive and encouraging statement.
You have referred, in your statement, to the Council's Report, and
to their estimate of the overall growth rate of 4 percent in real gross
national product.
It has seemed to me that this 4 percent is pessimistic, when you
recognize that the Department of Labor “ Projections 1970” suggested
that a 4.2 or 4.3 percent growth rate would be necessary between 1965
and 1970 to sustain even the present level of employment, and that if
we have only 4 percent growth rate that we might suffer increased
unemployment.
Now this is particularly true not only of the employment situation
but of the plant capacity ratio.
You say that we operated in December of last year at 89.5 percent,
and we are now down to 88 percent.
In view of the immense increase in the productivity of our plant
facilities, it seems here again we are underutilizing our resources by
setting too low a mark. What is your comment ?
Mr. T r o w b r i d g e . Sir. Chairman, I think the 4 percent projection,
which is the growth in real GNP, is a fair one for this coming year.
It seems to me that last year, in looking at what was the growth of 5.5
percent, I believe, in real GNP—closer to 8.5 including price rises—
we were really operating at a rate of growth which I would prefer not
to see on a constant basis, because it was basically pretty overheated.
I think we had in 1966 a substantial increase in the total GNP growth
up to a level of $740 billion which I believe was the final figure. Pro­
jections for this year, with some moderation in the economy makes sense
to look at the 4-percent figure as a real one.
We, yesterday, came out with the unemployment figures for January.
They remain at about the 3.7 level. This may continue; it may inch up.
But the projections, as the Council looks at it, in an economy where the
first half of the year probably will be one of a certainly lesser growth
rate, perhaps being spurred on in the second half of the year by in­
creased consumer demand. I think the projection is at this point a
realistic one: that we can maintain 4 percnt real growth and keep un­
employment in the 4 percent or below area.
Senator P r o x m i r e . I realize that this is realistic in the sense that it
is easier to achieve than a more rapid growth rate, but since the Labor
Department’s projections, which were widely hailed as being com­
petent, and this is an expert Department of Government estimates we
need a 4.2 or 4.3 percent or better, if we are going to maintain the pres­
ent level of unemployment, and since we have had lower unemploy­
ment, in 1952-53 unemployment hovered between 3.1 and 2.9 percent,
with much lesser increase in the price level, 2 percent in 1952 I guess,
about 0.7 of 1 percent in 1953, and it actually went down the following
year.
I just think that we are being too pessimistic about what our econ­
omy can do, in view of that record, and the fact that we have expanded
so rapidly, and what should result as you imply in your statement
as a greater productivity because of the additions of new plant and
equipment.
So I would hope that we would reconsider this, particularly since
business, which the Department of Commerce to some extent repre­




THE

1967 ECONOMIC REPORT OF THE PRESIDENT

465

sents, has been so progressive and so vigorous in making the kind of
progress that it has made.
Mr. T r o w b r id g e . It certainly has. The business investment, the
whole productivity of last year was going along at a tremendous rate.
I know I dealt in more specific terms with a number of the problems
that were created by some of our fast paced movements.
Chairman P r o z m ir e . It creates problems, but it also opens up
opportunities.
Mr. T r o w b r id g e . It does, of course.
Chairman P r o x m ir e . The full utilization of our resources with
stable prices is our objective.
Mr. T r o w b r id g e . That is right.
Chairman P r o x m ir e . So the kind of investment in plant and equip­
ment and new automated equipment and so forth is certainly in our
interest, which calls my attention to the second point I wanted to raise.
You talk about the incentive for investment, and say that will be
restored January 1.
You don’t seem to adjust your estimates in the latter half of the year
for the fact that you have this big gap. September? October, Novem­
ber, December, with an anticipation that if they wait until January 1
for their investment in plant and equipment, they can get both accele­
rated depreciation and the restoration of the 7-percent investment
credit.
This is likely to create a vacuum in the judgment of the experts in
the machine tool industry. Why should anybody buy $100 million
worth of equipment which some of these big firms do, in October of
1966, if they can wait 3 months and get a $7 million increase in their
net profit by waiting that long. There doesn’t seem to be any adjust­
ment and any expectation that this is going to have much impact on
the economy in the latter half of the year, and it seems to me it is.
You do say in the course of your statement that if the situation
changes, you might request an earlier restoration of the investment
credit. But you seem to make the assumption throughout that it is
going to be restored on January 1, and there is no problem involved.
Am I unfair?
Mr. T ro w b r id g e . Well, of course the current suspension, as ap­
proved by the Congress, if allowed to run its full course would carry
the suspension through until January 1.
I have talked with a number of people in the machine tool industry,
and they certainly reported to me as you have, that they are particu­
larly concerned by holdup of potential orders that might come be­
fore the reinstitution of the 7-percent credit. But I have the feeling
that there are lots of other factors that go into a business capital
investment.
Chairman P r o x m ir e . I am sure there are. Let me just interrupt to
say that I understand there has already been some reduction attribut­
able to the investment credit according to the McGraw-Hill study.
Mr. T r o w b r id g e . Yes.
Chairman P r o x m ir e . But you would anticipate that that would be
a lot less now than it is going to be later pn ?
Mr. T r o w b r id g e . Well, we have done some surveys on this, cooperat­
ing with the Securities and Exchange Commission, and our estimates
of the impact so far that are reported by the business community as




466

THE

19 67 ECONOMIC REPORT OF THE PRESIDENT

a result pf the 7 percent investment credit suspension, is that the total
amount of deferred new capital investment is somewhere a little above
$2 billion, perhaps $2.3 billion.
Chairman P r o x m i r e . And you anticipate that that would be consid­
erably greater if it is allowed to work its course, just because o f the ob­
vious commonsense o f the businessman who says “Why should I kiss
off 7 percent net profit when I can wait a little while?” And the wait
is a lot shorter.
Now I can see why any prudent businessman would say, “We have
made our investment plans. It is either good or it is not. This
marginal difference isn’t very great.”
Mr. T r o w b r id g e . That is right.
Chairman P r o x m i r e . The marginal difference would be enormous
in terms o f interest in the last 3 or 4 months of this period.
Mr. T r o w b r id g e . Correct. Well, that could well happen. I think
the happy thing is that we have a flexibility built in here. I f we see a
real need to reinstitute, I think the administration would come up and
ask to do so.
Chairman P r o x m i r e . The trouble with that flexibility, it takes an
act o f Congress. Sometimes those acts seem easy and sometimes they
are, and sometimes they are not.
Mr. T r o w b r id g e . That is right.
Chairman P r o x m i r e . Y o u can get a pretty stubborn Congress. You
might get a political situation where we have imposed a surtax on in­
dividuals of 6 percent, to take something off a business, that makes it
harder.

How about considering the possibility pf restoring this on a 1 per­
cent a month basis? I f you do this, you see, you don’t have the gap.
You eliminate it.
You still have a retarding effect. You move into the January 1
situation < a gradual basis. Why wouldn’t that be acceptable from
on
the standpoint of keeping the slowdown in effect but easing it off so
that you don’t have the punch at the end ?
Mr. T r o w b r id g e . It is a little hard to look down the pike that far
in advance, and have a completely crystal clear crystal ball. But it
seems to me that the administration should and would be willing to
look a t the alternatives necessary, under conditions where perhaps an
easing into that situation would be very helpful.
Chairman P r o x m i r e . You see, the thrust o f my question is this.
You anticipate, as I understand it, an increase in investment in plant
and equipment, whether it would be 5 or 6 percent as compared to the
15 to 17 percent we have had in the last 3 years.
This is a big slowdown, and it is a slowdown not only from the
standpoint of stimulating the economy, but it is a slowdown also in
our potentiality of being able to produce more and being able to keep
prices down. So I am very concerned with this aspect of the adminis­
tration policy, because it would seem to me that this is a good notion
of having an investment credit, we should certainly have it in effect
at a time when business seems to be slowing down and there is every
indication that it is slowing down considerably now.
Mr. T r o w b r id g e . Well, it seems to me, Mr. Chairman, it is important
to remember that we are slowing down from an extremely high plateau.
Chairman P r o x m i r e . Oh, yes, that is true. I think that is a good
qualification.



THE 1967 ECONOMIC REPORT OF THE PRESIDENT

467

Mr. T rowbridge. I think when we get into this relativity area, we
have to remember-----Chairman P roxmire . We still have 3 million people out of work.
We are still operating below the optimum capacity for business; we
are operating at 88 percent. What is the optimum capacity, about 91 ?
Mr. T rowbridge. Economists generally say in the range of 90 to 91.
This is the point where you are really bumping the ceiling.
Chairman P roxmire. We are below that.
Mr. T rowbridge. We still are, however, with an unemployment rate
of 3.7 percent as of January. There is bound to be some fluctuation
in that as we move along. But I think that when I use the words
“ cautiously optimistic” here, I mean it.
This recognition of the high level of activity and the health of our
economy is something we have to remind ourselves of pretty strongly.
We are going to have some leveling off, and indeed I think we can stand
some moderation, because it was pretty highly geared in the last
portion of last year. Inventory accumulation was particularly strong.
But it seems to me we are heading into a year where continued economic
activity at a high rate is going to be seen.
Chairman P roxmire. M y time is up. I w ill be back with some more
questions.

Mrs. Griffiths ?
Representative G riffiths . I would like to ask you about the invest­
ment credit myself. Did you actually have two-tenths or three-tenths
of a million orders that were not placed ? Are the toolmakers still in
business, still turning out tools ?
Mr. T rowbridge. The toolmakers are very much in business^ Mrs.
Griffiths. I f I am not mistaken, recent press reports have indicated
a slight reduction in the size of back orders, of unfilled orders. I think
it was down from—don’t hold me to this exactly—I recall 11 months,
and down to 10. And this survey, which has been held, is not in­
dicative fully, doesn’t tell us exactly, where the decisions were deferred.
I would like to ask Assistant Secretary Shaw, if I might, to comment on
this point. He has a little closer knowledge o f it.
Representative G riffiths . I would like to hear him.
Mr. S h a w . Mrs. Griffiths, may I make two comments. First, in
connection with this survey of business spending on plants, this
figure of between $2 and $2.5 billion is an estimate made by the com­
panies that do the capital spending. It represents the amount by
which these companies stated they will reduce capital spending in
1967, as a result of the suspension of the tax credit.
My second point has to do with this problem of orders, and, if I
might, I would like to read a few figures on new orders in the ma­
chinery and equipment industries. In December 1965 these new
orders were approximately $4.5 billion. Beginning with October
1966, and using figures on a seasonally adjusted basis, $4.8 billion in
October 1966, $4.6 billion in November 1966, $4.6 billion in December
1966.
In these figures there is as yet very little evidence that new orders
have dropped off sharply-----Mr. T rowbridge. In the machinery and equipment industries.
Representative G riffiths . I would say that the work within those
plants has dropped off even less. I was asked just the other day to




468

THE

1967 ECONOMIC REPORT OF THE PRESIDENT

get 15 skilled workmen immediately for a Detroit plant. Now, I
haven’t been asked that before. So that I am sure that the toolmakers
are still in business.
During the time that we discussed this on Ways and Means, I asked
repeatedly what would be the effect of taking our goods in place and
putting it back on orders, wha/t the effect would be. That some of
the largest concerns you would find on the first day of January 1968
would be able to buy fully equipped tools, and finally some manufac­
turer came in and said yes, he thought they would be.
You would have to place this in writing, to be able to walk in and
buy it. But it would be made exactly to your plan.
In my opinion the suspension of investment credit really didn’t do
very much. The way it should have been suspended was to simply
have repeal of the act, and when it was reinstituted it should have
been based on orders, not on equipment in place.
Mr. T rowbridge. I certainly can say my experience of the tightness
of the skilled labor market in the machine tool industry—perhaps with
your people, it is not as direct—that in the Department we have worked
as closely as we could in trying to identify those areas where tightness
in either raw materials or skilled labor was evident, and working
with the industry and with the Department of Labor in manpower
development work, it was very, very clear that the machine tool
industry is one of the tightest; there is no question.
Representative G riffiths . The staff would like to know now that
the economy nears its potential, it seems essential to concentrate in­
creasing attention on structural improvements. How are the area
development programs o f the Department of Commerce meeting this
challenge?
Mr. T rowbridge. The Economic Development Administration pro­
grams, which as you know have taken on the role once held by ARA,
the Area Redevelopment Administration, are I think in good hands.
They are working and are making good progress. Therenas been no
question that in the period o f adjustment, transition between the two
administrations, that we have had to take care of and process a backlog
of various projects that were under consideration.
A number o f them did not get approved. A number o f them
couldn’t be approved, because you can’t fill all o f the requests with the
money available, and these resources were limited.
We have had about 565 areas, roughly 10 percent of the country’s
population, suffering from severe unemployment, and these areas will
qualify for assistance in fiscal year 1968. The projection is that over
150,000 new jobs would have to be created simjply to raise these areas to
a minimal level o f prosperity, and an additional 150,000 new jobs
would be needed to match economic conditions in the rest of the
country.
I think this gives an idea of the magnitude o f the attempt. We
have now established these regional economic development commis­
sions. The chairmen, of these commissions have been appointed, and
they are in business. We look forward to a year in which we not only
learn a lot but do a lot in the whole economic development area.




THE

1967 ECONOMIC REPORT OF THE PRESIDENT

469

Representative G riffiths . When you have identified these areas,
what effort did you make to move the people out of the area or place
some jobs in, or does this go to Secretary Wirtz only \
Mr. T rowbridge. The movement of people i
Representative G riffiths . Out of the area to where they-----Mr. T rowbridge. I think the purpose really of the whole idea is to
provide jobs in an area rather than move people out.
Representative G riffiths . We have another program where we
bring them out. That is over in the Labor Department.
Mr. T rowbridge. I think it is.
Representative G riffiths . I f you identify the areas where there is
high unemployment, maybe we can get the Secretary of Labor to move
some of them out and make your job less. What have been the effects
o f the high interest rates on small business formations and failures,
and what is the small business failure, bankruptcy rate now ?
Mr. T rowbridge. Mrs. Griffiths, I don't have those numbers. I
would be very happy to supply them for the record.
Representative G riffiths . Please do.
Mr. T rowbridge. I know what one reads and what one hears, that
the high interest rates have been particularly difficult for many people
in the business community, housing being a prime example. But in
all honesty, I don’t know offhand what the rate of business failure is
most recently. I can find out and will be glad to submit it to you.
(Tables below were subsequently supplied by Secretary Trow­
bridge :)
I n t e r e s t r a te s and bu sin ess fa il u r e s , 1 0 6 5 -0 6

Year

1965:
1st quarter............................................................................................
2d quarter.............................................................................................
3d quarter......................................................................... - ................
4th quarter........................................................................ -..................
1966:
1st quarter........................................................-......................... ..........
2d quarter
_____ ________ . . . . ____ _____ ____________
3d quarter.............................................................................................
4th quarter.....................................................................-.....................

Bank rates
Number of Index of net
on short­
term
business
business
failures per formation
business
loans in
10,000
(1957-59=100)
month pre­ concerns *
ceding 1
5.00
4.97
4.99
5.00
5.27
5.55
5.82

6.30

53.1
51.7
56.5
52.4
48.3

47.5
56.6
65.1

106.4
106.4
106.1
106.2
109.4
106.9
103.8
*102.0

1Average for 19 cities.
* Seasonally adjusted annual rate.
1 October-November average.
N ote .—Statistics of business formation and failures by si*e of business are not available. It is known,
however, that the vast majority are small businesses.
Source: U .S. Department of Commerce, Survey of Current Business and Business Cycle Developments.

75-314—67—p 2—
t. —-1C



470

THE

1967 ECONOMIC BEPORT OF THE PRESIDENT

Bank credit to manufacturing corporations, Mf size of company—Percent changes
in total outstandings

September
1964 to
September
1965
Short term:
All companies__ ______ _________ _ _____ ___________
Smallest size class (assets under $1,000,000)___ ___
D ue in more than 1 year:
_________ __ - _____
All companies__ ______ _ _
____ - -__________
___ _ Smallest size class*--

September
1965 to
September
1966

25.7
5.4
35.5
3.1

40.5
18.8
30.9
25.2

June 1966 to
September
1966
7.7
11.9
.3
3.3

N ote .—It appears that small manufacturers expanded their bank borrowings relatively more than large
manufacturers during the period when credit was tightest. A possible explanation: small banks, which
lend m ainly to the smaller businesses, commonly keep their reserves well above the required minima, and
their lending power was therefore not so much affected b y the pressure on reserves in the latter half of 1966.
Source: U. S. Federal Trade Commission and Securities Exchange Commission, quarterly financial report.

Representative G riffiths . I f the East-West trade bill passed, what
would be your anticipation about our share of the market ?
Mr. T rowbridge, l don’t believe that the mere passage of the EastWest trade bill and the implementation of commercial agreements
through it, is going to have a tremendous effect on the total level of
trade between the United States and the Eastern European Commun­
ist countries right away.
I think it will, first, provide the framework in which this trade can
expand over a period of time, by in effect doing away with what is
a differential in discriminatory trade treatment.
Secondly, I think it will show our business community that the
Government does believe that the opening up of peaceful trade with
this area of the world is in our national interest, and that they will
then go out and develop some parts of this market.
There is a growing awareness, I think, in the American business
community not only of the value from the national point of view of
developing these peaceful contacts, but also that there is a sizable
market in the Eastern European area at the moment being filled by
the Japanese, by the West Germans, and by the Italians, by the
French, by the United Kingdom.
Our businessmen surely, as good competitors, would like to be in
that market and would go forward perhaps with more confidence if
the bill were passed, and if we proceeded to implement these agree­
ments. ^
I think we have to recognize that the pattern of trade which the
Soviet Union and other Eastern European countries generally follow
is one of bilateral balancing. They try to export as much as they
import from a given country, whereas we tend to try to triangulate
our trade.
The ability of the Soviet Union and the Communist countries to
export to this country and to market in our competitive market econ­
omy is going to be crucial to the growth of their exports, and hence
the level of our exports to them.
I think it would be good, frankly, to have some of our marketing
methods and our competitive world known to the economy of the
Soviet Union and to the Eastern countries. I think it would be very
salutary to put them in the midst of it and see how they make out.




THE

1907 ECONOMIC REPORT OF THE PRESIDENT

471

Representative G riffiths Personally I think it is a shame driving
around on Italian made tires, but I was told in England that 10 years
later they have not made a single improvement, so you can sell them
these improvements.
Chairman P r o x m i r e . Congressman Rumsfeld ?
Representative R umsfeld. I have three or four questions. The
President has made a proposal concerning the merger of the Depart­
ment of Labor and the Department of Commerce. I might say par­
enthetically that I approach this in a very favorable frame of mind.
As a member of the Government Operations Committee, which will
review this reorganization plan, it strikes me that it might very well
have a great deal of merit.
I would be interested to know, however, what your reaction might
be to the counterproposal concerning the possibility of isolating out
essentially economic functions and programs from a number o f differ­
ent agencies, and combining them intx> a Department o f Economic
Affairs. The problem comes up as to what the structure of the
executive departments should be, and how we can best meet the prob­
lems o f the country, and I am sure this was debated to some extent.
Do you think this has merit, this counterproposal ?
Mr. T rowbridge. Well, actually, Congressman Rumsfeld, I think
the basic proposal of the President, and as we are trying now to put
some real meat on the bones, is that it makes a lot of sense. We are
working hard on it right now. We hope to have the details of it avail­
able to discuss with you and other Members of the Congress in a short
time.
The approach we are taking in implementing the President’s pro-

osal is not to build a holding company or a merged Commerce and
abor just the two Departments put together in some form.
We are approaching it really from the basis of what can we do to
modernize, to pull together, to coordinate more effectively, to build a
new Department in Government using Commerce and Labor Depart­
ments as they now exist as the base o f it. But we have taken an inven­
tory o f other parts of the Government, other agencies, and other func­
tions which they now carry out, and which would logically fit together
with Commerce and Labor.
Representative R umsfeld. Do you anticipate that some economic
functions o f other departments would be included in the proposed new
Department ?
Mr. T rowbridge. I think so, yes. Our proposal is to try to pull
together the logically related functions of Government in the eco­
nomic development, manpower development, and economic analysis
areas, and first of all we have to apply the criteria of logical fit. Can
we put these things together and do they have a relation to each other?
Second, realistically can we propose this and get it approved. These
are the tests we are trying to apply right now.
Representative R umsfeld. I like to think if it is realistic it could be
approved.
Mr. T rowbridge. Yes, but everybody’s definition of realism always
isn’t the same.

E

Representative R u m sfeld. Right. This same question of course
came up when there was talk of creating a Department of Science and
Technology, and I personally felt that would have been inadvisable;




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THE

1967 ECONOMIC REPORT OF THE PRESIDENT

that these problems do touch all aspects of Government, and that it
would be far preferable to do what was done^ to create an Office of
Science and Technology in the Executive Office of the President to
coordinate these types of functions in the existing agencies. I can see
the merit in what the administration has proposed; namely, to merge
these two Departments, to try and bring the functions that are easily
brought in, but not to strip all economic function from the other de­
partments necessarily.
Mr. T rowbridge. Well, we hope to be able, as I say, to build on the
basic building blocks of the two existing departments, and add to
them in such a way as to get a very imaginative proposal, and one that
is going to be one of consolidation of functions, and make the Presi­
dent’s job a little bit easier in that he has got an awful lot of people
reporting directly to him, and lots of conflicting voices that he has
got to listen to. I think it would be better to have them under a roof
where you can pull them together from the national viewpoint.
Representative R umsfeld. Britain, of course, is making a strong bid
to enter the Common Market. I get the feeling that they aren’t ter­
ribly optimistic about entering within the immediate period, but that
they are quite optimistic about the possibility of entering some time
by 1970 or thereabout^ or somewhat before.
Let’s assume that Britain does get in. What would be the short-run
effect in 1 to 2 years on the United States, and the longer run effect,
specifically say beyond 2 to 4 years ?
Mr. T rowbridge. Well, I think the short-run effect has to be meas­
ured really on the basis of how the Kennedy Round comes out, because
if the United Kingdom joins with the Common Market she would
presumably go through with the obligations of the Kennedy Round.
The external tariff common to all countries would hopefully have
been reduced by the Kennedy Round, and that our trade, or the trade
barriers between us and them would be substantially reduced.
I think really we have approched this whole concept of a regional
common market recognizing that there are going to be some additional
tariff barriers and hurdles that our trade will have to overcome.
Representative R umsfeld . What particular segments will be the
hardest hit?
Mr. T rowbridge. By the creation of the Common Market?
Representative R umsfeld . By Britain’s entry ? What segments of
our society would feel the greatest impact from this, on U.S. exports?
Mr. T rowbridge. I find that a little hard to answer right offhand,
Congressman. Could I ask my friend Mr. Robert McNeill to counsel
me on that one or to make a comment?
M r . M c N e i l l . I was afraid, sir, he was going to do that. We
honestly don’t know what the answer to your question is.
In terms of U.S. exports, it is likely that in a short run there would
be certainly no major adverse impact that would be discernible to us.
In the long run, in terms of U.S. exports, we think it perhaps would
be beneficial for Britain to enter the Common Market with all that
that would mean for expansion of that market, the generation of in­
creased income, and therefore provide a larger magnet for imports
from this and other countries.
Representative R umsfeld . Y ou don’t see any harmful effects to the
United States short run or long term from this possibility of Great
Britain entering into the Common Market ?



THE
M r. M

1967 ECONOMIC REPORT OF THE PRESIDENT

cN e il l .

Y

ou

473

a re ta lk in g s tr ic tly a b o u t e x p o r ts ?

Representative R umsfeld . Yes.
Mr. M c N e i l l . We looked at this quite carefully back in 1961-62,
when Britain was negotiating access into the Common Market, and
at that time were not able to come up with any judgments that we
would be severely affected in terms of the drop in our exports to the
United Kingdom.
Representative R umsfeld. Turning to the other possibility, let’s
assume that the reasons why some countries are not very eager to have
Great Britain in the Common Market aren’t economic but are political,
and they can’t be worked out, and Britain doesn’t go in. What is your
Department’s attitude on the possibility of creating a free trade area
composed of some of the more developed countries, not just in the
Atlantic area but possibly also Japan and others ?
Mr. T rowbridge. Are you suggesting a regional across-the-Atlantic
free trade area kind of relationship ?
Representative R umsfeld. That is one possibility. However, ignor­
ing Japan would be difficult, so, as I say, not just in the Atlantic but
heyond.
Mr. T rowbridge. Well, our approach to tliis, I think, historically
has been the hope that multilateral tariff negotiations, such as the
Kennedy Round, are going to be a lot more advantageous than the
roliferation of regional trading blocks and preferential treatment
&tween them. Mr. McNeill may want to add something to that ?
Mr. M cN eill . I f I may, Congressman, digress a little bit on the
foreign policy objective of the United States m Europe, which basic­
ally is to bring together, as I understand the policy, the French and
the German people, in a situation such as now exists of peace. Our
postwar policy has been aimed toward that end.
Representative R umsfeld . I wasn’t asking you a foreign policy
question.
M r . M c N e i l l . I understand. I want to start there and then go to

E

th e an sw er.

Representative R umsfeld . My question is as to the economic impact.
Mr. M c N e i l l . Y ou would be negotiating for a free trade area, es­
sentially, I suppose, for an economic purpose, which is what you have
in mina. But the political implications of that would be quite serious,
because it would involve turning somewhat away from Europe toward
something else as the heart of Atlantic policy. By Europe I mean
Common Market Europe, and that, I think, would be a very serious
step that would have to be considered by the administration in any
consideration of a free trade proposal.
Representative R umsfeld . I am sure it would be. My time is up.
I would like to ask one last question if I may ?
Chairman P roxmire. You have unanimous consent. Go ahead, sir.
Representative R umsfeld . This concerns the proposals that have
been made recently to study the effect of the possible transition to the
metric system. It is my recollection that the proposals didn’t pass the
Congress in the last session. Is the Department planning to pursue
that this year? Will there be a message on that subject or a recom­
mendation from the Department, do you know offhand?
Mr. T rowbridge, Congressman^ I am searching my memory as to
where that does stand. I know that we were very active on that ques­
tion in the last session.



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THE

1 9 67 ECONOMIC REPORT OF THE PRESIDENT

You are correct in that it did not get approved here. I believe that
we continued (to support the idea of such a study. Whether or not
there are plans to reintroduce the idea, the proposal in this session, I
am frankly not aware, but I will be glad to comment on that
subsequently.
Representative R u m s f e l d . I think that very likely this ties into this
question of trade.
Mr. T rowbridge. Yes, it does.
Representative R umsfeu ). I think it has a bearing on it, and I am
further of the opinion that the fact that Congress has not specifically
requested such a study should be no inhibition or prohibition on the
Department of Commerce to undertake a study on the possible advan­
tages or disadvantages of U.S. use of the metric system. At least a
better understanding of what advantages or disadvantages might ac­
crue to this country as a result of such a study. I would hope the
Department would take a good look at it.
Mr. T rowbridge. We certainly will.
(The following statement was later submitted for the record:)
T

he

M

e t r ic

Sy s t e m

and

I

n t e r n a t io n a l

T

rade

The Department of Commerce has consistently supported the various bills that
have been before the 87th, 88th, and 89th Congresses to authorize a comprehen­
sive study of the advantages and disadvantages of increased use of the metric
system of measurement in the United States. While the Department has not
proposed such legislation, i strongly favors the enactment of appropriate bills
t
for this purpose such as S. 441, recently introduced in the 90th Congress by
Senator Clairborne Pell, and H.R. 3136, introduced by Congressman George P.
Miller.
During the 89th Congress, the Assistant Secretary of Commerce for Science
and Technology discussed the many important needs for a metric system study
when appearing before the Senate Committee on Commerce on July 14, 1965, in
support of S. 774. Similar testimony was presented to the House Committee
on Science and Astronautics on August 2 1965, when that committee held hear­
,
ings on H.R. 2626 which was superseded by H.R. 10329.
On these occasions, special attention was directed to the pressing need for a
better understanding of the extent to which disparities in systems of measure­
ment between the United States and metric-using countries m a y constitute a
barrier to our international trade. It was emphasized that there has been an
increasing trend over the last few years in various other countries not only to
make the metric system their legal system of measurement, but to prohibit the
use of any other system. The announcement of M a y 25, 1965, by the British
Board of Trade of that country’ intention to adopt the metric system was cited
s
as a particularly significant development in this general trend which m a y have
an important effect upon American Industry and our foreign commerce.
The Assistant Secretary also stressed our general lack of factual information
needed to guide decisions in both Government and private sectors concerning
increased use of the metric system in this country. Our limited understanding
of the interaction between measurement systems and the increasingly important
international product standards, which establish preferred sizes, shapes, and
other physical characteristics of the articles of international commerce, was
noted as one example of the many complex problems that should be investigated.
The Department of Commerce is fully convinced of the need for a broad and
comprehensive study of this subject to be initiated as soon as possible. W e
currently are considering various means to assist and encourage industry toward
voluntary self-examination with respect to some of these matters. Such activ­
ities by the Department might help to increase the awareness of American busi­
ness and industry to the problems posed by the increasing world-wide use o f
d
the metric system, and might help to identify voluntary actions that can be
taken in various industrial areas to adjust to this trend.
W e strongly believe, however, that our national interest requires a much
broader study of this very complex problem to produce factual information for




THE 19 6 7 ECONOMIC REPORT OF THE PRESIDENT

475

t i establishment of a national policy with respect to utilization of the metric
le
system. This will require the full cooperation of industry, commerce, labor,
science, consumers, and numerous other sectors of our society, and i will require
t
the investment of significant Government resources in terms of manpower and
money. W e believe that the necessary national support for such an extensive
and important study can only be assured through congressional endorsement
and authorization. For this reason we strongly urge prompt enactment of the
bills for this purpose that are currently before the Congress.

Chairman P roxmire. Senator Symington ?
Senator S ymington . Thank you, Mr. Chairman.
You mention tourism in your statement. The plan is still to have
incentives for people to come over here as against any restrictions
against the citizens of this country going abroad and spending over
there, is that correct ?
Mr. T rowbridge. That is correct, Senator.
Senator S ymington . I s there any contemplating of stipulating that
our citizens use ships and airliners under the American nag ?
Mr. T rowbridge. Not as any particular rule or legal requirement.
I think you are aware that as one of the techniques that we suggest
to American companies, as they approach how they contribute to the
balance-of-payments situation, is the use of American aircraft and
flagships in the movement of their people and goods. This is a
method rather than a requirement.
Senator S ymington . Does the Department of Commerce believe that
the 18-year continuing loss of gold—with the exception of 1957—is a
serious matter?
Mr. T rowbridge. Yes, it does, Senator.
Senator S ymington . Tourism today is probably the greatest single
antibalance-of-payments item, is it not ?
Mr. T rowbridge. At $1.8 or $1.9 billion, I think you are probably
right, as a single element of the total picture.
Senator S ymington . I am not sure, but believe so.
Mr. T rowbridge. Yes, sir.
Senator S ymington . You have said in your statement “ We are ever
mindful of the fact that voluntary programs are by no means a per­
manent solution.” What would you see as a permanent, or semiper­
manent, solution to curbing the flow of investment dollars abroad to a
reasonable level so as to improve our balance-of-payments position?
Mr. T rowbridge. Well, of course our very real hope is that we won?
t
need a permanent method of curbing investment outflow. We are
hopeful that the stimulation of exports, the accumulation of earnings
abroad and the use of those for reinvestment purposes, the borrowings
abroad, these various features of our current program, will be con­
tinued by business.
We are particularly mindful that American investments abroad are
a good thing, and our concern is how do we finance them.
Senator S ymington . I f the administration would come right out
and say that actually it didn’t make much difference whether we had
adequate gold or not, that would be one thing; and it could be discussed
with that premise. But each year, in all the years I have been inter­
ested in this subject, administration witnesses come down and say it is
very serious matter, and they are going to correct it “next year.” But
they never do.
That is what worries me most. We have now about 10 percent
o f free nonmonetized gold available if we were called by these foreign




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THE

1967 ECONOMIC REPORT OF THE PRESIDENT

citizens and their central banks. Even if we abandon the pledged gold
reserve against outstanding Federal currency, we wouldn't have half
the gold now needed, if there were a mass call.
The administration is the one saying it is a serious matter; but they
don’t seem to be able to do anything about it, sort of like Mark Twain
and the weather.
We have been getting these hopeful statements year after ^ear. The
operations may be successful, but the patient continues to die.
What do you think of a recent proposal to impose some sort of tax
on U.S. businesses abroad, as a means of defraying part of the cost of
the Federal Government, protecting, promoting, and defending those
private investments overseas.
American companies probably make 10 times as much off a barrel
of oil out of the Middle East than from a barrel of oil out of Oklahoma
or Texas. On the other hand, if it were not for all the money we
spend maintaining a position abroad, defense, foreign aid, et cetera,
there wouldn’t be much chance of all this business continuing the way
it continues today.
Again, with the premise we are steadily losing our gold, what
would be your reaction to our putting: some form of tax on those
companies abroad as a means of defraying part of the cost.
Mr. T rowbridge. Yes. I wouldn’t be very enthusiastic about that
idea frankly. I feel that the American position around the world
is one of heavy engagement because we have what we consider to be
national policy reasons. We have national security reasons for our
troops in Europe.
We have some very real programs of integrated defense and inte­
grated political action with our allies through treaties and so forth.
I think these are the reasons we are maintaining a large defense
posture at all.
Senator S ym in g to x . We have a lot of integrated programs with
them, presumable mutually advantageous.
Mr. T rowbridge. Right.
Senator S ym ington . N ow in recent years all the developed coun­
tries of the world have increased their reserves and <ro1d holding, Spain
over 600 percent, France over 500 percent, West Germany some 482
percent ; that is, all but the United States, and we have lost some 45
percent of our gold and reserves in the last 10 years. How long can
we have these cooperative agreements with these other countries
whereby they end up with heavily increased reserves and gold, and we
end up with heavily decreased reserves and decreased gold, if it is
u serious matter. The Treasury is always saying it is serious, and I
take their word for it.
Mr. Trow bridge. Well, sir, I certainly agree as to it being serious.
I can’t quite see though that the factor of our defense interests and
defense expenditures abroad can be characterized as being necessary,
and in fact in place, to protect American business investments, and
therefore the business involved should pay, through a tax, for these
defense activities.
.
Senator S ym in gton . There is more to it than just defense, including
All the loan and grant aid programs.
Mr. Trow bridge. Sure.
Senator S ym i n g t o n . Let’s take the shoe business, which we in
Missouri know something about.




THE

1967 ECONOMIC REPORT OF THE PRESIDENT

477

We make a tremendous number of shoes over here, on fine shoe
machinery. The Japanese and the Italians pay but a fraction of
what we pay our workers. We ship shoe machinery over there, which
they pay for, and that helps the export-import ratio; but ultimately
of course that comes to an end.
Also we ship the original machinery to the foreign affiliates of our
own companies. But is there a point of diminishing returns when
they will no longer seek such goods from the United States, instead
will be purchasing locally ? Have we made any studies about that?
Mr. T rowbridge. Well, I couldn’t quote you a particular study,
Senator, but I am quite sure that this is a continually evolving thing.
I think it is somewhat like the argument over whether computers were
going to really stimulate economic development or put a lot of people
out of work.
It seems to me that the truth of the computer industry is that it has
developed a whole series of new industries and a whole series of new
jobs, and I think that the American overseas investment can be looked
at in a very similar way. Where in one industry there may be a point
of no more return as far as American machinery goes abroad to make
a product, but there is another industry starting up tomorrow that is
going to need more machinery, or there is a third industry that is set­
ting up an assembly plant that is going to use semiprocessed goods or
materials from the United States.
This is a very dynamic situation. The overseas business world is
one which is growing tremendously, as you well know, there are oppor­
tunities for American business around the world for sensible invest­
ments, which will be supported by increased exports, and we do have
studies which show that in the year 1964,1 think that we had a level
of roughly $24 billion worth of exports, and about $6 billion of that
was directly tied to exports of commodities, raw materials, and ma­
chinery, from parent companies in the United States to their affiliates
abroad, supported from American investments.
Senator S ymington . Our excess of exports over imports has been
dropping pretty steadily.
Mr. TS owbridge. It has over a couple of years.
Senator S y m i n g t o n . Q h page 2 6 you point out something quite
intrig^ng; namely, that trade between the free world and Eastern
Europe, including the U.S.S.K. is $ 1 2 .5 billion, of which we do about
$ 2 7 7 million, or about 2 percent of the total.
Mr. T rowbridge. This is 1965, right.
Senator S ymington . For some reason all other developed countries,
politically, seem to be becoming more nationalistic, but we maintain
political internationalism.
But these same developed countries buy and sell a lot of military
and other equipment from the countries behind the Iron Curtain.
Now at the same time we promote and continue our international rela­
tionships politically, we maintain* position which is quite nationalistic
in our economic approach. Even though we defend a very large per­
centage of these countries, and .finance a large percentage through this
tremendous dollar printing o f paper gold, they do all the Iron Curtain
trade they want, and we do very little. We maintain internationalism
politically* nationalism economically. They are working toward
more nationalism politically, and internationalism economically.




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the

1967 ECONOMIC REPORT OF THE PRESIDENT

I asked Secretary of Commerce Hodges and Secretary of the
Treasury Dillon if there was any developed country in the free world
except the United States that wasn’ t doing its best to sell everything
it could behind the Iron Curtain. The answer in both cases was no.
Mr. T rowbridge. I think that is basically true.
Senator S ym ington . And so, from the standpoint of world trade.
We are the only country that can’t do a lot of things all other coun­
tries do. You mentioned that the President has clearly indicated he
will seek authority to increase our East-West trade, to give our manu­
facturers an opportunity to get in on these tremendous new markets.
When do y ou think that is coming up to the Congress ?
Mr. T rowbridge. The date of the submission I am not sure of, Sena­
tor. I am quite confident it will be along in a reasonably short time.
There is o f course the question o f arranging the proper time for hear­
ings and consideration by Congress. Chairman Mills has indicated
that this will go forward.
To the best o f my knowledge we have all intentions of proceeding as
the President has outlined. Our hope is that we can present a very
strong story o f the need to use what I consider to be a dual truck
policy in this whole area.
On the one hand we have our Vietnam commitments, we have our
determination that aggression won’t pay, but on the other, we main­
tain peaceful contacts, and we build those contacts and we use them
as a pressure release valve, and I think this East-West trade area is
going to be very useful.
Senator S'o iin g t o n . Mr. Chairman, my time is up. I would make
this observation. The diehards who now oppose East-West trade are
striking a telling blow against U.S. capitalism. We all know an
essence o f capitaKsm is competition. We all know too, that the way
you get a price is to sell at a profit, and profit is the guts of capitalism.
We all know, too, that volume is essential to low cost. Therefore,
those people in this country who, because they don’t like other coun­
tries’ religion, color, or something—I have never been sure just what—
don’t like to trade with these hundreds of millions of people, whereas
all the countries we finance and defend, France, Germany, Great
Britain, Japan, Italy, are doing as much as they can to sell to these
countries behind the curtain, and buy from them. It seems to me these
diehards over here are striking a telling blow against the very concept
o f capitalism. I wishyou the best of luck in presenting this problem;
hope it will get by the Congress.
Mr. T rowbridge. Thank you, Senator.
Chairman P roxmire . Mr. Widnall ?
Representative W idnall . Thank you, Mr. Chairman.
Mr. Trowbridge, it is certainly a privilege to have you with us this
afternoon.
Mr. T rowbridge. Thank you.
Representative W idnall . Mr. Wirtz testified that the increase in
productivity this year would be at or a bit below the 2.8-percent in­
crease in 1966. You said in your statement which I just read, “The
increase this year may be somewhat higher than 2.8 percent.” How
do you reconcile the difference ?
Mr. T rowbridge. The differences I think are very, very small, pro­
ductivity rates being, I think, not the easiest thing to gage. The 1966




THE

479

1967 ECONOMIC REPORT OF THE PRESIDENT

figure being 2.8,1 think Mr. Wirtz may have been thinking in terms of
2.7 or 2.6, and I am thinking in terms of 2.9, so I don't think there is
that much spread.
Representative W idnall . I f they merge Labor and Commerce it
will make no difference; is that the net gain ?
Mr. T rowbridge. We may come to the same numbers.
Representative W idnall . I am interested in your comments on tour­
ism and the loss that we suffer each year in that connection. How
much loss do we suffer each year in dollars through payments of social
security and retirement benefits and other remittances overseas to both
American citizens and non-American citizens ? I think it is quite a
substantial amount.
Mr. T rowbridge. Congressman, I don’t have those figures, but I
would be very happy to try and submit them to you for tie record as
soon as I can get hold of them. I do know there are a number of com­
mitments of different types for American citizens resident abroad,
for veterans’ agreements. Veterans’ payments to the Republic of the
Philippines would be an example o f residual responsibilities which
our Government has taken on.
I am sure that the amount of dollars that do flow out in compliance
with these various programs is available. I don’t happen to have them
at the moment. I will be glad to submit them for the record.
Representative W idnall . I believe the last figures that I saw, they
amount to hundreds o f millions, and amount to a rather substantial
outflow. You might submit those figures for the record, if they have
not previously been submitted.
Mr. T rowbridge. Yes, s ir ; I will be glad to get those.
(In response to the above question, the following information was
supplied:)

f

,

Detail of U.S. Government pensions and other transfers in the balance of
payments fiscal year 1966
Total_______________ —

Millions

__________________________________ $321

Pensions and retired pay:
Social security (OASDI) and railroad retirement_________________
Defense and Veterans’ Administration___________________________
Civil Service-----------------------------------------------Other______________________________________________________
Grants:
Education and cultural exchange (Fulbright) — — ----------------Research:
National Institutes of Health-----------------------------Damage claims and misceUaneous-----------------------------------

161
82
11
2
28
14
10

Source: U.S. Department of Commerce, Office of Business Economics, Balance of Pay­
ments Division.

Representative W i d n a l l . Would you or the State Department have
the figures on our counterpart funds accounts overseas ?
Mr. T r o w b r id g e . The Department of the Treasury, if I am not
mistaken, maintains records on those, and again I would be happy to
get the latest accounting of those. They are quite substantial m cer­
tain countries, India, I believe Egypt, and some of the places where
our agricultural sales have been particularly high.




480

the

1967 ECONOMIC REPORT OF THE PRESIDENT

(The following material was subsequently supplied for the record :)■
The following three tables from Special Analyses of the Budget of the United
States, pages 171, 173, and 175 show the foreign currency stocks now available*
to the United States and the current sources and uses of these.

T a b l e L - l . — Cash availability of foreign currencies
[In millions of dollar equivalents]
1966

actual
Currencies owned by the United States:
For U .S. uses:
Excess currencies.. _____ ______ ___ ______________
Nonexcess currencies ____________ _______ ____ _____
Subtotal for U .S. uses _________ ____ _____________
For country uses___________________ __________ _____
Amounts unfunded in Treasury accounts____________
Total
_________________*________ _
j . . . __
Currencies held in trust_________________ ____ ______________

1967

estimate

1968

estimate

1,624
392

1,567
439

1,835
440

2,017
2,202
—9

2,006
1,881
-54

2,275
2,049
“ 67

4,210
84

3,835
97

4,257
97

T a b l e L - 3 . — Summary of foreign currency transactions, U.S. uses
tin millions of dollar equivalents]
1966 actual 1967 estimate 1968 estimate
Cash balances brought forward:
Excess currencies _____ ____________ _____
Nonexcess currencies___________ _ _ ______________ _____ _
Subtotal, cash balances brought forward_______________
Collections:
Public Law 480 sales__________ ______________ ___________
Foreign assistance programs (including special letters of
credit)_____ ___ __ _________________ _____________
Interest on public deposits.................................. ...........................
Other nonloan collections_____ _____ ______ _
__
Loan repayments (principal and interest):
Public Law 480 lo a n s____ ______ __ _______________ _
Foreign assistance loans (including Development
___________ ______ ______ Loan Fund)
Subtotal, collections_______ _______ -............... .........
N et transfer to country use__ ____ ________________ _ _____
Total availabilities..........................................................................
Expenditures (deduct):
Foreign currency expenditure authorizations_______ _____
With dollar credits to—
Foreign assistance programs (special letters of credit)..
Miscellaneous receipts of the general fu n d .:______ ____
Commodity Credit Corporation, Agriculture....... ..........
Other_______ _ .......... ............ ......................................... ..
Deposits for replacement currencies__________________
Subtotal, expenditures K ________ _____ ________
Adjustments due to changes in exchange r$tes __________- ___
Cash balances carried forward__ - _____________________

1,345
91
1,436

1 ,2 2 1

61
1,282

1,530

158
116
26
55
no
142
608
-2 7
2,017

199
144
25
79
134
152
733

184
143
25
81
163
160
757

13
113
186
133
-3
409
-3 2 5
1,282

1,464
66

-1 0

-1 1

2,006

2,275

14
140
141
140

4
1

8

140
142
117
42

476

460

1,590

1,826

* Excludes sales of country-use currencies, subject to later replacement, as follows: 1966, $4 *2 0 0 , 0 0 0 ; 1967"
$15,000,000; and 1968, $5,000,000.




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1967 ECONOMIC REPORT OF THE PRESIDENT

481

T a b l e L - 6 .— Summary of foreign currency transactions— country uses
[In millions of dollar equivalents]
1966 actual 1967 estimate 1968 estimate
Balances brought forward................................... ......... ............. ...........
Collections:
Public Law 480 sales___________ _______________________
Foreign assistance program......................-____ _____ ___
Subtotal, collections................ ............. .................................. ..
Net transfer from U.S. uses .............. ......................................
Total availabilities___________ * ________
Expenditures (deduct):
Public Law 480 country loans and grants__ -............... *
Public Law 480 loans to private e n t e r p r i s e ________ Other foreign assistance programs ............ . ................ _
Subtotal, expenditures................. ................... *_______
Adjustments due to changes in exchange r a t e s _______
Balances carried forward____...__________ _____________

1,384

1,008

1,197

789

857

833

791
27
2 202
t

864

841

1,881

2,049

736
37

641
36

685
36

786
-409
1,008

684

614

1,197

1,436

2

1
2

6

8

8

8

1
1

1
0

Representative W i d n a l l . I certainly feel that in the instances where
they are very substantial, there ought to be a reassessment and an
attempt to recoup in someway, because the original contracts in
connection with the counterpart funds-----Mr. T r o w b r i d g e . I might add, Congressman, that we in the execu­
tive branch of the Government, when we look at the programs we
have overseas, for instance, our trade promotion programs in the
Department of Commerce, we asked for permission from Congress
and received it to use as much counterpart funds, local currency
as we can, for the expenses involved in setting up trade promotion
activities in given countries where these counterpart funds exist.
But we do have a conscious program to try and use them wherever
possible and wherever legally feasible.
Representative W i d n a l l . In your statement under “ Travel promo­
tion” you say:
In countries such a$ Mexico and Greece they invest more than $5 to attract
each foreign investor. W e spend 50 cents.

How do you break down the $5 that they spend, and how do they
attempt to attract visitors in a different way than we do? Is there
any major difference in the promotion ?
M r . Trow bridge. I t h in k t h e t e c h n iq u e s a r e p r o b a b l y a b o u t t h e
s a m e . T h e d if f e r e n c e is i n t h e t o t a l a m o u n t o f e x p e n d i t u r e s , t h e
t o t a l a m o u n t o f n a t io n a l e f f o r t t h e y p u t b e h in d t h e i r n a t i o n a l t o u r i s t
b u r e a u . T h e y d o a g o o d d e a l m o r e in t e r m s o f o v e r s e a s , w h a t t o
t h e m w o u l d b e o v e r s e a s f o r e i g n o ffice s lo c a t e d in t h e k e y c e n t e r s , t o
a ttr a c t th e to u r is t d ir e c tly a n d t o w o r k w ith th e tr a v e l a g e n ts
o r g a n i z i n g p a c k a g e t o u r s i n t h e i r c o u n t r ie s .

They do have I think a good many more programs which are
government sponsored, and government generated, such as package
tours and facilities, making facilities available to incoming tourists at
perhaps subsidized rates. Of the various techniques, I think the basic
ones are advertising and sales promotion, but they certainly do have
more expenditure per visitor than we do.




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19 67 ECONOMIC REPORT OF THE PRESIDENT

Representative W idnall . At one time people traveled overseas to
see the difference in culture, the difference in costume, and an entirely
different tour of the land than does the United States. Today we
probably have the greatest scenery in the United States. We don’t
have the oldest buildings. We have bulldozed them out of existence.
We manage to get rid of any culture we have in many instances,
but today the main competition it seems to me between lands is who
has the newest Hilton hotel. Actually you travel from one country to
another and this is all you see, the Hilton hotel. The rates are the
same wherever you go.
Now what is the difference in approach ? We have the scenery and
they have the oldest buildings. Now what is it that is attractive?
Everybody dresses the same today.
Mr. T rowbridge. Well, Congressman1 think there are a couple of
obvious hurdles that our travel promotion people have to face. One
is distance and transportation costs. There are, I think, a lot of
people who feel that the U.S. Travel Service, trying to operate on
$3 million a year as far as the budget goes, is obviously limited in
what it can do in promotion work.
The biggest appeal of this country is as yon say, the tremendous
expanse, the scenery, and excitement of watching this country at work.
I am encouraged by the way many of our travel industry have re­
sponded with things such as a bus ticket, on which a person with a
passport from some other country can travel for I think 99 days for
$99 anywhere in this country. Another program is affiliation between
various trunk airlines, so that someone coming in can go almost any­
where in the country for a flat sum.
T h e t r a v e l i n d u s t r y h a s r e s p o n d e d v e r y s u b s t a n t ia lly t o t h e n e e d
t o m a k e i t m o r e e c o n o m i c a l t o see t h e s iz e o f t h is c o u n t r y a n d a ll o f
t h e e x c i t i n g t h i n g s w e h a v e i n it .

The travel service has done a lot of work in trying to stimulate
neighborhood reception for people from other countries. You may
have heard o f this program called “ Company’s Coming,” in the at­
tempt to get a welcome mat laid out m each community. But
there is no doubt that a lot o f people around the world have the feel­
ing that it is terribly costly, probably a mistaken image of the cost o f
seeing our country.
We do have great success in visitors from Canada, Mexico, and
nearby areas, and in the growth in visitors to our country, and I think
the growth has been particularly significant since the U.S. Travel
Service started work several years ago. It has been very encouraging.
We had the millionth visitor last year, for instance, the first time we
have ever had that.
Representative W idnall . I think they have done a tremendous job*
and they are doing it right now and it is very noticeable. To what
extent is the foreign traveler to the United States limited by the
amount o f money they take out o f various countries ?
Mr. T rowbridge. In Europe, except for the United Kingdom, which
does have a limitation per person on the amount they can take out, I
don’t believe that there are any restrictions on foreign currency.
Japan still limits their citizens I think to $500 per trip.
In Latin American countries, there may be differences between them.
The OECD has tried to make it a universally accepted policy that




THE

1967 ECONOMIC REPORT OF THE PRESIDENT

483

there will be I think a $500 limit in cases where countries for balanceof-payments reasons have to restrict currency outflow. But the liberal­
ization of this has been quite substantial in the last 5 or 10 years around
the world.
Representative W idnall . We have succeeded to some extent in limit­
ing the amount of goods brought in by American tourists from other
countries which stops expenditure o f dollars over there, but we cer­
tainly haven’t limited the amount of dollars taken out of this country,
and that is spent in other countries and kept there in these other
countries.
Mr. T rowbridge. That is quite true, sir.
Representative W idnall . I don’t know that I would really want to
suggest something like this, but certainly you have got every oppor­
tunity to spend thousands and hundreds of thousands of dollars over­
seas, without any limitation by the United States. You can’t foresee
any kind of reciprocal situation as far as the foreign countries are
concerned.
Mr. T r o w b r id g e . Well, as I said in the statement here, we are
basically trying to accentuate the positive when we look at this prob­
lem. It is a big one.
We have got a tremendous tourist gap, but we are faced with I
think a fairly important principal, and that is the freedom of the
American citizen to travel, and this administration has not tried to
put limits on that freedom. We have somehow got to solve our prob­
lems, and if we can, keep that freedom at the same time.
Representative W idnall . Just one more question. I f the British
bid for the EEC membership fails, would the United States look
favorably on promoting a trade area of those who are not members of
the EEC ? Did you go into that ? I am sorry, I withdraw the ques­
tion. My time is up.
Chairman P r o x m i r e . Secretary Throwbridge, is the Department
of Commerce studying methods by which the growth of our economy
can be increased ?
Mr. T rowbridge. Yes, Senator, in many different ways.
Chairman P r o x m ir e . What are these methods?
Mr. T rowbridge. Well, I think the whole programing of the eco­
nomic development administration, the attempt there to signal our
areas which require stimulus for economic growth, job creation, new
investment, public works, community action. I think there is a
whole series of methods.
Chairman P r o x m ir e . These are programs th a t have been passed.
Congress has acted on them.
Mr. T r o w b r id g e . That is correct, sir.
Chairman P r o x m i r e . I am talking about new programs.
Mr. T r o w b r id g e . We have a new program again approved, but a
very recent one based on the Office of State Technical Services, the
idea of using technology as a stimulus to economic growth. Our
whole science and technology operation—
Chairman P r o x m ir e . This is very good and I approve of that. I
think that as President Johnson said, that was a real sleeper of the
89th Congress. It accomplished a lot, and that was kind of over­
looked. You are talking about Senator Magnuson’s bill ?
Mr. T rowbridge. That is correct, sir.




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THE

1967 ECONOMIC REPORT OF THE PRESIDENT

Chairman P roxmire . In addition to that you have the investment
credit that was introduced a few years ago, and is coming back now
we expect, and so on. I am talking about new ideas that we are look­
ing forward to now.
We seem to be settling for a growth rate of only 4 percent, which
we are told by the Department of Labor is not enough to sustain even
the present level of employment or unemployment rate. I am won­
dering what new proposals we now are going to have to pick up our
growth, other than the proposal of having an expansionary fiscal and
monetary policy.
Mr. T r o w b r id g e . Well, Mr. Chairman, I would think that those are
the really important tools to be used. I think it seems to me, in look­
ing at this problem, that really Government has to set the framework
in which economic growth comes, but it is the private sector that is
going to do the job.
I personally tend to question the capability of the Government all
by itself trying, through a series o f programs, as well planned and
defended as they might be, to solve all the problems. I think it is the
job of Government to create that framework largely through mon­
etary and fiscal policies, and let the business and labor communities
get on with the job.
Chairman P roxmire. I understand that you have, that the Depart­
ment of Commerce has a computer model of the U.S. economy.
Would you tell us about that model, and whether or not you found
it useful ?
Mr. T rowbridge. I would guess that you are talking about the
input-output analysis that we have developed.
Chairman P roxmire . Yes.
Mr. T rowbridge. I would like Assistant Secretary Shaw to comment

on that. It is really a development in his part of the Department.
I think it is a very exciting project and model, and we are currently
bringing it more up to date, so it will be based on newer numbers. I
would like Mr. Shaw to comment.
Chairman P roxmire . Mr. Shaw, before you do, let me say that I
would like to know what that model shows for 1967 and what it shows
as to the effect o f the 6-percent surtax.
Mr. S h a w . Mr. Chairman, may I make several comments? First, I
would like to correct one apparent misunderstanding, and that is that
our goal is only 4 percent in real terms. That is a target for 1967.
For the longer run, our goal, and I think the goal of others as well,
would well be expressed as 4.5 percent or better than 4.5 percent, if we
are to retain such goals.
With respect to these models, there are actually two sets o f models.
The first one to which Secretary Trowbridge referred is the inputoutput model, which is a structural model of the economy, and which
basically, however, has to do with the past. We offer examples some­
times using coefficients in that model based on the data o f several vears
back. We hope this year and next to update that particular model.
I think however, Mr. Chairman, the model to which you refer is our
second model, which is an attempt to develop a series of equations
which help us or should help us we hope get a better idea of what is
likely to take place in the economy during the four quarters ahead.




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485

My personal judgment as one in the forecasting business for many,
many years, is that the use of models to date can oe regarded as very
helpful but nevertheless only as a supplement to good judgment, and
that is the way in which we are presently making use of that model,
which is in charge of the Office of Business Economics.
I might say as far as the 1967 period is concerned, the last results I
saw of that model would come out with results not far from the judg­
ment forecasts or projections that we have been discussing today.
Chairman P roxmire. By that you mean increase in the price level
by 2.5 percent, unemployment of about 4.5 percent at the end of the
year, and a growth of about 4 percent.
Mr. S h a w . Give or take a few tenths of a percent point in each
case. I think we have to keep in mind here that when you are talking
about the future, much less the present and the past, it is I think to
some extent oversimplifying the situation to talk down to one-tenth
o f 1 percent.
Chairman P roxmire. We know it is not a crystal ball. It all de­
pends on your estimates. Last year in December of 1965, one of the
Governors of the Federal Reserve Board—not Mr. Martin obviously—
told us they put the increase of the rediscount rate into a Brookings
model and found that it increased the price level, not decreased it.
Mr. S h a w . May I comment on the second pait of your question, Mr.
Chairman, which had to do with the effect or possible effect of a
tax increase on the outlook for 1967.
Chairman P roxmire . Right.
Mr. S h a w . I have not seen the results of the model of the Office
of Business Economics. As a matter of fact, I am not sure whether
that particular shift in equations has yet been run through. I have,
however, seen several models, similar models developed outside the
Government, some developed by individual industry firms, some the
better known ones.
The ones that I have seen have indicated that the proposed tax,
surtax increase of some 6 percent along with the remainder of the
fiscal policy recommendations of the President, the difference be­
tween having that tax and not having that tax would not have a sig­
nificant impact on the total demand m 1967.
Chairman P roxmire . That is very interesting. It will not have a
significant effect on 1967?
Mr. S h a w . Not on 1967.
Chairman P roxmire. It might have it in 1968 ?
Mr. S h a w . Yes; the impact might have this in 1968.
Chairman P roxmire. Which is beyond what the crystal ball will
show. You don’t know what that will be ?
Mr. S h a w . Yes, sir.
Chairman P roxmire . That is very interesting. Now let me ask
this; You sav, Mr. Trowbridge, that you expect in the second half
of the year, defense spending will tend to ease off, the impact of de­
fense spending will ease off, still at a very high rate, but that it won't
be as stimulating as it has been or as it is now; is that correct ?
Mr. T rowbridge. Y ou are referring to the statement “A tapering
off in the rate of advance in defense purchases" ?
Chairman P roxmire . That is correct.
Mr. T rowbridge. Right.
75-314— 67— p t 2-------17




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THE

1967 ECONOMIC REPORT OF THE PRESIDENT

Chairman P r o x m i r e . N o w taking a look at the situation in the last
half of the year, we are going to have a tax increase which we have
just been told will not have much effect on demand. If it has any
effect, it would certainly be negative. At least that has been proposed.
A slowdown in business investment because of the proximity of the
resumption o f the investment credit. We are going to have a slow­
down in defense purchases.
You have indicated that we are going to have a profit, perhaps some
profit squeeze. This will be true if the very lai^ge number of labormanagement contracts are settled with the wage increases that we
expect, and the difficulty for business to pass those on to the consumer.
On the other side we have only these factors; No. 1, a stepup in
social security benefits. The testimony we had is that that is likely to
have its main impact in increased demand for food, which is unlikely
to be very inflationary, because food isn’t too responsive on the demand
side, production factors are more important, and possibly medical
services. Also not demand sensitive.
Most o f the elements in our economy, like home buying, automobile
buying, won’t be affected much by the increase in social security
benefits.
And then No. 2, you are allowing the second biggest element in the
latter half, a resumption of prosperity or at least some better condi­
tions in homebuilding, in construction generally, because of lower in­
terest rates.
Mr. T rowbridge. Yes.
Chairman P roxmire. The testimony we had this morning was to me
not very reassuring in that area. Chairman Martin indicated that
there are many problems involved in getting at the long-term rate,
bringing it down, and in doing much more than we have done on the
short-term rate because of the international balance-of-payments sit­
uation. So under these circumstances, it would seem to me we have
some pretty significant bearish elements in the second half of 1967,
and the bullish elements are not very impressive.
Mr. T rowbridge. Wouldn’t you add, Mr. Chairman, to the bullish
side of the equation the anticipated State-local government expendi­
tures, which I think are projected to be at a higher level, whereas we
say, “ a tapering off in the rate of advance in defense purchases,” it is
most likely that those defense purchases still are going to be quite high.
C h a i r m a n P roxm ire. B u t t h e a d v a n c e is s o i m p o r t a n t , b e c a u s e o u r
w h o l e e c o n o m y is g r o w i n g a ll t h e t i m e , a n d o u r c a p a c i t y t o m e e t p r o ­
d u c t i o n i m p r o v e s e v e r y m o n t h , a n d im p r o v e s s o im p r e s s i v e l y , t h a t
u n le s s t h e a d v a n c e c o n t in u e s , w e a r e l i k e l y t o h a v e e v e n m o r e s la c k in
y o u r resou rces.
Mr. T rowbridge. I think there is some projection too as to the

buildup of inventories, which at the end of 1966 was very high.
Chairman P roxmire. That is true, yes. The assumption there is
that that will be taken care of in the first half of 1967. Why is that ?
Mr. T rowbridge. I think the projection is that the rapid or the
tremendous buildup of inventories in the last quarter of 1966 will
taper off, and in the first half of 1967. The resumption of an upswing
though is projected in the second half, and I think this would be on
the bullish side of the equation as well.




THE

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487

Chairman P roxmire. I know that that is the assumption, but why is
it made? The Council of Economic Advisers has some conflicting
evidence in their report.
They indicate that one of the reasons for the increase in inventory is
because of goods in process expanding, because I suppose the impact
of the Vietnam war is such that many of the things produced take
18 months or more to produce on the average, instead of 12 months.
This obviously increases your inventory. Why would you have a
very much different picture in the last half of the year on that?
Mr. T r o w b r id g e . On the last half or the first half ?
Chairman P roxmire. Mr. Paradiso ?
Mr. P aradiso. The picture would be different, Mr. Chairman, be­
cause in the last half we do expect a slowing down in the rate of de­
fense expenditures, and this should not require the same degree of
accumulation of raw materials and goods in process inventories as is
the case in the last several quarters.
Similarly if we get a reduction in the rate of spending for capital
goods, this should not require that kind of accumulation.
Now as we move into the second half of 1967, there are these stronger
elements coming in. Nobody can say that social insurance benefits
are going just for food. Generally I think they would go for non­
durables and services, I agree, or not for durables.
So if we get an additional spurt beyond that which we would obtain
with a normal rise in the personal income and higher employment,
due to the increased social security benefits, in the nondurable goods
area and services, this should require some additional inventories to
support that higher rate of purchasing. Similarly if the housing
picture changes-----Chairman P roxmire. Where d o you see these increases coming?
Mr. P aradiso. For clothing ? The food industry certainly increases
its inventories. We see quite a bit of variation in that industry. All
along the line that is so. In the drug area, in some of the service
areas they will need some additional inventories to maintain a higher
rate.
Chairman P roxmire. Aren’t all of those inventories turned over a
great deal faster than in durable goods ?
Mr. P aradiso. They did turn over a good deal faster, but the level
will rise. In other words, they get up to a higher level to support a
higher level of purchasing.
In the housing case, I think the same thing is true, although their
inventories are not very large. Nevertheless the housing picture I be­
lieve is going to turn around.
The amount of money available in the savings and loan associations
is becoming much more normal in many areas. It isn't all the high
interest rates. It is the availability of mortgage money which is a
factor. And as we indicated earlier, the number of households is ex­
pected to accelerate this year in comparison with last year, and this
should provide a stimulus to the housing industry later this year. I
don’t think we can pin it as to July m August, but sometime during
this year there is bound to be some uptrend in the housing picture,
which would have some influence on inventories.
Chairman P r o x m ir e . I take it, Mr. Trowbridge—and Mr. Paradiso
and anyone else that has a judgment on this—you would feel that it




488

THE 1667 ECONOMIC REPORT OF THE PRESIDENT

would be wise for the President and for the Congress to wait as long
as we can before July 1 to make our decision on the surtax increase
rather than move now.
W ould you agree that we can get a clearer picture of the economy
90 days from now than we can now, and would you also agree that in
the event in our best judgment the economy leveled off or was turning
down, it would be unwise to impose a surtax ?
Mr. Trowbridge. M r. Chairman, speaking for myself, I think that
the flexibility in the President’s proposal is a very wise thing. Ob­
viously 90 days from now we will know a good deal more about how
the economy is going. I think Secretary Fowler has indicated that the
decision as to whether to proceed full speed with this proposal will
get looked at again both by the administration and obviously by
Congress.
To the effect that a tax surcharge would help take out some of the
heat that we do think is coming along in the second half of the year,
I would think it would be very wise to go ahead and put it on.
Chairman Proxm ire. Mr. Trowbridge, meet Mr. Shaw. Mr. Shaw
has told us it is not. Maybe I misinterpreted Mr. Shaw. I understood
you to tell me that it would not have any effect on 1967.
Mr. Shaw. Mr. Chairman, I said the model indicated that. Second,
what I meant to say, and if I didn’t say it, I would try to make it
doubly clear at the moment, that what the model said was not merely
in terms of the proposed tax increase, but in terms of the whole fiscal
package proposed by the President, and that includes the passage
of the increased social security benefits.
Chairman Proxm ire. W hat they are saying is that this is a wash­
out.
Mr. Shaw. The reason quite clearly why the model seems to come
out that way is that in the second half of 1967, the proposed increase
in personal income taxes would be just about offset by the proposed in­
crease in social security benefits, in the second half of 1967.
Chairman Proxm ire. Now let me say that is the trouble with models.
That is the trouble with macroeconomics. When you break it down
and determine what effect the social security benefits have specifically
in particular areas, and what effect the surtax would have m specific
areas, you find quite a different picture. A s I said, the increase in
food purchases is going to be heavy. On the other hand I doubt if the
surtax increase is going to diminish food purchases at all. On the
other hand, the surtax increase is going to have some effect very pos­
sibly on automobile sales. It is going to have some effect conceivably
in construction^ although maybe we could debate that.
A t any rate, it is not going to have the same effect at all, the surtax,
as the social security benefits. That is why looking at it in the overall
is likely to give a distorted picture. A t any rate, in view of the facts
that we have almost an unlimited capacity to produce food, we have
been spending money hand over fist to keep our farmers from produc­
ing more^ we can easily meet the increased demands for food. And
I doubt if we can do very much about the increased demand for
medical services by any kind of a tax. It is not going to cut it down.
So, therefore, it would seem to me that the notion that you are going
to get a tradeoff, a balance here, isn’t very sound in terms of using our
resources as much as possible, or in terms o f maintaining price
stability.




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489

Mr. Shaw. Mr. Chairman, first let me say that I agree with Mr.
Paradiso in his statement that the proposed benefits, if enacted, will
be spent on a much broader spectrum of goods and services than just
food alone and medical supplies alone. I think clothing and textile
products will benefit. I think a whole host of consumer services will
benefit.
On this second question, Mr. Chairman, which is a key question
which you have raised several times this afternoon, this question of
whether or not we are going to have capacity and resources to do much
more than is apparently implied by the 4-percent rate of real growth,
which the Council has set forth, I would only say that here again in
my judgment we must avoid just looking at its overall totals. W e have
an economy today which is pretty close to full employment, perhaps
not quite where some of us would like to see it, but nevertheless which
also has a number of imbalances and distortions, and we have to con­
sider those imbalances and distortions in determining where and how
fast we can go during the next 12 months.
A s I pointed out earlier, this 4 percent is a rate of growth which is
proposed only for the next 4 months. I don’t think the Council, I
don’t think any of the other agencies would in any sense argue with
you that we should be aiming for a higher rate of growth than 4 per­
cent over the longer run.
Chairman Proxm ire. It is just not clear to me, it hasn’t been made
clear why 4 percent is all right now but it is not good for the long run
and why 4.5 percent would be all right in 1968, 1969, and 1970, unless
you are arguing that with the Vietnam situation which is unproductive,
when we take people into the Armed Forces, while it is an essential and
vital service tney perform for national security, they don’t produce
anything for the economy. Is that the reason why 4 percent is-----Mr. Shaw. No, I think my argument would be based more on the
hope and expectation that we have that some of the keen balances
which are present in today’s economy would not be present as we go
out of 1967.
Chairman Proxm ire. W e always have to balance this, Mr. Shaw.
Mr. Shaw . Yes, but they usually are not quite as heavy or as dis­
torted as they are at the present moment.
Chairman Proxm ire. Let me just ask a couple o f quick questitons.
Mr. Trowbridge. Mr. Chairman, Mr. Paradiso had one comment.
Chairman Proxm ire. Yes ?
Mr. Paradiso. In arriving at a 4-percent rate of growth, basically
you have to make some assumption with respect to what the produc­
tivity growth is going to be, what the increase in the labor force is
likely to be, and on that basis, and of course, the rate of unemployment.
Now whether you get a 4-percent rate of growth or somewhat more
for any year depends specifically on what you do with regard to your
assumption about productivity. Therefore, if you assume that the
productivity rate for 1967 is likely to be somewhat lower than 1966,
and the number of entries into the labor force in 1967 is not likeljr to
be as high as 1966, because the economy is not growing as fast as it
did, you can derive a rate of growth which would be 4 percent and
consistent with a 4-percent rate of unemployment.
Chairman Proxm ire. Let me just interrupt Mr. Paradiso to say this
is both circular and contradictory. It is contradictory because M r.




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Trowbridge told us the Department’s position is that it would be better
than 2.8. Is that correct or incorrect?
Mr. Paradiso. That is correct.
Chairman Proxm ire. I f you don’t have a growth of more than 4
percent, you won’t attract people into the work force. W hat attracts
them into the work force is an expanding economy and a demand for
people to come into it.
Mr. Paradiso. W ell, when we are talking about a little more than
1966, as M r. Trowbridge indicated, it is a question of a tenth of a
point. However, if you assume that the rate of gain in productivity
this year is not going to be 2.8 but 2.5, that the labor force growth is
not going to be 1.8 million such as last year but only 1.6, then on the
basis of those factors, you can derive a 4-percent rate of growth con­
sistent with a 4-percent rate of unemployment. So the question is,
what do you assume with regard to these crucial factors of labor force
and productivity ? That is the difference I think.
Chairman Proxm ire. A ll right. I want to once again apologize to
M r. Rumsfeld. I won’t take much longer.
In your statement, you make the favorable assumption that our
trade balance, not the balance of payments but trade balance, will
improve. I remember in 1964 and 1965 people were saying when we
had this enormously beneficial balance of payments, but what has
always struck me is the fact that we have such an overwhelmingly
favorable balance of trade now, and our favorable balance of trade
must be an unfavorable balance of trade for other countries and they
must be striving desperately to have a favorable balance. Those coun­
tries are advancing and progressing. Those countries also^have an
economic situation now which seems favorable for improving their
trade balance; that is, their unemployment is increasing somewhat.
Their resources are more available than they have been. Under these
circumstances it is realistic to assume that we can have an improve­
ment in what is already a favorable balance of trade although not
quite as favorable as it was a few years ago ?
M r. Trow bridge. W ell, the trade surplus which has gone down since
1964 from a level of about $6.9 billion, I believe, to 1965, 5.1; 1966 it
was 3.8, a substantial drop, has of course been caused by this tremen­
dous surge in imports as our absorptive capacity is there to buy from
all parts of the world.
W e foresee in 1967 continued strong demand for our exports in
Japan, France, Italy, Canada, probably less so than last year in the
sizable markets of the United Kingdom and Germany. In other
parts of the world, it is hard to paint a very broad brush picture, but
m the bigger markets, there are signs of continued expansion and high
demand for our exports.
A t the same time we foresee a reduced capacity utilization— you
mentioned this 88-percent figure— more flexibility for the American
roducer to produce both for domestic and export. W e foresee and
ope for continued expansion of more American companies getting
into the export business.
Now, on the import side, we foresee a reduction in the inventory ac­
cumulation, where imports are particularly strong or were last year,
in the first half o f the year, and we feel that the overall demand, which
will be slightly down from last year, will represent itself in lower
imports, or a lower rate of import growth.

C




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491

Now many countries around the world do have an imbalance of
trade with us, but they offset much of that trade balance with tourism
receipts of investment flows. Take a country like Spain. Spain
has substantial imbalance of trade with the United States, but the
investment flows going forward, plus tourism, plus other invisibles,
their balance of payments with us is, I think, if I am not mistaken,
fairly close.
Chairman Proxm ire. Can we expect to have a greater degree of
balance in all these individual elements of the balance of payments ?
In other words, trade is likely to be less favorable perhaps in the long
run. Our tourism we hope as the affluence of other societies improve
and so forth is likely to be coming in closer balance. W e hope we
will be able to reduce the number of troops we have abroad. W e hope
this isn’t perpetual. That has been a great drain on our balance of
payments so as we do that shouldn’t we be more accustomed to recog­
nizing maybe a healthy long-term situation cannot have this very
strongly favorable balance of payments we have had in the past, we
are going to have to adjust this situation of our exports to imports?
Mr. Trowbridge. It may well be. Certainly the $6.9 billion surplus
level in 1964 probably reflects a very difficult situation for a lot of our
trading partners, where they just didn’t have the dollars coming from
their exports to finance all of their trade. I think, though, that with
our technological advantage, this gives us a very real competitive ad­
vantage in a lot of ways, and that we can expect our exports to stay
in surplus. W hat the numbers are going to be-----Chairman Proxm ire. But as we increase our capital exports and
along with this export of American know-how so that we improve
their efficiency and their amount of capital investment and their
amount of technological progress, so that the end of that, the result
is going to be a more efficient free world.
Mr. Trowbridge. I think that is the long-term result, yes, of capital
flows and technological transfers.
Chairman Proxm ire. I am not saying it is bad. I am saying it is
good. I am saying that, in my judgment it is something we ought
to be accustomed to.
Mr. Trowbridge. I do too.
Chairman Proxm ire. And not single-mindedly constantly having a
favorable balance.
Mr. Trowbridge. I would say this, too, and as I said before, the
transfer of the investment and the technology very often brings with
it not only economic growth where located^ but stronger continued
follow-on exports of perhaps new commodities, new materials, but
continued trade and expanded trade from the United States to the
locale of the new plant.
Chairman Proxm ire. I want to thank Congressman Rumsfeld for
being so patient.
Representative Rumsfeld. On that point, can one assume that as
that happened, as that progression took place, that the United States
theoretically should be in position where they could then reduce some
foreign assistance programs? W hile the favorable balance of trade
lessened, wouldn’t the balance of payments and the gold situation
change for the better possibly as such programs were reduced ?




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Mr. Trowbridge. I think so. I think you have to remember, though,
that a great percentage now, and I think it is close to 90 percent of our
procurement under the foreign aid programs, is tied to the United
States. Your net loss factor there of the foreign aid program that
may total in budget terms over $2 billion has considerably less outflow
as far as dollars go.
Representative R um sfeld. Yes, but I am unconvinced on that. In
the first place, the foreign assisance programs total overall a lot more
than $2 billion, and, in the second place, I am not persuaded that these
programs do not have an effect on the gold situation and balance of
payments overall. They do. They have to, even though it may be
less than the total assistance figures.
M r. Trowbridge. Right, than the budget figures.
Representative R um sfeld. I will grant that.
Mr. Trowbridge. Yes.
Representative R um sfeld. There was a question on which Mr.
Paradiso made a comment. He said that you anticipated a slowing
down of the rate of defense expenditures. Did you mean that or did
you mean that you anticipated a slowing down of the rate of increase
of defense expenditures ?
Mr. Paradiso. It is a slowing down in the rate of increase.
Representative R um sfeld. O f the rate of increase.
M r. Paradiso. The rate of increase. I am sorry if I gave the other
impression.
Representative R umsfeld. How many years before you are going
to be bringing that model before congressional committees to testify1
Mr. Paradiso. This model is still quite an experimental model. It
is certainly for the Government. W e don’t want to put out any results
from an econometric model which we haven’t tested over a period, and
there is still a considerable amount of research being done in getting
much better relationships.
For example, two of the relationships that there is a great deal of
work going on now are, what is a good relationship for inventories, and
what is a good relationship for housing.
Representative R um sfeld. And you are able to ‘■
‘war game”
economic problems, is that right ?
Mr. Paradiso. That is right. Once we are satisfied that we have
had reasonably good results over a period of years, and these relation­
ships stand up, then at that point we can say, “all right, here it is for
public consumption,” not before.
Representative R um sfeld. W as this developed in the Department
or contracted out ?
Mr. Paradiso. No. This came about in the following way. Pro­
fessor Klein, from the University of Pennsyvania, had been working
on a very similar model for about 3 or 4 years. About 3 years------Representative R um sfeld. I don’t need-----Mr. Paradiso. I will go very quickly. He gave it to us.
ve R um sfeld. So it was developed outside and brought
M r. Paradiso. And brought into our office and we updated it and
have worked on it since.
M r. Shaw. May I add, Congressman------




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493

Chairman Proxm ire. Would you hold it for 1 minute, Mr. Shaw?
I want you to hear this plug for Northwestern; it’s a great institution.
Representative R um sfeld. The chairman has a son there and the
university happens to be in the 13th District of Illinois. They are
working on simulators in connection with foreign policy and national
security problems. I know there is a great deal of this going on in
universities. That is the reason for my question. I was interested
in seeing if there has been an exchange between groups in and out of
government working on similar problems.
Mr. Shaw. I think we can say that the technicians of the Office o f
Business Economics do keep in close touch with the experts in the field.
I merely wanted to add that I thought Mr. Paradiso was being a little
bit modest about the Office of Business Economics. I think the
model has been improved significantly since the time that we got it
from the University of Pennsylvania, and Lawrence Klein.
Representative R um sfeld. Mr. Shaw, in connection with this model,
simulator or whatever it is, did you plug in to see whether or not there
would be different effects depending on whether on the one hand the
tax increase were adopted by the Congress, or on the other hand a com­
parable reduction in Federal expenditures was accomplished by the
Government ?
Mr. Shaw. I have not seen any recent plug-ins in the model so
that I have to answer your question by saying that to my knowledge
those have not been plugged in.
Representative Rum sfeld. Thank you. I am interested in this
East-West trade question that Senator Symington brought up. I
know it could take all day and I don’t want to belabor it. It is late
and I know you gentlemen have been hard at it. But let's consider
your testimony. You made the comment that you can forsee sub­
stantial increases in our trade with Eastern Europe in goods and
technology for peaceful uses.
W ell, now, “goods and technology for peaceful uses.’- W ho is to
say what is the peaceful use of something ( You can’t know that. I
can’t know that. There have been those who during W orld W ar I , I
recall, possibly it was Bernard Baruch, who said everything was stra­
tegic. Now I don’t know that that is as applicable in an era of nuclear
warfare, but the fact remains that it is difficult to draw a distinction.
I will comment further on the reason for my mentioning that in a
minute.
You say that you fully support the need for this authority that
has been requested, and that you feel it will lead to worthwhile in­
creases in peaceful trade.
Do you favor trade, just to explore this for a minute, by the United
States with North Vietnam?
Mr. Trowbridge. No, I do not.
Representative R um sfeld. Right. Do you favor it with China?
Mr. Trowbridge. No.
Representative R um sfeld. O f course not. And this points up the
communications problems we are having on this difficult question.
You don’t want to trade with North Vietnam, but not for economic
reasons. For economic reasons you would favor trade with Nprth
Vietnam or China, if you were thinking only of economics, but you are
not. Ypu are plugging in some political and military considerations.




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THE 1967 ECONOMIC REPOET OF THE PRESIDENT

To try to argue the concept of East-West trade on purely economic
bases is not going to result in a thoughtful dialog on the subject.
I was impressed with Senator Symington’s comment about U .S. na­
tionalistic approach to some extent with respect to economic question
and U .S. international approach in other areas such as political and
military matters. Yet the basic difference of opinion cannot be swept
away with the kinds of comments that are in your statement, and I
appreciate that your statement wasn’t intended to exhaust the EastW est trade question. Yours was a much broader subject, so I am cer­
tainly not being critical.
But they can’t be swept away that simple. The difference of opinion
that I sense in this country and to some extent among Members of
Congress boils down to a difference in viewpoint as to the nature of
the threat that exists in the world, and a difference in viewpoint as to
the effect on that threat by increased East-West trade. One of the
fundamental problems is that it is a difficult question to deal with in a
broad way, because it seems to me that what is or is not desirable eco­
nomically, politically, militarily, varies from country to country, from
commodity to commodity, and sometimes from year to year. There­
fore, I have trouble buying the argument that one must be for EastW est trade or that one must be against East-W est trade, because I be­
lieve one must look to the country and look to the commodity and look
to the political and military and economic framework at the time that
a decision is being made.
It would seem to me that we are going to have a more constructive
dialog on this subject if the arguments are not based purely on eco­
nomics, when the opposition is coming from people who recognize the
economic advantages, but who are concerned more about the potental
political and military disadvantages. Eather, the arguments must
show specifically what we would gain economically in exchange for
what we might be losing in terms of some potential political or mili­
tary problems in the future.
Some argue, saying that the Communist countries are going to get
the commodities anyway, from Britain, Japan, or from some other
country. They further argue that therefore we should trade and get
the economic benefits. W ell, that has some merit economically, and
it does eliminate one of the problems politically and militarily, but it
doesn't solve the question because of the fact that the answer to it
might be, well, why isn’t this country exerting a little more pressure
leadership in the world to try to develop support and cooperation from
other nations, so that in the event a situation does develop with re­
spect to a specific country or a specific commodity at a specific time,
we could en cou rag e other nations to see that they don*t get it, instead of
just throwing up our hands and saying they are going to get it
anyway.
It reminds me of the story about the village where there was mud in
the streets and the people who walked along the curb would get spat­
tered with mud every time a cart went by. Sjo the city fathers met
and decided to work this out reasonably. They passed an ordinance
saying that every time a cart came by everyone had to line up along
the curb so they would all get sprayed with mud equally.
This has been a lengthy comment on a subject on which I need a
great deal more information, but I would like to see a considerably




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495

more precise and thoughtful discussion on this subject in the country
by the administration. W e are ultimately going to find the right
posture for this country in the coming months only if we have sucn a
discussion. I have not been terribly impressed with what I have
heard thus far. Again, I don’t mean your statement. I feel you have
made a very fine statement here today, and I very much enjoyed your
comments and responses to questions. I am referring to the ad­
ministration generally.
Mr. Trowbridge. Thank you, Congressman. I might comment
briefly. There is no question the definition of the word “peaceful” or
the definition of the word “strategic” is one of the toughest things in
this whole argumentation.
W e who have the Export Control Act responsibilities, in looking on
these things on a case-by-case basis as we do, wrestle with these
definitions all the time. I had a personal experience some time back
which might illustrate the difficulty.
One day on a hillside in Korea a Chinese soldier threw a grenade in
my direction. It didn’t go off. I took it apart. I was curious. I
looked in the handle, pulled something out. It was a piece of news­
paper with gunpowder used as a fuse. I opened the newspaper and
it was from Sacramento, Calif. That wasn’t strategic as newspaper,
but it sure felt strategic when I opened it up. The end use very often
determines the problem here.
I think when we talk machine tools, are machine tools strategic or
are they peaceful? W ell, I happen to think that if the Soviet Union
decides to go into the automobile industry in a big way, and devote
very large resources to the creation of a private-automobile kind of
economy, with roads and with repair shops and service stations and
all the other things, I think this kind of development is the kind of use
of their resources that is probably very good, xrom our point of view.
I would rather see them creating that kind of consumer-goods economy
than using it for strategic purposes. And for that reason I think we
could and should sell them machine tools to go into a plant to make
automobiles.
This is the kind of case-by-case determination that you come down
to very often, and often this difficulty of semantics and determining
really what the word means and what the end use is is a very real part
of the problem, and I think we do have to talk this out.
W e tend— we, the United States— tend to look at this question in the
economic and political context. When it comes to our export controls
we are a member of an international group that has decided upon
a list of items. W e have a second list which is our own unilateral
control list, and we review that to see how’ realistic it is, but it is
considerably more than the internationally agreed list.
W e do work with basically the N A TO allies group, to see to it that
items on the international list are up to date, are added if we can con­
vince them that this is a new element that really is strategic and should
be controlled, or as they become less and less important, the opinion
is we ought to take them off, to agree to taking them off. But these is
the effort to work with our allies, to get a certain community approach
as far as exports go.
I think we are going to hear a lot more about this whole question of
trade contacts. I think there are some economic advantages. W e are
losing business in the competitive trade field. I think indeed there




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THE 1967 ECONOMIC REPORT OF THE PRESIDENT

can be, if we can develop the kind of trade contacts which are long
term, some very good political results out of this, too.
Representative R u m sfeld . I suppose there are instances in history
that show both ways.
Mr. Trowbridge. Yes.
Representative R um sfeld. W e had pretty extensive trade relation­
ships with Cuba.
M r. Trow bridge. Yes.
Representative Rum sfeld. So it can be argued both ways. I agree
with you the contact in and of itself can be favorable and helpful
rather than harmful and unfavorable. W ith that I will conclude.
Chairman Proxm ire. Thank you very much, Mr. Rumsfeld.
Thank you, Mr. Secretary. This has been very enlightening and an
informative day for me. You did a fine job, and I certainly very
much appreciate your excellent comments and statement.
Mr. Trow bridge. Thank you very much, Mr. Chairman.
Chairman Proxm ire. The committee will reconvene Wednesday,
Februaiy 15, to hear W alter Heller in the morning at 10 o’clock and
Arthur Burns in the afternoon at 2 o’clock.
(Whereupon, at 4 :25 p.m., the committee adjourned until February
15,1967, at 10 a.m.)




O


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